With the stock market stretched and in need of a pullback, I thought it a good time to look back at what oil is doing since it’s been almost 4 months since we last checked in. As I wrote last October, I expected oil to break higher out of the $50 consolidation range which had developed after forming the double divergent low bottom. It took almost 8 weeks, but it finally broke out to the upside at the end of November (and was confirmed with big volume), peaked its head just above $55 in January and then immediately stalled out. It looks like my $77 dollar upside target will have to wait.

Consolidations that occur immediately after breaking out of a consolidation are nothing out of the ordinary. It is a reflection of a market very much in equilibrium. What makes this most recent consolidation of interest is its tight range ($52-$55) and the fact it has lasted 10 weeks. The greater the time period, combined with the small range, pinches the Bollinger bands and warns that whenever it does breakout it will likely be very a powerful move. Unfortunately, it doesn’t tell us which direction it will go or when. I still give the benefit of the doubt the next move will be higher since that is the direction of the trend prior to consolidation.  

Digging a little deeper for some additional ammo to confirm the expectation for oil higher oil prices, we see in the seasonality chart below the fact we are just coming into a time which is normally very bullish for oil.  Over the past 30 years the period from March through October has seen oil’s price rise an average 15%.

But what about that nagging fundamental data that shows the world is awash in oil and inventories continue to climb? What about the laws of supply and demand that we learned in econ 101?

 As written in the Financial Times …

 “A mystery is confounding the US oil market: when inventories rise, prices rise, too.  That is not the way it is supposed to work. At 518.1m barrels, stocks of crude sitting in commercial tanks are the highest in records dating to the early 1980s. Fundamentals tell us that excess supply should weigh on markets and drive prices lower. But this year a loose pattern has emerged after the US government releases weekly oil data: surprisingly large increases in crude stocks have prompted spurts of buying.”   

Are we living in the Matrix?

 What’s an investor to do?  First and foremost, recognize that price is all that matters and there are always times when fundamentals, logic and common sense don’t matter. As such Its prudent to use them with caution. Times like this typically occur during fundamental shifts or when irrational exuberance has taken control.  The risk averse approach is to sit on the sidelines and watch. The bolder and riskier style is to recognize that uncertainty can offer a chance to pile up big profits and consider throwing caution to the wind and jump in. If the second option is your style, whatever you do insure you have an exit strategy determined before entering and follow it to a tee. Because when it ends, and it will eventually, it usually leads to an equally nasty move in the other direction.