Based on the September 30th, 2013 Oil Investment Update
Tensions in the Middle East have always had an impact on everyday life around the world through their effect on the price of oil. During the last month we saw this impact very clearly. At the beginning of September, the price of light crude dropped as fears of U.S. military action against Syria faded. In the following days, crude oil declined as Libya's production recovered to nearly 40% of pre-war capacity. Higher crude oil output in Iraq was an additional bearish factor, which pushed the price lower. In the previous week, investors watched closely all the US-Iran news. On Friday, the price of oil fell as tensions eased between the United States and Iran after the Obama-Rouhani talks.
What impact did these events have on the price of light crude?
Looking at the chart of crude oil from today's point of view, we can conclude that September was a hard month for oil bulls. After the June-August rally, which resulted in a new 17-month high, the situation in the oil market deteriorated. The price of light crude dropped from the September high at $110.70 to a new monthly low at $102.20 per barrel. With this move, crude oil has lost nearly 5% so far this month and declined for a third straight week.
And what did happen with the oil stocks at the same time? How does the relationship between light crude and the oil stocks look like? Could lower prices of crude oil have any implications for the oil index? Before we try to answer these questions, let's take a look at the NYSE Arca Oil Index (XOI) charts to find out what the current situation in the oil stock market is (charts courtesy of http://stockcharts.com).
We begin with the long-term chart and almost immediately see that the situation has improved.
The XOI not only broke above the July top, but it also broke above the May 2011 high. If the buyers hold the oil stock index above 1,400 today, this will be the highest monthly close since June 2008.
Additionally, the XOI is still above the previously-broken long-term declining resistance line based on the 2008 and 2011 highs and the breakout hasn't been invalidated. The oil stock index also remains in the range of the rising trend channel.
Taking these observations into account, the situation is still bullish.
To see this more clearly, let's zoom in on our picture and move on to the weekly chart.
Looking at the above chart, we see that the oil stock index remains above the July peak (in terms of weekly closing prices), but the breakout is unconfirmed at the moment. It's worth noting that the XOI closed higher for a fourth week and is still close to the May top. On top of that, when we take into account weekly closing prices, we notice that this is the highest weekly close since June 2008.
Taking the above into account, we should carefully keep an eye on oil stocks. The proximity of the above resistance level may encourage oil bears to go short and trigger a correction. In this case, the first support would be around 1,400.
Please note that even if the buyers do not give up and manage to push the XOI higher, further increases may be halted by the upper line of the rising wedge (currently close to 1,450).
The medium-term uptrend isn't currently threatened, and the situation remains bullish.
Once we know the current situation in the medium-term, let's focus on the relationship between light crude and the oil stocks.
When we take a look at the above charts and compare price action in both cases, we clearly see that oil stocks were stronger in the previous week once again. They closed higher for a fourth week and remain above the July peak (in terms of weekly closing prices). What happened with the price of crude oil at the same time? Light crude declined and closed lower for a third week. Additionally, it dropped to a new September bottom on Wednesday, which clearly shows its weakness in relation to the oil stocks.
Now, let's turn to the daily chart.
As you see on the above chart, the situation didn't change much in the previous week. After a breakout above the declining resistance/support line based on the May and July highs, the oil stock index remains in the consolidation. At this point we should consider two scenarios. If the buyers manage to push the XOI above the September high, we will likely see another upward move, which may result in a breakout above the May high.
On the other hand, this strong resistance may encourage sellers to go short. In this case, we may see a corrective move to at least 1,400. If the oil index drops below this level, we could see further declines .
Please note that the nearest support is the bottom of the current consolidation (the 1,400 level). The second one is the previously-broken declining resistance/support line (around 1,396), the next one the 50-day moving average (currently at 1,389.56). Going even lower, we have a support zone based on the August 27 and August 30 lows (1,361-1,364), and a further one based on the August 21 bottom and the 61.8% retracement level (1,338-1,339).
Before we summarize, let's comment on the relationship between the WTI and the XOI in the short term. This time, we see a negative divergence between the price action in light crude and the oil stocks. Although we saw declines on Monday (in both cases), the rest of the week looked completely different. We've been seeing a consolidation in oil stock in the recent days and the NYSE Arca Oil Index is trading between the September 18 low and the September high. Meanwhile, in the case of crude oil we saw further deterioration which resulted in a new monthly low.
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. The oil index closed higher for a fourth week and, what's most interesting, this was its highest weekly close since June 2008. Additionally, if the buyers manage to hold the XOI above 1,400, it will be the highest monthly close since June 2008. Meanwhile, crude oil not only lost its major allies (the 50-day moving average and the short-term rising support line), but it also declined below the medium-term rising support line. Additionally, the breakdown is confirmed and light crude has hit its new monthly low. Taking into account the relationship between light crude and the oil stock index in the previous week, we can conclude that the oil stocks remain stronger in relation to crude oil.
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