And what has oil done in the weeks since? Fallen about 12%. Ouch...
The technicals look pretty lousy, too. On the daily chart of West Texas Intermediate crude (WTI), the Relative Strength Index (RSI – the middle portion of the chart) is on a sell signal, as is the moving average convergence/divergence (MACD – the lower portion) indicator. There's no positive divergence to speak of.
Prices are forming a clear downtrend channel, too. Last week's action puts us at the bottom of that channel, which means we may start to see higher prices soon as sellers reach exhaustion. But the mid-term trend of the last couple months is down.
Now, this is great news for filling up at the pump (I saw gasoline at $3.20 around the corner here in South Florida... not too shabby).
But it's bad news for anyone exposed to oil stocks at higher prices.
People like, for example, me...
I've been slugging cash into shares of Exxon Mobil (XOM) since before the Ukraine-Russia conflict began in 2022. At one point, it was a top performer in my portfolio. Now, it's a loser.
But am I giving up on this oil trade? Absolutely not.
Oil prices will trend higher in the coming years. The simple facts of the global oil market have me almost certain of it.
And despite the short-term bleeding we're seeing in the markets, oil has a number of bullish tailwinds that should send prices higher over time. Maybe even twice as high as they are today.
This begins, as it tends to these days, with the poor choices of the U.S. government. But it's much bigger than just that.
This may be the biggest tech opportunity you'll see in your lifetime. (HINT: It's not Google, Microsoft, Nvidia, or other obvious companies that have already run up).
I expect oil prices to move higher in the short term, as bulls take back control for the next leg of the mid-term downtrend.
But also, going years out, I think oil prices could be double what they are today or even higher.
Let's cover the long-term case first.
I can cover this for you in three words: Supply and demand.
Economics 101 is more than enough to forecast higher oil prices. Let me show you why...
We'll start with the U.S. oil stockpile, the Strategic Petroleum Reserve.
It's dropped to levels not seen since 1983, the year after the formation of the SPR.
A lower SPR is suppressing oil prices – for now. But the U.S. cannot go on flooding the market with supply forever while sacrificing its emergency oil stockpile – especially as conflicts erupt around the world that threaten to disrupt the global oil trade.
That's one point in the supply scarcity column. Here's another...
On the other side of the world, two major world powers depend on higher oil prices to support their economies.
Both Saudi Arabia and Russia reiterated their stance on Sunday that they want to cut oil production. This should come as no surprise if you have even a passing familiarity with their economies. Both of them largely depend on oil to function.
Saudi Arabia has taken to diversifying its investments outside the oil industry in recent years, but oil still makes up about 42% of its GDP and 90% of its export revenues.
The country also holds about 17% of the world's petroleum reserves, second only to Venezuela. No matter how diversified it would like to be, petroleum will remain a large staple of Saudi Arabia's economy for a long time to come.
Similarly, Russia's home to about 5% of the world's petroleum reserves – a relative handful compared to Saudi Arabia. It's also a smaller part of its economy, about 16%. But the recent conflict in Ukraine shows just how important Russia's oil and gas still is on the world stage, especially Europe.
OK, now let's talk demand.
The Center on Global Energy Policy forecasts oil demand will grow by 1 to 1.5 million barrels per day each year until the end of the 2020s. In case you're wondering, we were at nearly 100 million barrels per day in 2022. This means more and more oil will be used as time goes on.
Emerging markets are the key source of this oil demand growth. Places like India, which recently became the world's biggest population, and countries in Southeast Asia are buying more oil as they grow and build.
Add on top the fact that oil is used for much more than just energy fuels. Oil is used in plastics, textiles, and countless other chemicals and finishings that make up products we use every single day.
That's why I've said time and again that the death of oil has been greatly exaggerated. Even in a world that doesn't sell a single internal combustion engine vehicle, oil will still have a huge role in the global economy.
But let's now look out to the next couple months, where I see a trade developing...
Microsoft's CEO says AI is a "tidal wave" with more potential than the internet.That's why Microsoft has spent $13 billion on AI investments - they're desperate to claim their own stake. And you should be too.
But before you buy MSFT (or any other FAANG stock), you'll want to watch this interview. In it, 50-year Wall Street veteran names his #1 AI stock to buy (it's not what you'd expect).
Let's bring up that chart of oil futures again, and zoom out a bit...
As we established earlier, oil is trading in a downtrend channel, erasing all of the gains it's made since September.
It also recently broke down below its 200-day moving average, a critical level that it last broke above in late July.
Note also the two horizontal dashed yellow lines in the chart above. The bottom one represents the primary support for the first four months of 2023, before becoming resistance throughout the summer. The top line represents this year's early resistance level, and a recent area of support through October.
Right now, with oil prices trending down, I think we should expect that bottom dashed line to act as a level of strong support. We should view any trading down at the $73 level as a buying opportunity.
Similarly, the top dashed line represents a good price to take profits should the downtrend look like it's going to continue. Now that the bullish trend has reversed for the short term, it should resume its prior strength as resistance.
It may be a bit early to get overly bullish on oil prices right now. They may slide a bit more toward that lower support line.
But over the next several weeks, I anticipate we'll see oil prices rise to about $78.50. That's a gain of roughly 4% as I write.
That makes this a solid setup for a speculative call-option trade on the SPDR Energy Select Sector ETF (XLE).
XLE is currently trading at $82.45 per share. As I write, the $82 call option expiring on Dec. 29 is currently trading at $3.65, or $365 per contract.
If XLE rises about 4% along with oil prices, it will reach a price of $86 per share. And the Options360 Probability of Profit (POP) Calculator gives us a probability of 80.17% for that to happen by Dec. 29:
If we see that move by the end of November, it'd result in a 45% gain on the value of the call option, or a return of $147 per contract.
Even if it took all the way 'til Christmas, this price move would result in a gain of 22%, or a $73 profit.
As always when trading options, you should only trade what you can afford to lose completely. If oil continues its slide, which it very well could, the value of the option could quickly erode. The longer it takes to see any return, too, eats in to the profit potential.
Still, this highlights the importance, as I've been preaching all week, about being willing to trade the market's ups and downs.
Prices for all assets are proving to be volatile in a high-inflation, high-interest-rate world. Your ability to trade that volatility will make all the difference.
Along with the beta-phase POP Calculator I just showed you, Options360 includes a weekly email highlighting the top options income opportunities our algorithms have identified.
P.S. I added to my long-term energy positions last week, too. Not just oil, but natural gas and nuclear energy, as well.
I'd like to know, as always, what you think of the long-energy trade. Are you bullish? And if so, which energy commodities do you think will perform best in the coming years?
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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