- Published on Friday, 20 January 2012 08:00
- Written by Andrew Snyder, Editorial Director, Inside Investing Daily
- Hits: 1193
Now is the time for crude oil. The charts are bullish. The fundamentals are bullish. Are you positioned to take advantage of what lies ahead?
I love it when I'm right, but I'm still surprised at the resilience in crude oil prices. Last month, I told you that American troops leaving Iraq was going to open the door to huge geopolitical action that would push the price of oil higher.
We've seen posturing and threats from Iran, and countered sanctions from the U.S. and its allies.
The truth is, I thought we'd see a lot more volatility in oil prices. But this is what we've gotten instead.
We've seen prices maintain their uptrend, even under the pressure of a "stronger" dollar and a crumbling European Union.
Now we're seeing two bullish chart patterns to go along with some bullish fundamental news.
First is the gap pattern I've marked in red. Gaps like to be filled, but most times they are filled within a week. That oil has taken so long to come back to that gap means this pattern is only slightly bullish. But here's what it does do... It gives traders a potential point of resistance.
That's important to keep in mind for the second pattern -- the inverted head-and-shoulders pattern marked in green. Inverted head-and-shoulders formations normally mean prices have put in a bottom and will move higher from here.
This formation, however, comes after a long-term price run from the bottom in 2009.
Because this pattern occurred in an uptrend (or slightly after the uptrend) the upside potential might not be as big as when this pattern happens at a true bottom.
But I still see oil prices climbing to $105 before losing much gas.
That gap formation is going to act like a magnet, pulling prices higher.
And then we throw in some bullish fundamentals -- like the huge inventory estimate miss from the American Petroleum Institute (API). Weekly inventory data released on Wednesday showed a drawdown of oil supplies.
But not just a small drawdown... oil inventories fell by 4.8 million barrels for the week ending Jan. 13!
This is even more surprising because the API expected oil supplies to rise by 2.8 million barrels.
We're also -- surprisingly -- seeing a little bit of euro strength after the International Monetary Fund said it's going to pad its piggy bank with a further $600 billion -- a full doubling of current funds -- to help deal with the euro debt crisis.
That's putting pressure on the dollar, and a weak dollar makes commodities priced in dollars more expensive.
All together, oil looks pretty appealing to investors.
Indeed, Morgan Stanley lifted its bullish price target by $10 this week to $125 a barrel, citing geopolitical risks still in play.
The "bottom" in oil prices might not be that far from where we are now.
I told my Macro Trader readers that oil ministers in the Middle East want to stabilize oil prices at $100 a barrel.
We've also heard news that President Obama is scrapping the Keystone Pipeline plan to bring more Canadian oil into Oklahoma and down to the Gulf of Mexico.
This has bigger implications than just the price of oil. Allow me to rant for a bit...
The Obama administration rejected a bid to expand the controversial Keystone oil sands pipeline Wednesday, saying the deadline imposed by Congress did not leave sufficient time to conduct the necessary review.
"The rushed and arbitrary deadline insisted on by Congressional Republicans prevented a full assessment of the pipeline's impact, especially the health and safety of the American people, as well as our environment," Obama said in a statement.
I think this is fluff political rhetoric, and it changes the topic from economic potential to environmental and safety issues. It's a bad political move, and it's a bad policy move.
As green-minded as I am, the issues surrounding the Keystone Pipeline have had plenty of time to be addressed. The route was proposed more than a year ago and invited comments from states and the public.
At a time when jobs are still -- as they should be -- the main point of discussion, "canceling" this project is just plain dumb.
And to top it off, pipelines are far "greener" than shipping oil halfway around the world in massive tankers. The environmentalists out there deserve a voice, but let's be real, and let's not cut our nose off to spite our face.
It's like the argument that we shouldn't use windmills because they can kill birds. It just doesn't take the big picture into account.
Our big picture with oil is that we import far more than we produce, and huge amounts of that oil come from far-flung reserves, sometimes from unstable areas. We have an opportunity to boost imports from a friendly country through a pipeline instead of a tanker travelling more than 7,000 miles from the Suez Canal to the Gulf of Mexico.
Get with the program, Barack.
Now, the Keystone project's not dead, so keep an eye on TransCanada (TRP:NYSE). It's going to re-file an application for the pipeline. We haven't seen the last of TRP yet.
Editor's Note: Aaron Snyder, the alternative investment guru behind Unconventional Wealth, just sent me an email and said his play on the natural gas boom is up over 15% in the last month. If you have not gotten in on the industry's freshest and hottest newsletter, this is a great opportunity.
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