According to broker reports in recent weeks, oil is experiencing the “longest winning streak” since December. I shake my head when I see commentary that implies that oil has been booming when what has occurred is quite different.
Reports over recent months have mentioned that a rally in oil prices occurred because of optimism about OPEC oil production cuts, but any support this would provide may be offset by US shale drilling.
This had created uncertainty, and uncertainty creates volatility, which means prices can move quickly one way or the other. This week oil has dropped by around 5 per cent.
When I see words like “winning streak”, I immediately refer to my price chart to put the rise in the oil price into context, it’s only been rising for three weeks. The real rally occurred in the first half of 2016 to an early June high. However, since the high, the oil price has traded sideways while merely appreciating less than 10 per cent before falling back into the sideways move.
In my opinion, any “winning streak” has been short-lived. However, a strong close on any day above $53.80 would signal a more sustained rise in the US oil price to between $58 and $64. However, if oil falls below $48 the price is likely to continue the decline to between $43 and $45 in the shorter term. Either way, this presents a great opportunity for traders with the right knowledge.
What do we expect in the market?
The strong positive for Aussie shares is how the All Ordinaries Index (XAO) finally broke through the level of the 2015 high at 5963.5 points last week to achieve 5983 points before falling away this week. It has taken around two years for the market to get back to this level and the move signals the bull market is still unfolding, which fits with my longer term view of the market.
As the market is due to pull back short term, I would like to see this move completed over the coming few weeks. Given this, now’s a good time to consider increasing your exposure.
To the economic front, retail spending figures are still not where economists would like to see them. Reasons given are slow wage growth and higher household debt, offsetting lower interest rates. In my opinion it would be a mistake for the RBA to cut the cash rate in response.
Dale Gillham is the Chief Analyst at Wealth Within
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