Tensions in the Middle East have always had an impact on
everyday life around the world through their effect on the price of
oil. During the last month we saw this impact very clearly. At the
beginning of September, the price of light crude dropped as fears
of US military action against Syria faded. In the following days,
crude oil declined as Libya's production recovered to nearly 40% of
pre-war capacity. Higher crude oil output in Iraq was an additional
bearish factor, which pushed the price lower. In the previous week,
investors watched all the US-Iran news closely. On Friday, the
price of oil fell as tensions eased between the United States and
Iran after the Obama-Rouhani talks.
What impact did these events have on the price of light crude?
Looking at the chart of crude oil from today's point of view, we
can conclude that September was a hard month for oil bulls. After
the June-August rally, which resulted in a new 17-month high, the
situation in the oil market deteriorated. The price of light crude
dropped from the September high at $110.70 to a new monthly low at
$102.20 per barrel. With this move, crude oil has lost nearly 5% so
far this month and declined for a third straight week.
And what happened with oil stocks at the same time? What does the
relationship between light crude and oil stocks look like? Could
lower crude oil prices have any implications for the oil index?
Before we try to answer these questions, let's take a look at the
NYSE Arca Oil Index
(INDEXNYSEGIS:XOI) charts to find out what the current situation in
the oil stock market is (charts courtesy of
We begin with the long-term chart and almost immediately see that
the situation has improved.
The XOI not only broke above the July top, but it also broke above
the May 2011 high. If the buyers hold the oil stock index above
1,400 today, this will be the highest monthly close since June
Additionally, the XOI is still above the previously broken
long-term declining resistance line based on the 2008 and 2011
highs, and the breakout hasn't been invalidated. The oil stock
index also remains in the range of the rising trend channel.
Taking these observations into account, the situation is still
To see this more clearly, let's zoom in on our picture and move on
to the weekly chart.
Looking at the above chart, we see that the oil stock index remains
above the July peak (in terms of weekly closing prices), but the
breakout is unconfirmed at the moment. It's worth noting that the
XOI closed higher for a fourth week and is still close to the May
top. On top of that, when we take into account weekly closing
prices, we notice that this is the highest weekly close since June
Taking the above into account, we should carefully keep an eye on
oil stocks. The proximity of the above resistance level may
encourage oil bears to go short and trigger a correction. In this
case, the first support would be around 1,400.
Please note that even if the buyers do not give up and manage to
push the XOI higher, further increases may be halted by the upper
line of the rising wedge (currently close to 1,450).
The medium-term uptrend isn't currently threatened, and the
situation remains bullish.
Now that we know the current situation in the medium term, let's
focus on the relationship between light crude and the oil stocks.
When we take a look at the above charts and compare price action in
both cases, we clearly see that oil stocks were stronger in the
previous week once again. They closed higher for a fourth week and
remain above the July peak (in terms of weekly closing prices).
What happened with the price of crude oil at the same time? Light
crude declined and closed lower for a third week. Additionally, it
dropped to a new September bottom on Wednesday, which clearly shows
its weakness in relation to the oil stocks.
Now, let's turn to the daily chart.
As you see on the above chart, the situation didn't change much in
the previous week. After a breakout above the declining
resistance/support line based on the May and July highs, the oil
stock index remains in the consolidation. At this point we should
consider two scenarios. If the buyers manage to push the XOI above
the September high, we will likely see another upward move, which
may result in a breakout above the May high.
On the other hand, this strong resistance may encourage sellers to
go short. In this case, we may see a corrective move to at least
1,400. If the oil index drops below this level, we could see
further declines .
Please note that the nearest support is the bottom of the current
consolidation (the 1,400 level). The second one is the previously
broken declining resistance/support line (around 1,396), the next
one the 50-day moving average (currently at 1,389.56). Going even
lower, we have a support zone based on the August 27 and August 30
lows (1,361-1,364), and a further one based on the August 21 bottom
and the 61.8% retracement level (1,338-1,339).
Before we summarize, let's look at the relationship between the WTI
and the XOI in the short term. This time, we see a negative
divergence between the price action in light crude and the oil
stocks. Although we saw declines on Monday (in both cases), the
rest of the week looked completely different. We've been seeing a
consolidation in oil stock in the recent days and the NYSE Arca Oil
Index is trading between the September 18 low and the September
high. Meanwhile, in the case of crude oil we saw further
deterioration which resulted in a new monthly low.
Summing up, from the long- and medium-term perspectives, the
outlook for oil stocks remains bullish and the uptrend is not
threatened at the moment. The oil index closed higher for a fourth
week and, what's most interesting, this was its highest weekly
close since June 2008. Additionally, if the buyers manage to hold
the XOI above 1,400, it will be the highest monthly close since
June 2008. Meanwhile, crude oil not only lost its major allies (the
50-day moving average and the short-term rising support line), but
it also declined below the medium-term rising support line.
Additionally, the breakdown is confirmed and light crude has hit
its new monthly low. Taking into account the relationship between
light crude and the oil stock index in the previous week, we can
conclude that the oil stocks remain stronger in relation to crude
For the full version of this essay and more, visit
Nadia is a private investor and trader, dealing in stocks,
currencies, and commodities. Using her background in technical
analysis, she spends countless hours identifying market trends,
major support and resistance zones, breakouts, and failures. In her
writing, she presents complex ideas with clarity that enables you
to easily understand market changes and profit from them. You can
read Nadia's analyses at
where she publishes her articles on gold and crude oil