Is oil undervalued?

With recent geopolitical upheavals, economic shifts, and fears of tightening supply, you might have expected oil prices to skyrocket.

On the contrary, the oil price (CL2Spot) has been trading sideways around $80 since mid-2022.

This unusual development raises two key questions: firstly, has the market misread the true price of oil, and, more importantly, is there a lucrative trading opportunity present?

Before we explore potential trading opportunities, it’s essential to understand the global context. US commercial crude oil inventories recently fell by 4.5 million barrels, exceeding expectations. This tightening of supply would typically drive prices up.

China slowdown’s a counterbalance

However, China’s economic slowdown is a major counterbalance. As the world’s largest oil importer, China’s reduced oil imports and refinery activity indicate weaker economic growth, exerting a downward pressure on prices.

With these opposing forces keeping oil prices stable, what could trigger a breakout?

Federal Reserve’s potential rate cut

Enter the Federal Reserve. With the Fed hinting at a potential rate cut in yesterday’s meeting, we could soon see an increase in demand for oil, as a weaker US dollar makes oil cheaper for other currencies globally.

Turning to the oil futures price (CL2Spot), the current sideways move is tightening, suggesting we are close to some explosive price action. Volatility is expected, as it is unusual for oil prices to remain sideways for such an extended period. The last period of similar stability was between 2011 and 2014, around $95, followed by a dramatic decline of over 70 per cent in less than two years.

So, with the Fed’s decision looming and oil prices due for a directional move, I encourage you to closely monitor the price of oil as a fantastic trading opportunity may be just around the corner.

What are the best and worst-performing sectors this week?

The best-performing sectors include Information Technology and Real Estate, which are both up more than four per cent, followed by Consumer Discretionary, up over three per cent. The worst-performing sectors include Health Care, Materials and Utilities, which have still all added over one per cent.

The best-performing stocks in the ASX top 100 include Seek Limited (ASX:SEK) and Technology One (ASX:TNE), up over nine per cent, followed by IDP Education (ASX:IEL), up more than eight per cent. The worst-performing stocks include Fortescue (ASX:FMG), down more than six per cent, followed by Arcadium Lithium (ASX:LTM), down more than five per cent and IGO (ASX:IGO), down over two per cent.

What’s next for the Australian stock market?

Buyers made a decisive move this week, pushing the All Ordinaries Index up by over two per cent.

In last week’s report, I mentioned that we would gain more insight into our market’s future based on the sellers’ efforts. Given that they only exerted pressure for one week, which buyers quickly overran, it’s clear where we are heading next.

Market at record levels

With a break of the previous all-time high of 8329 points this week, I anticipate that our market is heading towards 9000 in the medium term. The question is, how will the market reach that level? Will it plod or rocket to 9000 points? Let’s break it down.

Firstly, the reporting season is approaching. A positive reporting season could see stocks and the All Ords rise quickly, while lacklustre results, especially in major sectors like finance and materials, might lead the market to edge up more slowly, with more peaks and valleys along the way.

Second, and more importantly, is the materials sector’s next move. Will it wake up? What’s interesting is that we might have just seen the beginning of this market giant awakening, because the price for the month of July has managed to hold above the previous significant low of October last year.

A monthly close below the October 2023 low would have signalled real cause for concern and increased the likelihood of a weaker index.

Hinging on Materials

However, with the materials sector closing above 16,687 points, we could be on the brink of a strong upward move, adding the necessary catalyst to spur the market to 9000 points quickly.

So, if the materials sector has indeed found its low and we achieve a strong reporting period, then expect our market to rocket up. This means a strategy designed to capture fast volatility could be the best approach over the next couple of months.

For now, good luck and good trading.