Oil prices (NYSEArca:USO) have held up surprisingly well these past three months. We’ve seen geopolitical threats from Iran push prices well above $100/barrel (bbl), while slumping demand from the U.S. and Europe has dragged prices as low as $95/bbl.
This $5 trading range has been frustrating for investors. Indeed, I’ve watched a Macro Trader recommendation swing from red to green to red.
The factors surrounding the price of oil are getting much more attention, it seems.
Currencies have played a big part in the price of oil. When the euro tumbled so swiftly, the value of the dollar jumped. . .and oil prices fell.
And the inventory reports have had a bigger impact, too, when coupled with these price fluctuations.
Let me give you an example using the past two weeks of oil reports.
This week, on Feb. 1, the Energy Information Administration reported that oil inventories climbed by 4.2 million barrels (MMbbl). At the same time this report was released, the euro started falling against the dollar.
As a result, oil prices fell $0.77.
Last week, on Jan. 25, the EIA’s report showed a 3.6 MMbbl climb in inventories. But oil prices (NYSEArca:DBO) closed up $0.20. Why the difference? The U.S. dollar was falling in value to the euro.
In other words, currency volatility really affects the price of this commodity, negatively when coupled with climbing supply.
And that’s why we’re seeing oil prices in this slump.
From a technical perspective, oil prices could drop as far as $95/bbl before finding support, and the volume action indicates heavy selling for the past week.
I wouldn’t count oil down and out for long, though. But traders and investors might have to take a wider look at what’s going on. Take a look at this one-year chart of March oil futures.
A quick look at this chart and it’s easy to see the resistance to higher movement. The downtrend from last spring and summer has given oil prices a couple of test points. As of yet, oil has failed to beat them. . .
But prices also haven’t given up yet.
If oil prices can stay above $95/bbl—and the greater factors like a still-weak dollar despite the euro mess say this is a strong level of support—then we could see prices jump easily to $100, and then to $105/bbl, if gaining momentum.
There are bigger issues keeping oil prices high. Exxon Mobil (NYSE:XOM) missed estimates on declining production. Its oil operations in Africa produced 24% less in the fourth quarter of 2011. Production in Europe dropped 23%. [Related: Chevron Corporation (NYSE:CVX), ConocoPhillips (NYSE:COP).]
Overall, crude production fell 11% for the company.
At the same time, North Sea oil exports to Asia are at an eight-year high. North Sea producers, such as British Petroleum (NYSE:BP), have shipped 8 MMbbl to the region since mid-December. Bloomberg says that’s the most for any month since 2004.
The major importers are China, South Korea and Australia. China’s oil demand is expected to jump 4.3% to 9.9 MMbbl a day. Developing Asia’s supposed to get a 3.8% boost in demand this year. That more than offsets the drop in demand expected in Europe.
In other words, China’s sopping up all the excess oil from developed nations. Taking extra supply off the market is putting in a floor for oil prices.
This might be a good buying opportunity for traders, though the next couple of days will be rocky as oil prices test out that support between $95 and $96/bbl.
I still like the long-term picture for oil, too. And with OPEC maintaining that $100/bbl is a reasonable price for oil, prices don’t seem to have a lot of room to move lower.
The one factor that we need to keep a super close eye on, though, is the dollar and euro. And this is what we’re up against:
The overall trend of the euro for the past year has been down. . .This boosts the relative value of the dollar, and commodities take a beating when the dollar climbs. But I said "relative." The real value of the dollar is not climbing. Our interest rates are stuck near zero for the next two years.
But this comparison does have its effects on oil prices, so it needs to be paid attention to.
Sara Nunnally, ETF Daily News
As senior research director, global correspondent and coeditor of Smart Investing Daily, Nunnally has traveled all over the world in search of the best investment opportunities to recommend to her readers, be they in developed economies like France and Italy, in emerging markets like the Czech Republic and Poland, or in frontier terrain like Vietnam and Morocco. Her unique "holistic" approach of boots-on-the-ground research has given her an edge in today’s financial marketplace as she searches for the next investment opportunities in hot sectors like alternative energy, currency markets and commodities. Nunnally’s diverse background includes studies in history, computer science, literature and financial research. She has appeared on news media such as Forbes on Fox, Fox News Live, Bloomberg and CNBC's Squawk Box, as well as numerous radio shows around the country.