Oil Market update
December 15th, 2006
The technical condition of oil has continued to improve since the last update, as expected, even though it has not, as yet, broken out of its ongoing base area to start a new uptrend.
On the 1-year chart for Light Crude we can see how, since the last update, it has broken twice above the 50-day moving average. After the first break higher early in November it was swiftly beaten back again as the advance was premature, however, this move draw off some of the overhanging supply. The second break above the 50-day moving average, which occurred when it was starting to flatten out anyway, was much more convincing and it has since held most of these gains and the average is even starting to turn up. This advance was capped by resistance at the early October high, and the subsequent reaction is unwinding the short-term overbought condition, creating the conditions for a breakout from the intermediate base area that has been forming since mid-September, and which will be signaled by the price breaking above the early October high at $64.40. The outlook for oil is therefore positive, and it will take a break below the late October lows towards $56 to completely erase this bullish scenario.
Oil stocks are a different story, having been out of phase with oil itself for some time. Oil stocks have been advancing quite strongly for some time, in sympathy with the rally in the broad market, and, it is believed, in anticipation of higher oil prices. Thus, they may have largely discounted a rally in oil over an intermediate timeframe.
On the 1-year chart for the OIX oil index we can see the uptrend in oil stocks dating from early October, and both the intermediate and long-term uptrends shown on the chart remain unbroken. As can be seen from the RSI and MACD indicators at the top and bottom of the chart, it is now getting substantially overbought. It is therefore considered to be prudent to selectively take profits in oil stocks, especially the majors that follow the indices closely, as the index approaches the long-term uptrend return line, currently at about 700.
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