Back in January of this year, I reminded readers to find a nice, cheap oil stock to hold until the Fourth of July. Oil and American driving habits coincide in an upswing during this period. Everyone likes to toot their horn once in awhile. There is no praise like self-praise. I am overflowing my cup with it. However, I'm here to say that I was totally wrong on this call. I put my money where my digital mouth writes these lines. I purchased Encana (ECA). Needless to say, it is down like all oil stocks.
Recap
I did not fear the trade tensions or tariff wars. Our economy is doing fine and Americans are slow to change their habits. Driving season has not changed. Then, I considered the civil unrest in Venezuela and Libya which means less oil to the market. The Iran situation was also a kicker under geopolitics. I looked at China and they usually buy ahead of time when they sense trouble on the horizon or the extended layoff their nation endures like during the New Year celebration. Maybe they did buy as oil was rising in April? In any event, the call is wrong. Oil is down 16% for the month of May. However, the fat lady has not sung as of yet.
Reality
The slowdown effected the psyche of the market. It is why the market is up 100 points on Monday and down 100 points on Tuesday. No reasonable explanation as emotions, chart lines, volume and programs rule the exchanges. The rumors and bye-lines add to the impact. As for oil, there continues to be a build on stocks. It becomes bearish since this is a period when driving habits make for large draws on inventory.
Relief on the horizon?
The recent history of oil is reflected in the charts. Do you remember oil hitting $147 a barrel just prior to the financial crisis of 2008? Then, it began a steady decline. One could argue that decline hit a bottom in December 2016 at $26 a barrel. I am not in that camp as the trendline was broken many times during this period. With that said, a closer look at the recent price action reveals that oil has touched the $42 price level repeatedly. When it hits this price range, a reversal happens. Presently, oil is at $53.50. The 200-day average is $52.59. That line has not been pierced. It looks like it will not hold. Oil could fall to its breakout point which is $42 a barrel.
*As mentioned, oil hit $26, but then, reversed. By April of 2017 or four months later, it was $51.
*A low in June 2017 of $42. It reversed. Six months later, it was $66 in December.
*A low in December 2018 of $42. It reversed to $66 in April of this year.
This history presents the case that oil may fall and touch $42 price level. If it does and holds, this could be a triple bottom. Oil could reverse and in six months or so, we could recoup our losses. There is also the aspect of buybacks. Oil companies buyback their stock. This provides a floor. I rather see the money used to pay down debt or a dividend, but sometimes, there are deeper reasons. Maybe the company has a bond or loan and the stock must stay at certain price levels? By the way, bank stocks will drop with oil as they are on the hook for many loans to the industry.
What this data also indicates that some time in the future, due to a lack of investment, the oil stocks reserves will weaken considerably. In addition, oil futures are indicating a reversal. This is a price contradiction to the present trend. If future prices are higher under this downtrend, this means tightness in the market. The fat lady has not sung yet.
No comments:
Post a Comment