Expect More Drifting in Oil Prices

Includes: OIL, USO
by: Market Blog

By David Berman

Despite a few bumps here and there, the price of crude oil has been moving within a $20 (U.S.) trading range over the past year. In late-morning trading on Tuesday, oil fell to $73.14 a barrel, down $1.72 and within $3 of its 50-day-moving average.

Dominic Schnider and Constantin Bolz, analysts at UBS, expect this trading range to persist in the near future, with prices affected by concerns about global economic growth. They noted that oil demand increased by 2.3 million barrels per day in the first half 2010, compared with a year earlier. Now, though, the recovery will decelerate in the coming months, due to lower economic activity – especially in China and other emerging markets.

In the coming months, investors should expect prices to be range bound,” the analysts said in a note. “We even see risks that prices might dip below $70 a barrel. Such a patch of weakness should be used to build up long positions, in our view. We expect prices to be well supported close to $65 a barrel. These levels would trigger a supply response from OPEC, which prefers prices to trade above $75 a barrel.”

Meanwhile, energy stocks have been trailing the price of oil over the past year. While oil has risen 5% after a number of bumps and dips, Canadian energy stocks in the S&P/TSX composite index are up just 1.9% (after factoring in dividends). U.S. energy stocks within the S&P 500 have risen a mere 1%.

However, buying North American energy stocks when the price of oil is down hasn't been much more profitable. The price of crude dipped to a low of $68 a barrel on May 20. Since then, it has rebounded 7.6%. Canadian energy stocks have rebounded only 5.9%.

Disclosure: None