Oil: Once Insatiable Levels

We all remember when oil prices reached "once upon a time” high levels. But prices have been falling for nearly a year now and it was only during the last month that we observed how the uptrend led to diverging opinions among analysts as to whether this period is over or is it only a correction where oil will drop again.

The relentless price war really caused many changes in the market in terms of supply, demand, and the way in which the common trader looks at trading oil. Unlike what we saw last month when it was safe to say that traders do not know how to behave with the black gold, today we can see a movement which is a bit more technical and less based on fundamental data.

Yet, the question remains – should I sell or should I buy?

There is no doubt that this is indeed a very difficult question to which the right answer will definitely be worth a lot of money. It would involve a number of factors on which one must look at to get the answer.

Last week we saw how oil prices surged 1.8% to a price of 59.6 dollars per barrel. The price jumped by 25% last month due to assessments about a slowdown in U.S. manufacturing. This is the sharpest monthly leap since May 2009.

According to OPEC, oil production rates in the U.S. would rise in the second quarter of 2015 to an average of 13.65 million barrels per day. This increase would already brake in the following quarter, and from there, it's a long way down. The decline in oil production is a direct result of the decrease in rigs and oil wells. According to data of the information society in the field of oil Baker Hughes (NYSE:BHI), the number of rigs and active oil wells last counted May 1st in the United States shrank to 905, and is expected to fall further during 2015.

Via a technical view we can see how oil reached closer to the 23.6% fibs level on a weekly chart, which is around $60 a barrel. And as we saw earlier, it is now not only a matter of a fundamental data but technical as well. So the 38.2% ($68.9) level seems like a reasonable 1st target price to place.

For most traders we know how the market tend to react based on fibs levels so that 50% ($76.2) would be the 2nd target to place.

Although we can see how technical it is to get the black gold back on the truck, that does not necessarily mean this will be the case. The main concern remaining at this point is the fact that with the increase of oil prices during this past month, many investors may like to cut on losses and will close their long positions - which could cause another sharp drop on the prices that were just starting to stabilize to around $55 a barrel after dropping over 60% during the past months.

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So, once more, should I buy or should I sell?

Personally, until oil reaches the 38.2% fibs level, I buy.

Written By: Roni Stern