By Tim Knight
Well this is laughable.
With crude prices having already recovered fully from their early March swoon, someone in Riyadh apparently thought we needed a little but more of a push ahead of this afternoon’s API data. Here’s the headline:
- SAUDI ARABIA SAID TO WANT OPEC TO EXTEND PRODUCTION CUTS: WSJ
And the reaction was swift and predictable:
Of course jawboning has a generally short shelf life so this will probably be faded quickly, but really we’re not sure why the Saudis are bothering with dropping hints about production cut extensions. After all, if they really wanted to drive up prices, they’d just send a little more money and a couple of pallets of ammo to their Sunni proxies in Syria, because the only thing that’s been able to produce a sustained upturn in oil prices of late is “war”…
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.
For equities in general, though, I would simply offer this headline on ZH that just came up:
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.”
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:
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:
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.
By Tim Knight
Oh, yes, I remember now – – “trendlines matter”
There really aren’t enough ways to say “thank you” for this February 22nd call on crude oil (when it was $55). It has plunged about 14% since then.
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.
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:
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.
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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:
- Crude inventories fell 884k bbl last week
- Cushing -1.73m bbl
- Gasoline -893k
- Distillates -4.23m
- 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
“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.
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.”
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…
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.
— 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…
— 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.