Oil’s Slippery Slope

We haven’t talked oil in a while, so let’s dive into the charts as it looks like “black gold” is getting ready to make some moves.

For what it’s worth, a few Wall Street analysts voiced their opinion on oil in the last week and I have to say… I wasn’t impressed.

Just a little more than a year ago, we had price projections at well more than $100 a barrel with a few analysts’ targets nearing the $200 mark. Now, we were still coming off the pandemic and the Fed’s real fight with inflation, which meant more supply was coming online and that demand was lowering because of rising rates.

Today, demand continues to increase around the world, though there are some questions on whether the global economies have emerged from their pre-recessionary states enough to support robust demand for oil.

Those fundamental notes aside, Oil is entering one of the strongest seasonal periods of the year.

Over the last 19 years, the months of February, March, and April have netted positive gains an average of 64% for each month. This is by far the best “winning” streak that oil sees out of the t12 months of the year.

Looking at the average return by month, the only months that oil does give positive returns is February, April, May, and June.

That’s it!

Only four months of the year see average returns for oil that are above 0, the other eight months average losing returns.

Here’s the chart of those returns.

uso monthly average return

(Click to enlarge)

In addition to the seasonally strong performance that stretches from February through June, the chart of the United States Oil Fund (USO) is currently showing some breakout potential that may see shares rally 10% or more.

The chart below shows a building technical breakout for the USO shares.

(Click to enlarge)

In short, shares of USO are in the process of breaking above the $73 level, which has stood as resistance in November and more recently in February. A move above this price will signal that a breakout has started, drawing buyers into the USO shares.

Additionally, USO shares are trading above their bullish 200-day moving average and their 50-day moving average, which just initiated a bullish trend last week.

Bottom Line

Oil and the USO shares are poised for a bullish three to four months run. The market will keep its eyes on the potential for inflationary pressures to cause the Fed to act by maintaining higher interest rates, which may put some pressure on oil.

That said, this seasonally strong period looks to provide upside potential of up to 10% ($80 price target) over the next four months.


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About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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