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Oil Price Down: Crisis or Opportunity?

Oil prices have plunged more than 50% since June, but U.S. crude production remains at multi-decade highs.

U.S. crude oil inventories are at the highest level for this time of year in at least the last 80 years!

For country like Russia, where close to 16% GDP and 70% exports is related to oil and gas, this is really bad news. Airlines, US consumers and China are net beneficiary of the cheap oil prices.

But why the oil prices keep dropping?

This is because the high oil prices push companies to drill for hard to extract and more expensive crude in Texas and North Dakota oils sands. In fact, US have already surpassed Saudi to be the last oil producer last year.

So what are the trading opportunities now that oil prices are so low?

Firstly, let turn our attention to the USO United States Oil ETF

Firstly, let turn our attention to the USO United States Oil ETF

From the charts, USO was range bound from 2010 – 2014. The support is around 30 and resistance at 40. The long term trend line was broken in Oct 2014. USO drop to a recent low of 16.50

There is a short term reversal candle detected just 2 week ago. Immediate support is around 16.50. Going forward, I will watch the support at 16.50 carefully. If the support at 16.50 gets taken out, the next support at 15. This around 50% from the last support which is 30. On the hand, if price does not drop below 16.90 but form a W reversal. We may see price heading up towards 20. This scenario will be play out over the next few months.

Know this information, how do we trade this?

Bullish Scenario

If you are a long term investor (> 6months), I think buying USO at current price has a good risk reward ratio.

If you are trading less than 6months, you may also buy USO at current price and sell on the first sign of resistance around 20.

Alternatively, you can wait the chart pattern formed first. If price are forming a bottom here, I will be looking out for a higher low to be formed next few months.

Bearish Scenario

If 16.90 support get broken with the next 1-2months then I will wait for the next reversal to happen. Immediate support is at 15.00

An alternative way of trading the Oil is Keppel Corp. Keppel has 64% in Offshore and Marine.

Keppel Corp is meeting short term resistance at around 8.90. The support around 8.10. The path of least resistance now is still down; however, if price can decisively clear above 8.90 we see it move towards next resistance at 9.90-10.00. Alternatively, if price break below support at 8.10, we may see a little more downside towards 7.50

I think at current price anything below 8.90 to 7.50 represent a good risk reward trade for the long term investor.

In conclusion, someone once said: the Chinese word for crisis comprise of 2 words. One represents danger but the other represents opportunity. In this crisis moment for oil, it also presents itself opportunity.

Collin Seow
Collin Seow

Collin Seow is a qualified Chartered Portfolio Manager (CPM) and holds a Certified Financial Technician (CFTe) qualification. He is a member of MENSA Singapore and Technical Analyst Society Institute (TASS). Not only a trainer with CyberQuote (A member of PhillipCapital), he is also an inventor of a stock trading software known as TradersGPS and CSI Trading System.
He is a columnist of Shares Investment Publication and Tradeable and has been featured as one of the traders in the book titled "Secrets of Highly Profitable Traders" which is in the Straits Times national bestseller list for 24 weeks.

Collin is also a regular speaker at numerous conferences and seminars. He was invited to speak at the Shares Investment Conference, Shareinvestor Carnival, Phillip Ifest and the MetaStock Conference. Collin was awarded the Top 10 Achievers in PhillipCFD for the many consecutive years.

Collin combines his unique brand of "street-smarts with heart" in trading. Collin also owns a popular blog