Oil has likely hit its bottom around low $40 and in the past couple of weeks, it has rather impressively strengthened to go briefly over $60. But I highly doubt it will simply go up from here to return to the previous highs like $80 or $90. You see, the US still producing too much oil due to the revolutionary new drilling technology, fracking but the demand has been decreasing not increasing due to worldwide weakening of the economy. Yes, the number of active rigs for drilling has been substantially reduced in the past half a year or so but not to the level that has greatly impacted on the reduction of oil produced. In other words, we haven’t seen enough blood in the streets that will trigger a turnaround for the oil sector. This day for sure will come but I don’t think it has knocked on our door at the moment. So my gut feeling is that we will still see chopping fluctuations of oil prices for a while for the moment between $40-60, and for the moment it is more likely that oil may go down from here around $60. If this thesis is correct, which sector will benefit most? See the chart below. Can you see that in the past 3 months when the oil price has crashed and fluctuated, the oil refinery company, Valero (VLO), has moved almost in a perfect inverse relationship? For refineries, their business thrive when they can buy the crude oil cheap because they can get more profit margin from their final product, gasoline, due to reduced costs. So VLO (blue) went up when the crude oil (red) plummeted but declined when the crude oil strengthened. Now if the crude oil is going to come down again as I expect, VLO will likely be doing well. Of course, this is not for a long-term play but more for a short-term trading sensitive to the oil price. Trade accordingly.
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