As mentioned before, we have some reasons for thinking that energy prices will not fall further. Unsurprisingly, now that prices have stayed low for three months, some are calling for even lower levels. This view is quite widely held and supports our approach to studying mood in markets – price trends are the most important influence on mood and people much prefer to buy markets that have risen a lot rather than those that have fallen. Some of the same commentators that are now calling for $20 oil were calling for $140 a barrel or more prior to the start of the drop last June.
Meanwhile, we saw monthly-scale bottom extensions as the fall neared an end and this is our main reason for not expecting lower prices:
This doesn’t mean that we immediately switch from bearish to bullish of course. The Saudis are back in the business of managing prices and their agenda seems to have a lot to do with discomfiting their rival oil producers, as I first pointed out on the radio in the November 24th edition of the Naked Short Club (from around the 20-minute mark if you want to listen again). Managing oil prices through control of the supply is an inexact art however, so quite large price movements can develop without the intention of the men in charge of the flow.
We now have some stability in prices and compressions have appeared. These are at a daily-scale and so naturally will lead to new price moves that may last for up to three weeks or so. We are inclined to think that the monthly-scale bottoms shown in the first chart make rallies more likely than dips for the next six months or so, which means we will be looking for places to trade from the long side. The current price range is quite wide and even the days’ ranges are big – yesterday’s compression occurred on a day when the range was $3.40 from high to low. This means that ‘buying a break’ will carry extra risk – it is already poor trading practice to ‘buy rallies’ especially in a trading range, for fear of whipsaw – so when prices are extra volatile this becomes downright dangerous. Instead we propose something that we don’t usually suggest – buy in expectation of a rally within the range. We already did something similar in US stocks and so we suggest it here too. Buy a part position in either WTI or Brent (WTI is probably the slightly better choice) and look to add if this newly-compressed condition resolves with an upward break. It’s hard to say where any price rally may reach before stalling, but $80 is the lower end of the old trading range that held for 5 years until suddenly it ended last June. That is a long way from here but still may be achievable – sell before that. We will advise. The daily picture:
