Monday, December 8, 2008

Oil Ready for Short Term Rally

Oil prices, and oil stocks, are ready for a short-term rally here. OPEC is scrambling to deal with the major slowdown in global demand. Most likely they will decrease production output to help prices recover. Remember in July when President Bush went to Saudi Arabia begging for production increases? What a difference a couple of months can make.

The pattern I see here is:

A) Right now-oil stocks oversold with oil prices around $40.
B) OPEC cuts production. Oil moves to somewhere between $50-75/barrel. Oil stocks rally.
C) Rally wears off, sometime early 2009. Stocks fall again as recession-caused demand destruction continues. Oil stocks back to current levels.

By the way, this is also the pattern for financial stocks, and homebuilders, and automakers. We're seeing a potentially trade-able pattern, but a pattern of lower highs and lower lows.

For the trade, take a look at the usual suspects:

National Oilwell Varco (NOV)
Schlumberger (SLB)
Exxon Mobil (XOM)
Noble (NE)
Transocean (RIG)

Disclosure: None

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