Crude Oil is crashing again, down 36% from its high in early October.
With the S&P 500 moving lower in tandem during October (11% correction), part of the blame was placed on lower Oil prices.
By Kevin Muir
The other day President Trump tweeted the following:
US Crude Oil (West Texas Intermediate Cushing OK) spot price has fallen 34% just since October 3, 2018. And using US oil company Phillips 66 out of Bartlesville Oklahoma as an example, Phillips 66 plunged 25% since October 3rd as well.
At the south side of El Caribe, Venezuela has seen a plunge in their crude oil basket of 23% since early October.
It’s an over obsessed upon commodity, previously hyped for its (Hubbert’s) “peak” status by “experts” like T Boone Pickens and a whole clown show of promoters amplified by the media at the time.
Now WTI Crude Oil has reached a thick resistance zone (as managed in NFTRH for the last couple of years) and may be breaking down from a peak of a whole other kind. Here is the monthly chart we use.
It is preliminary, and one weekend OPEC jawbone could put oil back up in the consolidation. But as of now the price has ticked below the previous 2018 low to close the week. It is not a good look… unless you’re a gold bug, that is. More on that later.
Markets gave Trump the benefit of the doubt to start the new week after a weekend that found the President spending what certainly seemed like an inordinate amount of time assailing various (and in some cases entirely imaginary) foes on Twitter.
Seemingly oblivious to the optics, Trump regaled the world on Monday morning with his thoughts on farmers, soybean taxes, “all sorts of trade barriers”, deficits, the constitutionality of the special counsel probe, his power to pardon himself and “Witch Hunts” that he says are being conducted by “conflicted” Democrats and unnamed “others” who he says are “angry” at him for reasons he didn’t specify.
That went on for nearly three hours.
Despite that, stocks were fine, seemingly content to ignore the incessant rantings of a guy who is now openly suggesting that he’d absolve himself of responsibility for crimes he committed on the off chance anyone actually ends up producing proof of those crimes and seemingly resigned to the notion that, as Goldman put it over the weekend, “US trade policy is a conundrum.”
May 31, 2018
10 years ago in June 2008, oil prices were making a top above $140/barrel, which turned out to be an exhaustive blowoff top. A steep collapse ensued, taking oil prices down to below $40 in January 2009.
Crude oil gives us a 10-year leading indication for what the stock market is going to do. It is a phenomenon which has only been working for the entire 122-year history of the DJIA, so that may not be long enough yet for some people to believe in it. Making things more complicated, it is not a precisely perfect model of future stock market action. It is merely very good.
During the week of February 21, 2017, Money Managers (MGR) in the WTI futures market went all the way for higher oil prices. The CFTC Commitment of Traders (COT) report showed a then-record 405k net to the long side. For whatever reason(s), oil prices didn’t necessarily follow at least not in the same nearly direct manner as they had in the past. The intensity of MGR’s net long position alone had up until the “rising dollar” determined the domestic benchmark oil price.
A week after, the final one in February last year, MGR’s started to back off. Oil prices did, too, though to a lesser degree like on the way up. After just four weeks, the long position had been pared back by almost half. WTI that had climbed to a rebound high of $54.48 on February 23, 2017, declined back to $47 in late March.
The process has repeated in 2018 with a few notable exceptions. MGR positions hit a new record long the week of January 30 – the same week that global liquidations swept across stock markets. Since, managers have cooled in their enthusiasm, though not quite in the same repositioning as 2017. The net long as of the latest estimates (for the week of May 15) has only fallen back below 400k.
I’m not sure if you were reading the Syria headlines as bullish for crude or not, and I’m not sure if you’re in the camp who thinks there should be a “Bolton premium” in oil prices to reflect the very real possibility that Trump’s decision to replace H.R. McMaster with one of the most notorious foreign policy hawks in modern U.S. history likely raises the risk of more intervention in the Mideast no matter what Trump says at rallies about pulling out “very soon”, but if you were looking for a reason to be bullish on oil, here’s one:
This is obviously aimed at getting the best possible valuation for Aramco ahead of the IPO (or at least you’d think that has something to do with it) and it’s probably also tied to folks trying to figure out how to finance some of MbS’s ambitious plans.
Here’s the reaction:
Oil was already on the rise after Xi’s speech buoyed risk assets overnight.
At the end of the first quarter, Crude Oil was up 7.5% while Energy stocks were down 6.1%. How unusual is such a divergence? Let’s take a look…
Note: References to Energy/Energy Stocks/Energy Sector throughout this post are referring to the S&P 500 Energy Sector ETF (XLE), total return data from Stockcharts.com.
Since the inception of the Energy sector ETF (XLE) in December 1998, Crude Oil and Energy stocks have moved in the same direction on a rolling 3-month basis roughly 74% of the time. On a rolling one-year basis this moves up to 76%.
There’s a widespread assumption that supply and demand drive oil prices. Almost all economists base their oil forecasts entirely on this premise, and so do many speculators.
If the oil industry ramps up production and increases supply, economists expect a drop in oil prices. If production decreases, or some other factors hint at supply constraints, they anticipate a rise in oil’s price.
A case in point is this March 23 CNBC headline:
Trump security pick John Bolton likely to turn up heat on Iran and boost oil prices
As you may know, Bolton is considered to be “hawkish” toward Iran, so the thinking goes that a ramping up of U.S. sanctions against the nation could hamper Iranian oil production or Iran’s ability to sell oil on the open market.
It may very well turn out that oil prices do move higher, but, according to our research, production is not everything.
Consider this graph and commentary from EWI founder Robert Prechter’s 2017 book, The Socionomic Theory of Finance:
March 23, 2018
The movements of gold prices lead similar movements in crude oil about 20 months later. So if you watch what gold has already done, you can see the script for what oil prices are going to do.
It does not work perfectly; it is merely amazing, not perfect.
Crude oil prices had a brief swoon, dipping to $59/barrel in early February. That matched a brief dip in gold prices 20 months earlier in May 2016. Now oil prices are recovering, just as gold recovered to its July 2016 top. But the recovery in oil prices should only be a brief one, as gold’s chart plot shows a big decline ahead for oil prices.
There is agreement in this next chart for that thesis that oil prices are headed lower.
By Tim Knight
Welcome to a new week, everyone. First off, unrelated to anything, I’ve just got to see that this story about how California’s high-speed rail is going way over budget (tens of billions) and is going to be many years late is the least-surprising thing I’ve ever witnessed. California came up with this thing in the throes of the financial crisis, I guess as a changey-hopey way to convince citizens they were forward-thinking, but I immediately concluded it would be an utter debacle.
For those unfamiliar with it, the idea is basically to retrofit existing tracks, as well as build new ones, to create a sorta-kinda “high” speed train between San Francisco and, frankly, Disneyland (portrayed as “Anaheim”). This is not going to be anything like those amazing multi-hundred MPH beauties from Japan or China. No, in the end, it’s going to be an incredibly expensive, incredibly late, slightly-modernized train which they’ll probably wind up driving at 80 mph or so. My dire prediction seems to be right on target so far.
I just wanted to point out, away from the din of soaring equity prices, that oil seems to be rolling over (again). Please take note of the interesting pattern I’ve tinted in green. My view is that it’s going to be a repeat of the prior top, shown in grey.