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Buy Break of 12.10 in US Oil Fund

GuruFocus.com

- By Richard A. Cox

One of the most disappointing assets in the market o ver the last year has been seen in the oil space.

There are many reasons for this. But given the strong correlations that exist between oil and peripheral markets, it is a good idea to analyze some of these trends so investors can make better forecasts about a wide array of broad asset classes.


A look at oil ETFs

It is generally a good idea to consider activity in the United States Oil Fund (USO), which has shown heavy constrictions this year. It can be argued that sentiment is being guided by the lack of direction that has been shown at the U.S. Federal Reserve in its recent policy statements.

For the most part, we have seen discussions from the bank's voting members center on the need for patience and accommodation. This is designed to find ways to avoid inhibiting growth in the labor markets and in broader growth trends.

Price inflation trends

But the real question here is whether building dissent within the Fed will be enough to start changing the landscape in ways that could keep a lid on the price of assets tied to oil. When dealing with the Fed policy outlook, it is difficult to avoid an analysis of consumer price inflation.

Screenshot 2016-10-04 at 11.20.50 PM.png
Screenshot 2016-10-04 at 11.20.50 PM.png

Over the last year, these numbers have remained relatively steady in holding just above the 1% mark. This is still well below the Fed's stated inflation targets, so there is no immediate concern in these areas. But what we have been seeing in several Fed commentaries is the need to pre-emptively approach these areas in ways that could be helped by higher interest rates.

This drives down the bullish outlook for assets like the SPDR Gold Trust (GLD) in favor of personal wealth strategies like rolling over a 401(k). It should be understood that there were dissenting votes to raise interest rates at the last policy meeting but until the official numbers actually start to validate these concerns, it is unlikely we will see any major changes. Add to this the fact that crude oil inventories have shown growing supply limitations and we start to see a broader scenario that could favor higher oil prices.

Screenshot 2016-10-05 at 12.03.11 AM.png
Screenshot 2016-10-05 at 12.03.11 AM.png

The other elephant in the room can be found in the labor markets, which has shown activity that is much more erratic. The numbers so far this year have been all over the map and with the U.S. barely keeping up with the number of jobs needed to maintain pace with population changes (roughly 150,000 per month), we continue to see an environment where the dissent within the Fed might have trouble gaining traction. Going forward, however, these numbers will be viewed as being more and more critical in the ways they define the broader growth trajectory.

Chart View: USO

Screenshot 2016-10-05 at 6.15.39 PM.png
Screenshot 2016-10-05 at 6.15.39 PM.png

With all of this in mind, it will be critical to watch the actual price trends that are visible in the market. The lackluster performance in oil over the last year has painted a dismal picture for energy market bulls . But with the emerging context prevailing, this could start to change soon. From a sentiment perspective, we can see that an upside break of 12.10 in USO would fill many of the market's sell orders and start to push oil bears further toward the sidelines.

The declines that were seen at the end of last year were forceful and extreme, and when we pair the Fed's monetary policy outlook with the consistent declines in oil supplies then we can start to have greater confidence that oil will start to reverse some of its previous losses.

Disclosure: Author has no position in any asset mentioned.

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This article first appeared on GuruFocus.