Oil provides more than a third of the energy we use on the planet every day. That’s more than any other energy source.
During the 20th century, cheap oil powered global economic growth. But the golden days of cheap oil are behind us as we move further into the 21st century.
As a matter of fact, the price of oil has quadrupled over the last decade. And since the financial meltdown of 2008-09, world growth has been anaemic at best, partly thanks to high crude oil prices.
But on the fundamental side, investing in the oil story remains attractive and sound. I’ve taken advantage of key developments in the oil story by recommending quality oil stocks to Diggers and Drillers readers.
With this in mind, let’s take a look at the fundamental story.
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Geopolitical tensions are rising around the world, causing oil prices to rise. The latest geopolitical risk stems from Iraq. This week, terrorists attacked Iraq’s largest refinery, just north of Baghdad. Two storage tanks were in flames after hours of fighting.
Iraq isn’t the first place on earth to see rising geopolitical tensions — it also won’t be the last.
Nonetheless, geopolitical tensions tell only half the story. Understanding the supply and demand characteristics is just as important.
Known oil reserves are depleting world-wide and there have been minimal ‘elephant’ discoveries over the past couple of decades. On the demand side, it’s difficult to ignore that world population is growing, in an energy intensive world.
Rising geopolitical risk, declining known oil reserves and increasing demand are setting the scene for higher crude oil prices over the next couple of decades.
Saying this, let’s take a look at the technical picture. The chart below tracks the West Texas Intermediate (WTI) oil price. It’s the most common benchmark for crude oil. Each bar represents one month.
The chart above shows that crude oil has been in a strong bullish uptrend since 2010. You can see this by looking at the blue trend line. However, looking at the long term story, the Fibonacci sequence levels pretty much tell it all.
Heading into 2005 and 2009, the crude oil price technically bounced off the 261.8% Fibonacci extension level (US$43 per barrel). This target demonstrates true bottom support from both a bull (2005 technical low) and bear (2009 technical low) scenario.
The key 0% fibonacci retracement level (US$144 per barrel) shows major long term resistance. Crude oil has failed to break through this level several times since it last broke though in 2008, before the financial meltdown.
Between these two levels, important technical support and resistance levels exist.
The 2008 bull market run began after breaking through the 161.8% Fibonacci extension level (US$70 per barrel) in 2005. This level has since acted as a major support level several times.
As such, WTI must breakthrough US$114 per barrel for crude oil to experience another impulsive bull market rally similar to 2008. Considering the fundamentals and oil’s technical uptrend, this looks possible over the next year.
Assuming oil demand slows or supply rises, support exists around the US$96 per barrel. The next support level is at US$85 per barrel.
To sum up, I’m bullish oil and expect it to continue climbing along with shares over the next few years.
Jason Stevenson+
Resources Analyst, Money Morning
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