Crude Oil Likely to Rally in the Short-Run

 | Jun 14, 2017 | 9:23 AM EDT
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The future price of crude oil is a subject everyone is interested in. I would wager that everyone has an opinion about it -- informed or not. We typically pay more attention to supply information -- rig counts and such and OPEC announcements. The more we drive to work, to shop, to shuttle children around town, the more we think about the demand side. I have a plug-in hybrid and I still think about it.

We all remember when crude oil spiked to $147/bbl and the subsequent plunge. We remember paying prices for gasoline near $5/gallon (depending on where you lived). It was like gassing up a rental car in Europe without the vacation. Long lines to fill up and odd/even days are hopefully a thing of the past, which our grandchildren won't experience.

Let's look at a couple of charts of crude oil futures and see if they help shape our opinion in the short-run.

Source: Stockcharts.com

In this daily chart of the nearby futures contract, above, we can see that we have rallied in the first half of the chart from around $43 to $55 and then a three-legged decline from March back down to around $45/bbl. Futures traders are much more short-term oriented than equity traders, so here we used a 20-day and a 50-day simple moving average. Futures are below both of these downward sloping averages.

The daily On-Balance-Volume (OBV) line is interesting. (Yes, I know that many futures analysts pore over the changes in open interest for clues.) The OBV line rises with the price action from November to March, and then declines in March. Even though prices weaken, the OBV line rises in the past few months. A rising OBV line in a declining market could be more aggressive short-covering on up days or it could be accumulation -- hard to say.

In the lower panel is the slow stochastic indicator, a measure of oversold or overbought (extended on the downside or the upside). Currently, crude oil is very oversold and could be prone to a bounce or rally.

Source: Stockcharts.com

In this longer-term weekly chart of crude oil that links up a number of nearby contracts, we can see a broad sideways trading range market. Prices are just below the positive-sloping 40-week moving average line and the weekly Moving Average Convergence Divergence (MACD) oscillator is poised for a bullish crossover. From the early 2016 price low, prices make higher lows and the volume of trading has been increasing. It looks like prices want to move higher -- but bulls, myself included, have been disappointed.

Bottom line: the Dollar Index has been weakening this year and yet crude oil prices have weakened too, so we know there is more at work here than just the direction of the greenback. With the dollar still soft and crude oil futures technically oversold, I would put higher odds on some sort of near-term rally. A rally in the price of crude could translate into higher prices for some of the related equity plays.

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