Based on the June 5th, 2015 Oil
Investment Update
In our essay
on oil stocks from June 9, we focused on the connection between the XOI
and the general stock market to find out what impact the S&P500 index
could have on the oil stock index’s future moves. Back then, we also wrote
about the relationship between the oil stocks and crude oil:
(...) The beginning of May brought a new 2015 high of $62.58 in crude oil,
but we didn’t see a fresh high in case of oil stocks. In the following weeks,
crude oil has been trading in a narrow range and erased less than 38.2% of
earlier rally. What happened at the same time with the XOI? The index
declined sharply and approached the 61.8% Fibonacci retracement in the recent
days, showing its weakness in relation to light crude.
In the previous week, this negative correlation has been also in place and
crude oil gained 1.80%, while oil stocks remained almost unchanged (they lost
0.02%). Taking the above into account, we’ve decided to examine the
oil-to-oil stocks ratio to find out what can we infer from it about crude
oil’s future moves (charts courtesy by http://stockcharts.com).
Looking at the above chart, we see that the ratio moved higher in the
previous weeks and broke above the 38.2% Fibonacci retracement and the
long-term red resistance line (based on the Oct and Nov highs). Despite this
improvement, the upper border of the red gap between the Dec 8 low and the
Dec 15 high stopped further improvement, triggering a pullback.
Although the ratio rebounded in the previous week, the major resistance
level continues to keep gains in check. Taking the above into account, and
combining it with the current position of the indicators (the CCI and
Stochastic Oscillator are overbought, while the latter generated a sell
signal), we think that lower values of the ratio are just around the corner.
If this is the case, and we see a decline from here, such price action will
likely translate to a pullback in light crude – similarly to what we saw in
the previous months.
Having said that, let’s find out whether we can infer something more from
the stocks-to-oil ratio or not.
From this perspective, we see that the ratio reached the 38.2% Fibonacci
retracement based on the entire rally, which suggests reversal and further
improvement in the coming weeks – especially when we factor in the current
position of the indicators (the CCI generated a buy signal, while the
Stochastic Oscillator is extremely oversold and very close to doing the
same).
What does it mean for crude oil? As you see on the above chart, many times
in the past (we marked them with green) local bottoms in the ratio have
corresponded to local tops in crude oil. Therefore, if we see a rebound and
rally from here, the probability of a pullback in the commodity will
increase.
To have a more complete picture of the oil market, we also decided to
examine the WTIC:USD ratio.
From today’s point of view we see that the current situation in the CCI
and Stochastic Oscillator is similar to what we saw a year ago. Back then,
sell signals generated by the indicators preceded a sharp and sizable
decline, which took the commodity below $50. Taking this fact into account,
it seems that history will repeat itself once again and we’ll see lower
values of the ratio and crude oil in the coming week(s). If this is the case,
the initial downside target would be around 0.573, where the Feb highs are.
Summing up, crude oil still remains below the May and
June highs and the key resistance zone created by the long-term blue
resistance line and the 200-month moving average. However, taking into
account the current position of the ratios, which reached important
support/resistance levels (in all cases their reversals will translate to
pullback in crude oil), we believe that lower values of crude oil are just
around the corner – especially when we factor in the fact that similar values
of the CCI and Stochastic Oscillator (in case of the stocks-to-oil and
oil-to-usd ratios) preceded huge declines, which took the commodity to the
multi-month low of $42.41.
The above article is based on our latest Oil Investment Update. Its full
version includes much more details and is accompanied by scenario analysis
and summary of key factors that are likely to affect crude oil in the coming
weeks. If you enjoyed it, we encourage you to sign
up for Oil Investment Updates or the Fundamental Package that includes
it.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Oil
Investment Updates
Oil
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