Oil

Above is a weekly chart of the oil ETF, USO which is one of the most basic ways to play a rise in crude, the commodity {as opposed to buying an ETF or individual stock that specializes in either oil production or oil exploration. USO is not a perfect way to view oil as a commodity however. It is a futures and derivatives based investment and that somewhat complicates how it trades in relation to the actual product. But we can use it to show a longer term view of how the underlying commodity has traded. So when we analyse oil below remember that dollar for dollar the index will not match the price of crude.

The chart above shows that crude has moved in a basing pattern for over a year. It traded around $69 per barrel in late summer and we've seen an almost 16% since then. The chart shows that this move basically puts the commodity smack back in the middle of its longer term trading range.

It is also worth noting on a fundamental basis that in the midst what many economist are calling the worst recession since the Great Depression in the 1930's oil has rarely cracked the $60 level on the downside. This begs the question of what happens to its price as world economies rebound. Given that oil traded above $100 { at one point reaching nearly $140 per barrel} back in 2007, it is not unreasonable to suppose that we could trade back to that level at some point as things get better

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Developing countries have fared much better in this recession and their demand for oil is actually up on a year over year basis. China also continues to import more than its exports now. More important reserves that were once plentiful in Mexico are drying up. One of Mexico's largest oil fields, Cantarell , is facing a steep drop off in production. OPEC has also kept production at full bore so demand has started to outrun supply.

Add in the factor that much of what is left in the world is now being found in places that are extremely hard for it to be extracted from the ground, is located in places with a lot of social unrest or located in countries hardly friendly to Western interests and you have the recipe for potentially much higher prices in this commodity in the coming years.

*Long ETFs related to oil as a commodity but not long USO. Long ETFs related to oil exploration and production. Long all of these in client and personal accounts.