Why You Shouldn’t Be Worried About Surging Oil Prices

Thursday, July 18th, 2013
By George Leong, B.Comm. for Profit Confidential

I just filled my gas-guzzling SUV that only uses premium gasoline; trust me when I say it wasn’t pleasant. And I know I will need to visit the gas station again in just a few days.

I accept that, but what I don’t understand is the surging increase in oil prices. Oil is now more than $106.00 a barrel.

I realize we have the uncertainties in Egypt after the ousting of the country’s former leader Mohammed Morsi by the army. Of course, while Egypt is not a major oil producer, the Suez Canal does run through it. And a huge amount of Middle Eastern oil is carried through the canal to the Mediterranean Sea from the Red Sea.

At the current price for oil, the technical picture continues to point to gains in the near term. But I would look at an upside move in oil prices as an opportunity to sell if you currently have oil exposure. Oil is not in a sustainable upward move or bull market.

But the commodity is still advised for traders. I would expect a return to normalcy in the near future, with oil prices retrenching back to less than $100.00 a barrel.

The chart of the West Texas Intermediate crude (WTIC) oil prices below shows the overextension from the previous sideways channel, with $98.00 on the top end. I doubt the breakout will hold as the underlying fundamentals are not supporting a situation of a demand-supply imbalance.

Chart courtesy of www.StockCharts.com

The U.S. economic recovery is ongoing, but it’s also showing signs of stalling. U.S. companies are struggling to grow revenues and that implies a potentially lower demand for oil.

The global economy isn’t going gangbusters either, with muted growth from Europe to Asia and Latin America.

For oil prices to have a sustainable upward move at more than $100.00, we need to see the demand side explode upwards. And no signs indicate that will happen.

In addition, the Organization of Petroleum Exporting Countries (OPEC), the oil cartel, can no longer really influence world oil prices as much as it did in the past when it often held world markets captive.

Also America is producing much more oil now than in the past and this will continue to increase as shale oil from North Dakota and Montana is being pumped via fracking techniques. (Read “Why This Cold Prairie State Is an Investment Hotspot.”)

It’s wise to take a look at the oil companies and those supplying services to them. The prices of these oil stocks are headed higher, but not at the same rate as oil, because traders know the jump in oil prices is only temporary; it’s not sustainable.