Interactive Investor

Oil to get cheaper

3rd May 2016 13:48

Lance Roberts from ii contributor

Last week, I wrote a fairly extensive post on why I think oil prices are nearing their peak and made a case for trimming back on oil & energy related exposure. To wit:

"In a nutshell, the very easy near-term gains have likely already been seen. As I will explain below, the fundamental and technical backdrop suggests there will be plenty of opportunities for patient, long-term investors to pick up oil/energy exposure at cheaper levels in the months ahead.

"With supply and demand imbalance likely to remain for years to come, it is very likely that we will once again return to a long period of volatile prices within a very confined range, as seen during the 1980s-1990s. Therefore, for those wanting to invest in oil and energy related positions, the shorter-term price dynamics are going to be substantially more important.

"If we take a look at the 'Commitment Of Traders' report, we see that exuberance over the recent surge in energy prices has pushed the number of oil contracts back to the second-highest levels on record.

"As with the past, these surges in contracts have typically denoted short-term peaks in oil prices. This time is likely going to be no different."

A technical look at oil prices also suggests near-term profit taking in energy-related positions is likely a good idea. As shown, oil prices are not only trading at the top of a long-term downtrend channel, but are also pushing two standard deviations above the mean.

With momentum and prices at extreme overbought conditions, a near-term reversion is very likely. I have noted each previous peak price in oil with vertical blue-dashed lines.

Of course, one of the main drivers of such a reversion would be a reversal of the recent weakness in the dollar. Like the advance in oil, the decline in the dollar has also been just as extreme.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of "The Lance Roberts Show" and Chief Editor of the "Real Investment Advice" website and author of The "Real Investment Daily" blog and the "Real Investment Report". Follow Lance on Facebook, Twitter and Linked-In

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