The price of oil is headed higher.
Yes, that sentence flies in the face of the financial television talking heads who argue otherwise. They say the demand for the gooey black stuff is falling while the supply is increasing.
They argue a weak Chinese economy combined with the anticipated “drill baby drill” policies of the incoming Trump administration will keep a lid on oil prices.
But, the oil stocks are telling us something different. And, in the world of commodities, the stock prices lead the way.
We saw that a couple of weeks ago when we looked at the ratio chart of gold stocks versus gold.
The chart was falling – indicating gold stocks were much weaker than the price of gold. So, we concluded the price of gold was headed lower.
The shiny yellow metal has fallen about $200 per ounce since then.
With that in mind, let’s look at a ratio chart of oil stocks versus oil…
This is a ratio chart that divides the price of the Energy Select Sector Fund (XLE) by the price of oil. The absolute level of the chart isn’t important. It is the direction of the chart that provides a clue as to the future short-term direction for oil.
Oil stocks tend to lead the price of the oil. So, when this chart is moving higher – meaning oil stocks are outperforming oil – the price of oil is set to rally.
When this chart is moving lower – meaning oil stocks are underperforming the action in the commodity – it often leads to a pullback in oil.
After consolidating for September and October, this chart has turned sharply higher. The oil stocks are outperforming.
That’s a bullish sign for the price of oil.
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That doesn’t mean we should leverage up and buy as much oil as we can. The financial television talking heads have some valid arguments about the long-term price of oil.
For the short-term, though, the oil stocks are telling a different story. Oil is headed higher.
Best regards and good trading,
Jeff Clark
Editor, Market Minute