Oil could bottom any time now...

During the last three months we have seen the price of oil tumbling down from $78 to about $58.

• We try to find out from a technical point of view if there is a short term bottom in place for oil.

Figure 1: Technical analysis of the XOI index and the Light Crude oil

As we can see in the chart above investors seems to finally start to recognize that most of the major oil companies out there, still has low intrinsic valuations. At the same time oil traders seems to have now priced a mild weather for the coming months. We can also see (figure 1.) that the price of oil has in a short period of time bounced upward round the $57-$58 support level for the second time.

During the month of October we have seen a divergence between the price of oil stocks (XOI index) and the price of oil.

At the same time our technical indicators (MACD, RSI) has turned positive and confirms the fact that we could stand in front of a possible upward bounce for the price of oil during the coming weeks with some resistance round $61-$62 . The Aroon indicator which is used to determine whether a stock is trending or not and how strong the trend is, has now turned positive and building up strength.

Figure 2: The seasonality factor for the price of oil

The seasonality factor (figure 2) shown that the price of oil used to be strong during the summer period, weakening during the fall and get bullish again during the winter season. From seasonality stand point a short term rally in oil is still in place.

Add to that, there is as always the geopolitical factor which represents an important part of the risk premium build in the current price of oil. The risk premium could certainly grow with the problematic situations the world has to face in North-Korea, Iran & Iraq.

Finally, divergence of prices between oil stocks and the price of oil, positive confirmation of our technical indicators and the seasonality factor give us a short term buy signal for oil.