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Here's why an oil bottom may be in sight

As the price of oil cratered, a debate waged over whether lower prices were good or bad for the economy. I have been vociferous in stating that lower oil prices, while a boon for the consumer, also have dark side.

The shale oil boom has not only made the U.S. more energy independent, it has also been the fuel for the robust economies of Texas and North Dakota. Moreover, the signal that lower oil prices emit is that of a slowing global economy.

At times, the broader equity market has both agreed with me and made me look like Chicken Little. However, the recent sharp decline in stocks has many investors wondering when the slide in oil will stop. Trying to pick an absolute bottom in any market is a fool's errand, but there are a few signs that a turn may be coming.

Gasoline demand is at a five-year high. The drop in oil and gasoline prices has resulted in a surge in demand. According to the U.S. Energy Information Administration, seasonal gasoline demand is at the highest level in the last five years. What's more, current demand is well above the highs of the summer driving season.

Economics professors should rejoice knowing the uptick in demand corresponds with the drop in oil prices, thus validating years of drawing supply/demand curves. To us mere mortals, professors will explain that this jump in demand is the first sign of a potential rise in oil and gasoline prices.

RINs prices moving up. The second sign is the rising price of Renewable Identification Numbers (RINs). RINs are used by the government to ensure that ethanol and biodiesel are being blended into gasoline. If a refiner does not have enough biofuel to meet demand then they must purchase RINs to meet the environmental requirements. There is currently a price spike in RINs, which suggests that refiners continue to see surging demand for gasoline.


If the term RINs rings a bell, you might be a market junkie and may require professional help … but you are also an astute observer and recall that the 15 percent jump in oil prices during the summer of 2013 was the result of surging RINs prices. Since RINs prices are an input cost, it stands to reason that the cost of gasoline will also rise.

The longer the time, the more important the line. The final piece of the crude-oil puzzle comes in the form of good ol' fashioned technical analysis. Crude oil (WTI , Texas Tea, Black Gold) is resting on a long term trend line that begins in 1999.

When it comes to technicals my maxim is that the longer the time the more important the line. That is to say that the further back we travel in time the more potential buyers we accumulate as prices become more attractive. The combination of surging demand, rising RINs prices and long term technical support is powerful evidence that a reversal in oil prices may be near.

Brian Kelly is founder and managing member of Brian Kelly Capital LLC, a global macro investment firm catering to high net worth individuals, family offices and institutions. He is also the creator of the BKCM Indexes, benchmarks for multi-asset money managers. He's also the author of the upcoming book, "The Bitcoin Big Bang: How Alternative Currencies Are About to Change the World." Kelly, a CNBC contributor, often appears on "Fast Money." Follow him on Twitter @BKBrianKelly.