Which way will oil flow?

In this article Mish Schneider, director of trading research and education at MarketGauge.com, considers the headwinds facing oil, as well as the tailwinds that could get it flowing freely again.

News surfaced on Tuesday about stress on oil production caused by the recent temperature drop in the US. This is because water is involved in the process — if it freezes it can immobilise equipment, thereby halting oil production.

Does this mean oil will continue to increase in price from a temporary weather condition?

Possibly, but by looking at the weekly chart of United States oil [USO] we can find an even better reason for higher oil prices to continue going forward.

First off, oil has been beaten down since the beginning of 2020.

When traveling was basically cut off from the pandemic, the oil market suffered major losses.

Furthermore, supply chain issues make oil production challenging to restart, especially if oil companies are tight on cash from major yearly losses.

Knowing this, we can assume that companies will be careful about how much they add to supply as they now must sell oil for a fraction of the prices seen pre-pandemic.

Additionally, the increase in US vaccinations fares well for travel, and in turn for oil.

We are not the only ones that expect growth in oil prices. Berkshire Hathaway recently took a $4.1bn stake in Chevron [CVX].

With that said, if oil runs into some roadblocks along the way, watching the transportation sector [IYT] can act as a guide for further strength in the oil sector.

On Tuesday, IYT broke to new highs along with the S&P 500, Nasdaq 100, and Dow Jones.

If the transportation sector stays strong, this will further support the oil market recovery through this year.

We see support now in USO at $38.50 with $40 the pivotal area. Resistance is above at $44.00.

This article was originally published on MarketGauge. With over 100 years of combined market experience, MarketGauge's experts provide strategic information to help you achieve your investing goals.