–Tomasz Wisniewski, Director of Research and Education, Axiory Intelligence
The second half of August, September and October are a real Eldorado for oil bulls. The price of ‘black gold’ is climbing higher almost every day, raising both hopes and concerns that we’ll soon see it rise to 100 USD per barrel.
You’ve probably heard and have probably experienced that inflation is now surging. One of the main contributors to this is oil.
Directly and indirectly oil causes inflation because if companies pay more for fuel and energy, then they transfer that cost straight onto their clients, which in turn, increases the price of goods, even ones that have nothing to do with oil!
Oil is expensive. You know this is a fact because you’re likely noticing how expensive it’s becoming to fill up your car’s gas tank. You may think your tank’s getting bigger (sorry, but there’s no way that’s happening). The more likely scenario is that gasoline is getting much more expensive. The question is: Will this trend continue until the end of the year?
The majority of experts agree that the price of oil will continue to climb higher. Global sentiment among traders is bullish and the vast majority, if not everybody, is forecasting that the price of oil will continue to rise. That can actually get problematic at some point. One could say that there is simply just too much certainty here. Because it’s when there are absolutely no doubts that surprises spring up on you. That’s just a ‘general psychology’ observation rather than hard data. So, should we treat this price hike seriously?
Well, for sure it’s on the minds of more experienced traders. When everybody is telling you to buy, it means that it’s too late and you have to stay cautious and think about limiting your exposure rather than expanding it.
But what is the hard data saying? The answer is, hard data is bullish for oil. The demand for oil is still high and it’s expected to get higher, even up to around pre-Covid levels. In addition to this, the stockpiles are steadily declining and OPEC+ are very cautiously lifting their production restrictions. You don’t have to hold an economics degree to know that both limited supply and rising demand will have a positive impact on the price of the oil.
OK, the fundamentals are strong for oil, but what is the chart telling us? Here, we do have a very healthy uptrend. There are no signs of weakness whatsoever. One thing though. Since April 2020, when oil hit rock bottom, we do have a very interesting regularity. The price is experiencing a 3-4 month rise followed by a 2-3 month correction. If we assume that this regularity will last until the end of the year, we should expect the continuation of the uptrend in the nearest future, but also with some kind of correction at the very end of the year.
With all that being said, I think that a further upswing and a price closer to 100 USD are still more probable and possible than a trend reversal and the price reaching 70 USD. Trend continuation is always more probable than a trend reversal. This is simply how trends work.
One last thing. You probably know that there’s a strong reverse correlation between commodities and the USD. Commodities are quoted in USD, so a stronger USD usually means weaker commodities. This is a general truth but only in times when there are no external interruptions. However, this correlation broke in the past few weeks when we saw both the USD and oil strengthening. We can blame OPEC, Covid and the FED. If the price of oil is rising despite the stronger USD then you have to wonder what will happen if the USD weakens and doesn’t bother commodities anymore. Well, that’s just another bullish egg in a buyer’s basket.
To sum up, if you’re getting angrier when you are filling up your car then sorry, we don’t have good news for you. At least not until the end of the year. Unless you have a Tesla…or wait… no! That doesn’t hold at all. Not when electricity prices are also skyrocketing.
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