Small Cap Network Blog

If you’re one of those people who really thinks the global demand for oil actually dropped by 16% in less than a month, then I’ve got a bridge I’d like to sell to you. (By the same token, if you think the demand for oil quadrupled in the last four years, I’ve got another bridge….never mind.) Regardless of whether or not you think all the crude price volatility is justified or not, as I see it, right now isn’t exactly the best time to be making bets - oil’s still stuck in the mud, as it has been for a few days.

True chart-watchers call it a consolidation phase, where a chart’s price - whatever the security is - just moves sideways in a ‘range’. For crude oil futures, that recent range has been between $122 and $128. So, with today’s close of $122.08, it’s not like we have a whole lot to get excited about just yet. No, the next leg lower is only likely to begin once $122 cracks as support.

I don’t think it’s surprising that the consolidation is playing out at (1) a Fibonacci retracement level, and (2) around a long-term support line.

If the $122 area does end up breaking down as support, a move to $110 is not only possible, but I think likely. That’s where the next big Fib retracement line lies. It’s also an area proven to be a bullish bounce point before…in May. Still, it wouldn’t be a bad move, and it would definitely ease the pain at the pump.

By the way, I’m generally bearish on oil for a handful of reasons. One of them is simply that even though tropical storm Edouard is looming, it’s not enough to excite would-be buyers. Maybe they’re looking at the bigger picture…that OPEC has cranked up output for three straight months. Personally though, I’m not buying that argument.

The media is saying OPEC is ramping up output because a weakening global economy is hurting demand.

First of all, I don’t think demand has weakened that much. Even if it has though, think about the backwards-ness (nice word, huh?) of the theory. If demand is waning, you cut the supply to keep the price higher. Journalists are essentially saying OPEC is interested in a particular amount of cash flow, and will deal in volume (at low margins) in order to achieve it.

I’m no brain surgeon, but I don’t think the brains behind OPEC are dumb. I ‘m fairly certain they’re more than willing to not sell us any oil at a price they don’t like….they know we’ll have to buy it sometime. Their wallets should be plenty fat enough to tide them over until that day comes. In other words, I don’t think the ramp-up in production is permanent.
No, I think oil is going lower for one simple reason….just because it’s going lower. To assign some sort of rational reason for anybody’s decision to buy or sell? Well, frankly, I think it gives ‘em too much credit. The market isn’t that organized or reflective of the way things actually are.

Anyway, here’s the chart; you already know the key levels to watch.

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