Will Oil Prices Go Still Lower?
Posted in AMEX Oil Index (XOI) on June 29th, 2011 by admin – Be the first to commentBy Jim Donnelly, Olson Global Markets
After a frenetic week in the commodity pits culminating with the decision by the International Energy Agency (IEA) to release emergency reserves to make up for lost Libyan supplies, oil prices tumbled on Friday. And although half of the 60 million barrels to be released over the next month was from the U.S., that 30 million barrel commitment represents less than 4% of the 727 million barrels held in strategic reserve. In addition, the 727 million barrel stockpile is 35 million barrels above its 5-year average.
In any event, oil prices had already begun to fall following their recent peak set during the first week in May. Moreover, the AMEX’s XOI Oil Index had broken below key trend line support at 1,280 on June 10th, well before Friday’s surprise announcement. At the moment, oversold conditions are present on the XOI’s weekly time frame, which suggests that a rebound higher in oil prices is entirely possible from current levels. If the XOI does recover, a retest of the 1,280 area would likely be viewed as an opportunity to “lighten up†on long oil positions. When looking at the XOI weekly charts, it also appears that there is a reasonable “risk†for a possible move down to test key trend line support now sitting near the 1,100 area. That’s a whole lot lower than market participants are currently expecting. But from a technical point-of-view, the pattern that traced out between January 14, 2011 and the June 10th “breakdown†also happens to look like a bearish “head & shoulders†pattern that points to an eventual test of the 1,100 area as well.
In any event, increased volatility in oil prices appears to be likely during the summer months. Don’t be surprised if lower oil prices result.