The Sloppiest Commodity of 2012: At Equilibrium?

The Sloppiest Commodity of 2012 so far has been WTI Crude Oil ($CL_F, $USO). Crude Oil has basically done nothing all year despite the strong market rally. Given the strong historical relationship between Crude Oil and the Market ($SPX), something has to give soon - unless we are seeing the start of the breakdown of this correlation.

While Brent Oil ($NBZ_F, $BNO) has rallied with the market, Crude Oil has stayed flat year-to-date in a big sloppy, choppy range between ~96.50 to ~103.50. Given the fact that everybody is worried about Iran (but the market), the fact that the economies of the US and China are not slowing as expected, and the fact that Europe is in a recession, I ask the question: Is Crude Oil at equilibrium? Is $100 the perfect level for Crude – given the facts we know and assumptions we can make? This could very well be true, who knows, but all I know is that Crude is likely at a level where one should not take a long term trade (either long or short). While I was bearish on Crude oil for most of the first 3 quarters of last year, my stance here would be super-neutral.  Unless things significantly change between now and the new few months (very possible), Crude is a “buy the dip” candidate below $90 and “short the rip” candidate over $105.

$CL_F Daily Chart

A Couple of things catch my eye on this chart.

  1. The ‘volume by price’ indicator shows us that most of the volume over the past 7 months has been done right here, between ~96.50 and ~101 – thus confirming the equilibrium theory.
  2. The 200 day SMA is flat. This tells us there has been really no trend over the past 7 months. And technically, it is right. While it is true we have rallied from $75, most of the action over the past 7 months has been in a range. From August 2011 to October, Crude was in the $75-$90 range. From November 2011 to now, crude has basically been in the $96-$103 range. Compare this to early 2011 where the 200 day SMA was sloping up as the price trended up.
  3. Volume looks mixed.
  4. We are basically where we were last July (2011). Compare that to Last February (2011) where Crude was up ~11% when compared with the previous July (2010).

 

Tags: $USO, $CL_F, $NBZ_F, $BNO, $SCO, $UCO, $OIL, $DTO

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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