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Is Crude Oil a Step Behind or Ahead of the Oil Index?

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The outlook for oil stocks remains bullish and the uptrend is not threatened at the moment.

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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 http://stockcharts.com).

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 2008.

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 bullish.

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 2008.

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.
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No positions in stocks mentioned.
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