Oil: Higher Prices To Come

Higher oil prices are likely.

Below, we see the annual histogram for the oil price from 1983 through 2017. These bars represent the expected return (magnitude of price change multiplied by the probability of a price rise) on a monthly basis. March and April have been the strongest months. The May through July period has been slightly positive. In August, there is a 57% likelihood of higher prices with an average price gain of about 2.8%.

Chart 1

July has been a firm month; August has been strong.Cycles Research Investments LLC

The next graph is that of a composite of the most effective monthly cycles within the oil price. The cycle rises into mid-September and falls for six weeks into late October. This will likely be the time period for the next intermediate correction.

Chart 2

The monthly cycle points to a September high.Cycles Research Investments LLC

Chart 3 depicts the weekly oil cycle. This cycle bottoms on July 7th. Ten of the last eleven such cycles have led to profits over the last year.

Chart 3

The weekly cycle projects a low in the next week.Cycles Research Investments LLC

Chart 4 zooms in on the monthly cycle. There is a cycle low at the beginning of July.

Chart 4

This expanded view of the monthly cycle points to a low in early July.Cycles Research Investments LLC

The upswing in both the weekly and the monthly cycle in addition to the positive seasonality in July-August is likely to raise oil quotes over the summer into September.

Although we are concentrating on timing, it is interesting to consider what the drivers of price may be. First, there is increased demand spurred by a stronger economy. The economic cycle does not peak until 2020, so that factor is likely to remain intact. Second, the Fed doubled the money supply during the last crisis. These excess funds have to go somewhere as the credit seeps through the system. The direction of the new money is guided by investor psychology which we attempt to measure through cycles.

 



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