Why oil could be the next big investment opportunity

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. U.S. commercial crude oil inventories recently fell by 4.5 million barrels, exceeding expectations. This tightening of supply would typically drive prices up.

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? 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 U.S. 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 more than 70% 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 4%, followed by Consumer Discretionary, up more than 3%.

The worst-performing sectors include Health Care, Materials and Utilities, which are all up more than 1%.

The best-performing stocks in the ASX top 100 include Seek Limited and Technology One, up more than 9%, followed by IDP Education, up more than 8%.

The worst-performing stocks include Fortescue Metals Group, down more than 6%, followed by Arcadium Lithium, down more than 5% and IGO Limited, down more than 2%.

What's next for the Australian stock market?

Buyers made a decisive move this week, pushing the All Ordinaries Index up by more than 2%. 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.

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 2023.

A monthly close below the October 23 low would have signalled real cause for concern and increased the likelihood of a weaker index.

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 9,000 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.

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