Tapping the Breaks?

By Tim Knight

Since it seems the fate of the free world depends on this stupid healthcare vote, let’s talk about something – ANYTHING – else!

Below is the front month of crude oil. As much as I’d like it to plunge into the abyss, what I “like” doesn’t have much say-so in market direction. It seems to me that the commodity is steadying itself at the trendline and could be preparing for a turnaround back to major resistance at about $52.30 or so. Just a thought.

0324-crude

For equities in general, though, I would simply offer this headline on ZH that just came up:

0324-gart

Economics Through the Economics of Oil

By Jeffrey Snider of Alhambra

The last time oil inventory grew at anywhere close to this pace was during each of the last two selloffs, the first in late 2014/early 2015 and the second following about a year after. Those events were relatively easy to explain in terms of both price and fundamentals, though the mainstream managed to screw it up anyway (“supply glut”). By and large, the massive contango of the futures curve that showed up as a result of “dollar” conditions made it enormously profitable to pull crude out of current flow and deposit it wherever storage might be available, even at some considerable cost (so steep was the contango). It was the symbolic intersection between economy and finance which told the world there was nothing good about those times.

This time, however, there is only minor contango in WTI (or Brent) futures and a curve that isn’t much changed over the last year. And still crude is pouring into Cushing at an alarming rate, so much so that by earlier this month oil investors started to leak out of the over-crowded long trade. You have to believe that the unusually steady price of WTI from mid-December forward despite almost everyone being long was related to this once again gaining imbalance – no matter how hard you try to fashion “rate hikes” into a much more robust future economy there is this very visible degree of caution that cries out “not so fast.”

Continue reading Economics Through the Economics of Oil

Keeping it Real

By Tim Knight

This post has to do with something which may seem like an oxymoron: integrity in financial prognostications. What inspired me to address this topic? Oh, that’s easy:

0314-gart

As you can see, back on February 22nd, Dennis “Commodity King” Gartman went on CNBC to declare that, at long last, for the first time in about five years, he was bullish on crude oil.

Savvy traders jumped on this and, knowing Gartman’s tendency to generate reputational pratfalls, shorted the bejesus out of crude oil and were richly rewarded for it. But this is not about Gartman’s well-documented tendency to, shall we say, not have a perfect record. It has to do with this “five years” nonsense.

I’m not sure if Dennis thinks (1) we’re all really stupid or (2) we don’t have access to this here newfangled “Internet” thing, but it would only take a kindergarden student about 7 seconds to completely refute the aforementioned assertion. I offer Exhibit A:

0314-mostbullish

So as you can see, in October 2015, Gartman declared himself the “most bullish I’ve ever been on crude”. My arithmetic skills are strong enough to know that February 2017 minus five years is long, long before October 2015.

Continue reading Keeping it Real

Huge Imbalance in Crude Oil Positions

By Tom McClellan

Crude Oil COT Report Data
March 10, 2017

There is a giant wall of short positions held by the smart-money “commercial” traders in crude oil futures, and it is going to lead oil prices to come crashing down.

Each week, the CFTC reports on the numbers of long and short positions held by futures traders.  They are broken down into 3 separate groups:

Commercials – Those engaged in the business related to that commodity.  They are the big money, and thus presumably the smart money.  Think Cargill for grains, or Goldman Sachs for financial futures.

Non-Commercials – Large speculators.  Think hedge funds.

Non-Reportables – Those whose positions are too small in number for the CFTC to bother tabulating them individually.

This week shows the commercial traders net short position, expressed in numbers of contracts.  They just reached an all-time (since 1986) record for the number of contracts that they are net short, i.e. short positions minus longs.  Every futures contract is simultaneously a long and a short position, with the two sides of that contract held by different parties.  The short side is the one that has to deliver the product, and the long side wants to take delivery, or at least that’s the design.  Speculators also play in the futures markets, never intending to take or make delivery.

In the crude oil market, the commercial traders are often the producers, using futures markets for their original intended purpose, which is to be able to lock in prices now for sales of future production.  So the direct message of seeing the commercial traders reach an all-time net short position is that the smart producers think that recent prices have been a great deal to lock in for their future production.  If oil prices were going to rise, then locking in now would not be a great deal.  But if oil prices are about to fall, then smart traders would want to lock in prices before that happens.  This seems to explain what we have just seen.  And understand that the speculators, large and small, have taken the opposite site of that big imbalance in positions.

Continue reading Huge Imbalance in Crude Oil Positions

Crude Oil Foretold the Trump Rally 10 Years Ago

By Tom McClellan

Crude oil leading indication for DJIA
February 24, 2017

President Trump is being given credit for the post-election rally, based on analysts’ understandings of investors’ assumptions about what potential policy changes might mean.  And someday, I am pretty sure Mr. Trump is going to be blamed for a stock market selloff he similarly had nothing to do with.  Such is the nature of the media.

The uptrend still underway was foretold by crude oil prices 10 years ago, as this week’s chart illustrates.  This leading indication is one of the most fun insights I have uncovered in 22 years of newsletter writing.  I like to get the answers ahead of time, and often those answers are imperfect.  But it is still a compelling insight about the stock market.

I first noticed this when looking at a long-term chart of crude oil prices, using data compiled by the Foundation for the Study of Cycles.  I noticed that the chart pattern looked familiar, and it resembled that of the stock market.  Putting them together on one chart revealed that my observation was correct, but that the movements of crude oil prices seemed to be leading those of the DJIA.  A bit of tinkering showed that a 10-year leading indication made for the best fit.

That insight deserves a moment of contemplation.  The chart reveals that crude oil prices seem to know 10 years in advance what the DJIA is going to do.  The correlation is not perfect, but it is darned good.  How could the crude oil market know in advance what the stock market is going to do?

That is a fascinating but irrelevant question.  At some point, where there is enough data, one can let go of the “why” and start accepting the “is”.  The leading indication from crude oil prices has only been “working” for the entire history of both the DJIA and crude oil prices.  It has not worked perfectly, but it has still worked.  For most rational people, 120+ years of data should be seen as enough to validate an hypothesis, although I recognize that for others, this is not enough.  Perhaps they need 125+ years.

Here is a chart showing the same relationship, zoomed in on the last few decades:

Crude oil leading indication for DJIA

It lets us see more easily that the uptrend since the 2009 low is just the echo of a similar run-up in oil prices a decade earlier.  Oil peaked in June 2008, and so adding 10 years to that date gives us June 2018, plus or minus a few months.  When we get to the 10-year echo point of crude oil’s June 2008 top, the stock market should start to see a serious downturn.  I have no doubt that President Trump will earn the blame for that downturn, just as he has been getting the credit for the post-election rally.  Neither instance of credit/blame is deserved, but that does not stop the media from applying them.

The message from crude oil prices is that the stock market should continue to run upward into mid-2018, and then fall hard.  The risk in this hypothesis is that the 2008 commodity bubble collapse might be another exogenous event, like the 1990 Iraq War, or the 1979 Iranian revolution, and that the stock market will ignore this message.  If so, then the magnitude of such a stock market price response may be less than indicated.  But if oil’s 2008 top was a real market event, then we have some excitement ahead, just before the mid-term elections in November 2018.  The stock market should recover nicely from whatever excitement that might be, but that won’t stop the financial media and most investors from blaming President Trump for whatever happens.

Subscribe to Tom McClellan’s free weekly Chart In Focus email.

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How the OPEC “Cut” Actually Added 1 Million Barrels…

By Heisenberg Report

How The OPEC “Cut” Actually Added 1 Million Barrels/Day To The Oil Market

Well I’m not sure if I’d call it “bullish”, but as I’ve noted before “less dismal than yesterday” now counts as “good” news for oil prices and between the API numbers and the EIA report (both of which were delayed by a day this week due to the holiday), the picture is maybe “less dismal” than Tuesday.

You’ve probably seen the numbers by now, but here’s the recap:

API

  • Crude inventories fell 884k bbl last week
  • Cushing -1.73m bbl
  • Gasoline -893k
  • Distillates -4.23m

EIA

  • Crude +564k Bbl, Median Est. +3,250k Bbl
  • Cushing crude -1,528k
  • PADD 3 crude +887k
  • Gasoline -2,628k vs est. -1,500k
    • PADD 1B gasoline -933k
  • Distillates -4,924k vs est. -1,000k
    • PADD 1 Distillates -2,368k
  • Refinery utilization -1.1 ppt vs est. +0.1 ppt
  • Refinery crude inputs -187k b/d
  • Crude imports -1,205k b/d
  • Crude production +24k b/d

The reaction:

cruderbob

“U.S. crude stockpiles rose, despite API reporting a draw, yet the gain was smaller than forecast, [but] the drop in gasoline and distillate stocks [was] the constructive part of report,” Bart Melek, the head of global commodity strategy at TD Securities in Toronto, told Bloomberg by phone.

Whatever.

The bottom line, as Bloomberg goes on to note, is that crude inventories are at record levels and have gained for seven straight weeks with domestic production topping 9m b/d. The build came “despite record exports and big drop in imports.”

There you go.

But if you’re paying attention or haven’t otherwise been asleep all day, you probably knew all of that. Indeed it’s such a f*cking broken record that I wasn’t even going to mention it until I found a punchline.

Here’s that punchline, courtesy of Bloomberg:

OPEC and its partners probably need to prolong production cuts simply to counteract the glut they created just prior to the deal, according to Citigroup Inc.

The Organization of Petroleum Exporting Countries and allies including Russia don’t need to cut output much further to rebalance world markets, Citigroup’s Ed Morse said. However, they’ll likely need to keep output low once the accord expires in June in order to clear supplies added while negotiating the deal last year, he said. Producers will decide in May whether to prolong their agreement.

“The OPEC cut ironically added a million barrels a day of oil to the market” because producers ramped up before the deal took effect, Morse said in a Bloomberg television interview with Francine Lacqua and Tom Keene. “One of the ironic aspects of that two-month period when they all over-produced is that” it means the supply deal “probably needs to be extended.”

bloomberg

If that sounds familiar, it’s because either it’s common sense or because you heard me say it earlier this week. Here’s the specific Heisenberg quote from Tuesday:

Along these same lines, it’s worth noting that when we talk about OPEC cuts, it’s not exactly like they were cutting from suppressed levels of production.

So what this means is that if OPEC doesn’t extend the deal – which I contend that they may not, depending on how the Saudis are feeling about the debt market (i.e. if investors are still as starving for Riyadh’s debt as they apparently were in October when the kingdom’s $17.5 billion offer was hugely oversubscribed), the Aramco IPO, and Tehran’s ability to fund the three Sunni/Shiite proxy wars raging in Syria, Yemen, and Iraq – then what you effectively got with the production “cuts” was a production “hike.” 

Add that to record US inventories for both crude and gasoline and you’ve got yourself a full retard dynamic. And as always, you…

never-go-full-retard-tee

Crude Oil Prices: “Random”? Hardly

By Elliott Wave International

Crude Oil Prices: “Random”? Hardly.
The more emotional the market, the more predictable it is.

Last week’s shocking spike in crude oil prices is +12% and counting, the biggest one-week gain in five years. Media stories blame one culprit: the November 30 OPEC agreement to cut production.

In absolute terms, the agreed-to cut is small: 1.2 million barrels a day, less than 2% of daily global oil production. Given the existing supply glut, that’s a drop in the bucket (no pun intended). Yet, it was a bigger cut than the market expected; plus, the fact that OPEC members came to an agreement at all was enough to play a role in soaring prices.

The weeks leading up to the meeting were filled with anticipation and emotion. Oil prices went all over the place — down 4% one day, 3% the next. Yet, those fluctuations weren’t random.

The more emotional the markets get, the more influential the collective psychology of the market players becomes. That’s why Elliott wave price patterns often get particularly clear when volatility strikes.

See for yourself. Below are excerpts from the forecasts our Energy Pro Service, edited by the veteran oil market analyst Steve Craig, posted for subscribers starting in mid-November.

November 15

— Today’s pop above 45.95 leads me to believe that wave A ended at Monday’s 42.20 sell-off low. Trade below 45.28 would offer an aggressive hint that wave ((a)) is complete and I’ll be looking for downside follow through…

November 18

— Crude extended its slide from Thursday’s 46.58 rebound high down to 44.55 and is attempting to reverse. …trade above 46.58 should be a good sign that it marks an interim bottom and that the next leg of the advance is underway.

Continue reading Crude Oil Prices: “Random”? Hardly

Which of These Markets is Wrong?

By Steve Saville

The US$ oil price and the Canadian Dollar (C$) have tracked each other closely over the past 2 years. When divergences have happened they have always been eliminated within a couple of months, usually by the oil market falling into line with the currency market.

In a 25th May blog post I wrote that an interesting divergence had developed over the preceding few weeks between these markets, with the C$ having turned downward at the beginning of May and the oil price having continued to rise. This suggested that either the currency market was wrong or the oil market was wrong. As I stated at the time, my money was on the oil market being wrong. In other words, I expected the divergence to be eliminated via a decline in the oil price.

The oil price was $49 at the time. Over the ensuing two weeks it moved a little higher (to $51) and then dropped by 20% within the space of two months. The result was that by early-August the gap between the oil price and the C$ had been fully closed.

The oil price and the C$ then traded in line with each other for about 6 weeks before another divergence began to develop. Again it was the oil market showing more strength than was justified by the currency market, and by early-October it was again likely that there would be a gap-closing decline in the oil price.

As expected, there was a significant decline in the oil price from mid-October through to early-November. However, the following chart shows that the gap was only partially eliminated and that a rebound in the oil price over the past 1-2 weeks has potentially set the stage for another significant gap-closing move.

I won’t be surprised if the oil price trades a bit higher within the coming two weeks, but my guess is that it will drop to the $30s within the coming three months.

oil_C$_221116

More Bad Economic News From the Oil Patch

By Jeffrey Snider of Alhambra

[Oil] supply remains a problem but focus has finally shifted toward demand

At the end of August, the US Energy Information Administration reported that it had been overstating domestic demand for oil and energy products to a considerable degree. Using imprecise and lagging data, the calculations for the amount of product being exported overseas was understated by an average of 16%. That meant more output was being used elsewhere, thus less product being used here. While that is a positive for US producers being able to ship wherever they can, it was a more savage reflection on the economy especially this year.

In other words, nothing terribly surprising in oil unless you are expecting dramatic improvement for the US economy through something like a “full employment” liftoff. Instead, viewing oil as a primary intersection between finance and economy, the “rising dollar” part of the eurodollar decay unsurprisingly remains as an ongoing process – not a cycle to be moved into and then quickly out of. All the same mechanisms that were shocking economists in late 2014 and early 2015 are still visible here in the summer of 2016. It’s not going to just go away; like oil and gas inventory, it only gets worse a little more each time in these uneven waves.

Today it was the influential International Energy Agency’s (IEA) turn to deliver more such bad news. When oil prices first crashed starting in late 2014 and really January 2015, commentary was filled with the words “supply glut.” Particularly related to US fracking as the biggest contribution to non-OPEC growth, the intent in using those words almost exclusively was to downplay the possible negative implications of a serious commodity crash (especially what was causing it) given that such crashes are monetary by nature. At most, there would be some words expressed about economic “concerns”, but for the most part oil prices were purported to be the victim of too much success.

A year and a half later, supply remains a problem but focus has finally shifted toward demand, though not by choice. And it is here that the IEA’s latest forecasts have hit oil views hard. First, OECD oil inventories continue to climb, hitting a new record of 3.11 billion barrels in July even though, “refinery activities reached a summer peak, crude oil inventories refused to decline.” Now, however, refineries are starting to reject additional crude supplies, forcing the IEA to reduce its 2016 forecast for coming refinery runs to the “lowest rate in a decade.”

abook-sept-2016-oil-demand

The biggest problem related to the “supply glut” is that nowhere are there signs of economic recovery. Instead, demand continues to be well-off pace especially given where it “should” have been by this point. From the IEA report:

Continue reading More Bad Economic News From the Oil Patch