There’s no better time than now to go long oil.
NYMEX futures hit a 9-day slide downward. A rising dollar, robust U.S. domestic petroleum stockpiles, and a potentially momentous Fed announcement are all being counted against crude.
From a technical standpoint, though, we’re staring at a key reversal point for oil heading into 2010.
Below, we see a chart of the United States Oil Fund ETF (NYSE: USO). USO tracks high-quality West Texas Intermediate crude through bets on black gold and various refined oil products in forward-looking trades:
Watching Technical Indicators for a Reversal in United States Oil
The first thing to note is that since late October, USO (shown here in candlestick view to give more information than just day-to-day plot points) has traded in a similar channel to the S&P 500, shown in red.
By setting Bollinger Bands to show relative price levels over this 3-month period, USO is clearly nearing oversold territory and even threatening to break below the lower boundary.
Our candlesticks point to similar potential for a bounce here. The 8-day slide of crude futures into Friday, December 11, led traders to become more ambivalent about USO’s direction, and that gave us a Doji cross that can signal a reversal.
The Williams Percent Range (W%R), another favorite technical indicator you’ve heard about from my colleague, trading guru Ian Cooper, also shows "Oversold" in big neon letters.
With the W%R down near 100, this is textbook technical fodder for an upswing play — just look at what has happened the other times W%R dipped this low!
Of course, we need confirmation of all these reversal signals in the actual price movement, which we can’t see… yet.
That’s why it’s important to establish a long position in oil now, whether through USO or an ETF like AMEX: OIH that holds oil services companies. There are even supercharged long positions you can take, like the ProShares Ultra Dow Jones-AIG ETF (NYSE: UCO). UCO will double every one of oil’s upside moves, offering you the opportunity to reap quick rewards in the imminent upswing.
Now, both of the ETFs I’ve mentioned here are based on domestic oil price action in the U.S. But there’s a lot more to crude market dynamics than just American economic forecasts, Fed interest rate levels, and the greenback’s value…
Looking Beyond the Oil Market’s "Dollar Obsession"
A rising dollar could weigh on commodities as traders flock away from oil, metal and other material investment havens in favor of the global reserve currency. After all, the inverse relationship between the U.S. dollar and oil ("Dollar up; oil down") is practically part of investing Canon Law.
There’s also new talk of Iraq’s pent-up oil reserves flooding into the global crude market. (I’ve seen that same movie every year since 2003!)
You’re putting your money in peril, however, if you ignore the news out of China. Coinciding with a fresh International Energy Agency forecast that global petroleum consumption will increase by more than previously expected in 2010, last week the Middle Kingdom let us know just how rapidly its manufacturing economy is recovering from the credit crunch and market downturn.
Industrial output in China rose by 19% in November over the same month in 2008. Though the U.S. Department of Energy’s Energy Information Administration (www.eia.doe.gov) and oil cartel OPEC don’t see the demand scenario as fleshing out until 2010, the IEA outlook is bolstered by JP Morgan Chase (NYSE: JPM), a U.S.-based financial services giant.
JP Morgan analysts upped their oil price forecast for 2010 from $67.50 to $78.25 last Thursday, which would put crude about 12% higher than current levels around $69.90 per barrel.
JPM’s 2011 view puts prices even higher at $90, meaning you stand to gain nearly 29% if you get in now. It’s a simple medium-term trade for those bold enough to ignore what the Wall Street Journal has rightly called a "dollar-obsessed oil market."
Oil Companies Won’t Let the Rug Get Pulled Out
If the dollar is a haven for commodity and forex traders, let’s consider oil companies’ own sense of safety, too.
The biggest petroleum players are now investing record amounts in non-traditional revenue streams like natural gas for transportation and clean energy (see BP Wind Energy, for just one example).
Those investments rest on sustained higher oil prices as their capital base. If the oil price keeps plummeting, intensive exploration will also drop precipitously, which will lead firms like OIH components Schlumberger (NYSE: SLB) and Halliburton (NYSE: HAL) to raise hell. There is simply too much energy market momentum today that is banking on high oil for this drop to continue.
Today you’ve seen the technical case for a rebound in oil, and hopefully the logic of why the 9-day freefall will end is clear to you, too.
For more about the shifting energy investment tide and some astounding trends now playing out in the world’s oil producing heartland, check out this special report from my Green Chip International energy investment service: The World’s Longest-Running Drug Deal.