Energy Market Near Seasonal Top

April 2, 2019 Newsletter, Oil No Comments

Since we forecasted the early 2016 low with Oil near $26, we have remained long term Bullish. In late 2018 we projected an intermediate correction low in this Oil Bull market down to the lower $40’s and later we targeted a rebound above $60 in the Spring. Recent minor projections for $62.6 were reached today. There are no further specific projections higher currently, but there is still room for gains as the ideal timing for Oil to peak is in the April to May time frame. With Hedge Funds needing modestly higher prices from here to reach overbought extremes and signs of a modest global rebound in the 2nd quarter, we suspect any declines from the 2nd quarter peak into a low near June will be another Buying opportunity. With our forecast for a recession free economy in the US through 2020, we favor the energy Bull continuing in unison with the stock market. The inexorable rise in US Oil supplies out of the Permian and a strong Dollar will at times temper Oil price gains, but long term declines are unlikely until a US recession approaches or there is a new escalation in the US and China trade war. Assuming there is a trade deal, we would then expect stronger consumption demand and a lower Dollar that will be supportive to the energy complex. 

Oil momentum readings are overbought and a greater than $5 correction later this quarter is likely. However, with the link between Oil and stocks and the proximity of the stock market to its record peak becoming more of a magnet, we note the potential for a synchronous overbought rally in Oil into the $65 to $75 topping zone to match gains in stocks.

Unleaded gas moves closely with Oil  and the uptrend of higher highs and higher lows since last December remains Bullish. A new breakout leg to the $2+ area should be the right timing and price for Hedge Funds to become very overbought leading to a month or more of corrective action after the next leg higher is complete.

While Unleaded Gas and Crude Oil keep breaking out with the stock market to new highs throughout 2019, Heating Oil has diverged from its Oil parent since February.  Hedge Funds are mildly oversold in Heating Oil and the congestion pattern over the past 5 weeks looks constructive. With seasonals turning higher, we favor an upside breakout in coming weeks projecting above 210.

Natural Gas has been in a long term supply glut situation in the US for years with no end in sight. Exports continue to increase and could be a game changer if the US could supplant Russia in Europe. However, over the next year our capacity will keep growing almost regardless of price with occasional weather or news driven price spikes. Hedge Fund sentiment was overbought last December, but neutral throughout 2019 thus far. The seasonal picture is supportive throughout the 2nd quarter, but prices remain range bound moving toward technical oversold readings near the bottom of the congestion pattern. Significant price support is in the mid 2500’s.Look for a minor low in the 1st half of April.

Despite the steady 3 year Bull market in the energy complex, the underlying energy stocks and capital expenditures toward energy have been weak. The world of petroleum fracking has sparked a rapid increase in production without the normal expenditure expansion cycle. Drillers continue to adopt cost saving ideas such as cheaper propellants to release oil from the rocky layers of earth and multiple directional rig platforms to avoid adding new individual rigs. Should Oil move into the $80’s per barrel we would then expect an expansion of rigs beyond the Permian that could provide the wave of spending many stock investors have waited for. Until a China and US trade deal arrives, Oil may struggle to top $70 and is overdue for a corrective period this quarter as long as the US Dollar remains strong. 

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