The below report is a free, introductional version of the upcoming service from Sunshine Profits: The Oil Updates.
Looking at the charts of crude oil, we clearly see that the major factor, which has driven the price of light crude in the recent weeks was the uncertainty around Syria. At the beginning of the previous week, crude oil began to drop after Russia offered to help put Syria's chemical weapons under international control. Although the U.S. President Barack Obama said that he will still continue efforts to convince politicians to back military action, Russia's proposal raised the chance that a U.S. military strike would be delayed or averted. In the following days, we saw two-day small bounce up in crude oil prices as investors worried about whether diplomatic efforts to eliminate Syria's chemical weapons would avert military action that could disrupt oil supplies from the Middle East. These diplomatic efforts intensified as Russia warned that a U.S. strike could unleash extremist attacks and carry the country's bitter civil war beyond Syria's borders. However, this improvement was only temporary and crude oil slipped on Friday as the United States and Russia worked on a plan for Syria to surrender its chemical weapons.
On Saturday, U.S. Secretary of State John Kerry and Russian Foreign Minister Sergei Lavrov agreed to back a nine-month U.N. program to destroy Syrian President Bashar al-Assad's chemical arsenal. In this way, the U.S. agreed to call off military action against Syria in a deal with Russia. It's not hard to guess how this event affected oil prices. Today, crude oil has lost over 2% and is trading below $107 a barrel once again.
Once we know the situation around Syria, let's move to the most important event of the current week - the Federal Open Market Committee meeting. FOMC is meeting for two days from Tuesday with expectations high that policymakers will decide to reduce the monthly $85-billion bond purchases. On a side note, we recently published a detailed analysis (in Sep Market Overview report) of 8 ways in which the situation could evolve based on what the Fed will do regarding the QE program and the way it is announced.
Earlier this month, the weaker-than-expected U.S. payroll numbers for August raised doubts about whether the Federal Reserve will start paring its massive stimulus and resulted in higher prices of light crude. On Friday we saw similar price action as the weak consumer sentiment and retail sales data bolstered the view that Fed policymakers will slow an exit from the U.S. central bank's bond-buying program.
What will be the decision? By how much the central bank will cut its monthly asset purchase program? What impact will it have on the markets? Will it trigger a further rally in crude oil or a decline? We'll get answers these questions on Wednesday. Meanwhile, let's move on to the technical part of our Oil Update. Just like a week ago, we take a look at the charts from different time perspectives to have a more complete picture of the current situation in the oil market.
Let's start with a look at the monthly chart of light crude (charts courtesy by http://stockcharts.com).
Looking at the above chart, we see that the situation hasn't changed much. Light crude still remains above the two long-term declining resistance lines: one of them (bold red line) is based on the July 2008 and the May 2011 highs, and the second one is based on the September 2012 and March 2013 highs (the upper black line).
From this perspective the picture is bullish and the breakout above these two long-term declining resistance lines hasn't been invalidated.
Now, let's zoom in on our picture of the oil market and see the weekly chart.
Quoting our last Oil Update:
(...) crude oil reached the strong resistance zone based on the March 2012 top and the upper border of the rising trend channel once again.
Taking the above into account, we should consider two scenarios. If the buyers manage to break above this strong resistance zone, the first price target will be close to the May 2011 top. However, if they fail, history will likely repeat itself and the price of light crude will come back to the consolidation range.
On the above weekly chart, we see that light crude started the previous week above $110 per barrel, but the strong resistance zone stopped the rally once again. Oil bears quickly noticed the opportunity to go short and triggered a corrective move, which pushed the price of crude oil slightly above $106. Despite this drop, light crude rebounded in the following days and closed last week above $108 per barrel.
From this point of view, the situation is somewhat mixed, but with a bullish bias. On the one hand, crude oil still remains slightly below the May 2011 top, which is a bullish factor. On the other hand, there was a third unsuccessful attempt to break above this level, which resulted in a decline to the consolidation range, and such price action doesn't look so bullish.
Now, let's check the short-term outlook.
On the above chart we see that the situation has deteriorated since our last Oil Update was published. Since the beginning of the previous week the price of light crude has dropped and reached below $107 per barrel. Although, oil bears tried to push the price below this level on Wednesday, their attempt failed and crude oil rebounded above $109 in the following days. Last session of the week wasn't so good, but oil bulls didn't give up and pushed the price of light crude from its daily low to over $108 per barrel.
As you see on the daily chart, slightly below weekly low there is the 50-day moving average, which stopped the decline in June and, again, at the end of August. In both previous cases this moving average encouraged buyers to act, which resulted in sharp rallies in the following days. Please note that we also saw similar price action at the beginning of September. If history repeats itself, the moving average will likely stop a downward move in the coming days.
At this point it's worth mentioning that the current correction is still shallow and smaller than the previous one (from the August 28 top to the September 3 low), which is a bullish factor. What's interesting, even if the price of crude oil drops below the weekly low (to about $103), both corrections will be similar and the uptrend will not be threatened.
Where are the nearest support levels? The first is the 50-day moving average (currently at $106.51). The second one is the Tuesday low at $106.39. The third one is the rising line based on the August lows (close to $105.36). The next one is a zone (between $102.22 and $103.50) based on the bottom of the previous corrective move (the August 21 low) and the August low. In this area, there is also the 38.2% Fibonacci retracement level, which reinforces this support zone.
Summing up, although there was a downward move at the beginning of the previous week, which took the price of light crude slightly above $106, technically, the short-term outlook is still bullish. The uptrend is not threatened at the moment, because the recent decline was shallow and smaller than the previous one.
Once we know the current outlook for crude oil, let's examine the NYSE Arca Oil Index (XOI) once again to find out what the current outlook for the oil stocks is and to check if they confirm or invalidate the above analysis of the crude oil market.
Let's start with the long-term chart.
On the above chart, we see that the situation hasn't changed much and all of what we wrote in our last Oil Update is still up-to-date today.
(..) we've been seeing a consolidation in the recent months and the NYSE Arca Oil Index is trading between the July top and the July low.
The XOI remains quite close to the May 2011 top and it's still above the previously-broken long-term declining resistance line based on the 2008 and the 2011 highs and the breakout hasn't been invalidated. The oil index also remains in the range of the rising trend channel.
Taking the abovementioned observations into account, the situation is still bullish.
Let's take a closer look at the weekly chart.
Looking at the above chart, we see that the oil stock index continued its upward move in the previous week and climbed above 1,400. In this way the XOI moved away from the medium-term support line. Keep in mind that this strong support line (marked in black) stopped the decline in June, which resulted in a rally in the following weeks.
Despite the recent growth, we should still keep an eye on the above-mentioned support line, because it is also the lower border of the rising wedge. As you know, this is a bearish pattern and if buyers fail and XOI moves below the short-term support line, it will likely lead to a decline which may take the oil index at least to the lower medium-term support line (the red one).
The medium-term uptrend is not currently threatened, and the situation remains bullish.
What about the relationship between light crude and the oil stocks?
When we take a look at the above chart and compare price action in both cases, we clearly see that oil stocks were stronger in the previous week, as they closed higher for a second week. At the same time light crude close the whole week below the closing level of September 6, 2013. Additionally, light crude still remains below the strong resistance zone based on the March 2012 top and the upper border of the rising trend channel.
Now, let's turn to the daily chart.
As you see on the above chart, the 50-day moving average stopped further declines at the end of August. This strong support encouraged investors to push the oil index higher, which resulted in an increase above the 61.8% Fibonacci retracement level (based on the entire July-August decline). As we wrote in our previous Oil Update, the next resistance level was the declining line based on the May and July highs (currently close to the 1,404 level).
On the above daily chart we see that oil bulls managed to push the oil index above the previously-mentioned declining line based on the May and July highs. In this way the last resistance level below the July top was broken.
In this case, the next target for buyers is the July peak, and then the May top.
The nearest support is around 1,393 (the September 11 low), the second one is at the 50-day moving average (currently at 1,380.68). The next support zone is based on the August 27 and August 30 lows (1,361-1,364), and a further one is based on the August 21 bottom and the 61.8% retracement level (1,338-1,339).
Now, let's comment on the relationship between the WTI and the XOI in the short term. Despite the negative divergences at the beginning of the previous week, the second half looked pretty much the same in both cases and we saw declines.
Summing up, from the long- and medium-term perspectives the outlook for oil stocks remains bullish and the uptrend is not threatened at the moment. Taking into account the relationship between light crude and the oil stock index, we can conclude that the oil stocks have been outperforming oil since our first Oil Update was published.
Speaking of relationships, let's take a closer look at the chart below and check the link between crude oil and gold. Has it changed in the recent days? Let's examine the daily chart.
Quoting our last Oil Update:
(...) crude oil was trading in the narrow range between the Tuesday's bottom and top. What's interesting, at the same time gold declined once again. In other words, the consolidation in light crude triggered another move lower in gold.
Last week we saw similar price action, but in this case, the negative divergence was even more visible. In the first half of the previous week both commodities declined. However, after this downward move light crude rebounded in the following days and erased over 61.8% of its decline. What did happen with gold at the same time? The yellow metal extended its decline and dropped to a five-week low slightly above 1,300 an ounce.
Taking the above into account, it's worth taking a closer look at the medium-term outlook for gold.
Let's turn to the weekly chart of the yellow metal.
In our last Oil Update we wrote:
(...) the medium-term situation seems quite bearish and if gold drops below the declining resistance line based on the October 2012 and February highs the outlook will be even more bearish.
As you see on the above chart, after gold's attempts to move above the strong resistance zone failed and the breakout was invalidated, the yellow metal dropped below the abovementioned declining resistance line and accelerated the decline. On Friday, gold reached the 50% Fibonacci retracement based on the June-August rally. In this way, the shiny metal lost almost 6% for the week. It is gold's biggest weekly loss since June.
Summing up, taking the long and medium-term relationship between light crude and the oil index into account, we can conclude that the oil stocks have been outperforming oil since our first Oil Update was published. In the past, we saw negative divergences between WTI and the XOI many times. In the previous week, the oil index closed higher for a second week and broke above important resistance. Meanwhile, crude oil erased only over 61.8% of its last week's decline, which confirms weakness of oil in relation to oil stocks.
Looking at the relationship between crude oil and gold, we noticed another negative divergence. Although both commodities declined in the first half of the week, the second half was quite different. As we previously wrote, after this downward move light crude rebounded in the following days and erased over 61.8% of its decline. Meanwhile, the yellow metal extended its decline and dropped to a five-week low. Additionally, the recent decline in crude oil is still smaller than the previous one and the uptrend is not threatened at the moment. At the same time, the downtrend in gold remains in place.
Taking this into account, it seems that the short-term link between the yellow metal and crude oil will wane even more in the coming weeks.
ST outlook: bullish
MT outlook: bullish
LT outlook: bullish
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