With gasoline prices at the pump rising daily, investors have been forced once again to face the reality of rising energy costs. And professionals from business to government are also watching the double whammy of improving economic conditions and escalating geopolitical events. The former raises demand for energy. The latter can potentially cut supply.
As we learned in economics class, rising demand and shrinking supply, or even just the specter of shrinking supply, drives up prices.
Technically, the charts show something else people do not want to see – a bull market in oil prices.
Global crude oil markets saw significant declines in 2011 with the domestically traded West Texas Intermediate falling from roughly $114 per barrel to $75 per barrel. But in October, a rally was confirmed and the 2011 swoon was proven to be just a correction – albeit a big one – in an ongoing long-term bull market.
Between November and January, prices seemed to stabilize in a trading range. But earlier this month, crude rallied sharply to break free from that range and reaffirm that the bulls were in control.
The question is how far can this rally go and of course that is impossible to know in advance. The prospects of war in the Middle East cannot be analyzed on market charts and they will indeed have a huge impact on oil prices.
However, the market is far wiser than any analyst and will likely sense what may be coming. But for now, the trend is rising and as in any long-term bull market investors are often advised to buy on dips. For investors unwilling or unable to trade on energy futures, there are many energy stocks with rich dividends available as well as exchange traded funds (ETFs) tracking oil prices themselves.
Just be aware that oil may have gotten ahead of the fundamentals in the economy. That does not mean oil cannot rally as it did in 2008 but volatility is much higher under such conditions and so is risk.
Michael Kahn, CMT, writes the twice weekly Getting Technical column for Barron’s Online and publishes the daily Quick Takes Pro newsletter. Follow Quick Takes Pro on Facebook. Disclosure: Mr. Kahn is bullish on oil in his newsletter and is long on a few oil stocks (but not oil or the oil ETF).