As summer vacations start to wind down and families gear up for school, it shouldn’t be surprising to hear that demand for oil and gas has started to decrease. Reduced geopolitical risk, combined with weaker-than-expect demand from Europe, have acted as catalysts to a 7.05% decline in oil prices, as measured by the United States Oil Fund LP (USO). From a trading perspective, this ETF is trading at a key level of long-term support, and price action over the next couple of weeks will likely be a leading indicator for what to expect for the remainder of 2014.

Taking a look at the five-year weekly chart of the spot price of West Texas Intermediate light crude oil, you’ll notice that the price is currently trading near the 200-week moving average. This moving average has generated some of the best trading signals since late 2010 when the long-term bull market was triggered by the 50-week moving average crossing above the 200-week average. Position traders have consistently looked for entry positions near the 200-week average - shown by the swing lows over the period. The tightening of the trading ranges over the past few weeks suggests that prices may be nearing the floor and readying for another bounce higher. (For more, see: Oil And Gas Industry Primer.)

Look To Exxon Mobil For Clues

When analyzing the impact of volatile oil prices the first point of reference is usually Exxon Mobil Corp. (XOM). You’ll see from the chart below that prices have experienced some weakness over the past several weeks, but it is continues to trade within an extremely strong multi-year uptrend. The five-year weekly chart reveals that recent weakness has already been accounted for and strength in oil will likely propel XOM away from the 50-week average toward new all-time highs. (For more, see: Identifying Market Trends.)

Look To The Drillers For Confirmation

Like all commodities, oil prices are subject to rumors regarding shifts in supply and demand. When it comes to deciphering the severity of these rumors on future price action, your best bet is to take a look at the drilling companies. Weakening economics usually impact the drilling companies much more aggressively than the major integrated companies like XOM. Taking a look at Precision Drilling Corp. (PDS), you’ll find that the five-year chart is extremely bullish. Declining prices have led to a sharp drop in the share price over the past several weeks, but as was shown in the case of WTIC above, the price is currently trading near significant long-term support levels and it would not be surprising to see position traders start to chime in with buy orders. Bullish divergence in the long-term moving average is a very strong buy signal and traders will likely want to hold a long position until the price closes below the nearby support of the 50-week moving average ($11.13). (For more, see: A Guide To Investing In The Oil Markets.)

The Bottom Line

Short-term fluctuations in oil prices are enough to make anyone’s head spin. Sometimes it can pay to take a step back and take a look at the long-term weekly chart for clues. As we’ve shown above, the price of West Texas Intermediate crude oil is nearly at key long-term support levels. Unsurprisingly, the major integrated players like Exxon Mobil continue to reap the benefits and are trading within extremely long-term uptrends. If oil bounces off the nearby support levels then it wouldn’t be surprising to see the big players like XOM head higher. Lastly, stories of economic weakness and geopolitical risk are always a threat to oil prices, but price action of the drilling companies, such as Precision Drilling, suggests that they are not enough of a threat yet to reverse the long-term uptrend. (For more, see: How To Interpret Technical Analysis Price Patterns.)

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