Professor Elam

Getting up Off the Mat

Will
the Rocky Balboa of the Permian Basin (energy prices) get off the mat?  Or as  Trainer  Burgess
Meredith quipped, is he hurt Poimanent! 
The answer is that prices are showing bottoming signs though a genuine
rally across the energy complex has not begun.  We need all four components rallying to become bullish but
there are hopeful signs.

Crude
oil trades monthly at the New York Mercantile Exchange (www.nymex.com).   As noted here, those prices have traded at deep
discounts to future months, recently as much as $5-6 from the near month to the
next. This reflected a world awash in oil.  Stories of ocean going tankers as storage facilities still
dot the news. But,  do not look at
the news of the latest OPEC antics to gauge the markets. Instead look at the
what the markets are saying.   Oil for April delivery is trading over $40.  Six months out the contacts are about
$6 higher, This is  a much more
normal relationship that reflects the costs of storage.  Just two months ago the deep discounts
to the future reflected way more supply than demand. While the daily dollar
plus gyrations frustrate, the prices are slowly moving up. Various technical indicators
are flashing recovery signs.

Heating
oil has not recovered. It is trading at $1.21 and needs a close over $1.65 on
the weekly charts. Unleaded gasoline has recovered from a spike low under $1
and now trades at $1.38. This price has generated positive technical signals.
(This is a newspaper column not a technical market letter after all).  Perhaps the most significant component
for Texas is natural gas.  This is
because the US produces natural  gas, it is not imported from the Mid east. Buying season for
natural  gas is the spring when
prices seasonally rise. This component has collapsed from over $13 to
$4.34.   This market needs a close over $4.84.  This may be  the best indicator for the Texas economy.

The
fact of the matter is that stock prices track crude oil prices. Once crude oil
started dropping from $145, stocks accelerated their downfall. The reason is
simple, crude oil price demand is a barometer of the economy.  Even stocks are not accelerating with
the same ferocity shown in October and November.  Stock prices however have lost over one half of their total
advance since the 1932 low at DOW 41! And this has happened since October,
2007. Admittedly half that advance to DOW 14,000 occurred since 1995 but it
happened.  The full result of this
erasure of wealth, this theft from every endowment, 401K and IRA has yet to be
felt.  Estimates by the State
Comptroller that only 100,000 jo9bs will be lost in Texas are hopelessly naïve.   Still the big drop in stocks
should be nearing some sort of capitulation this spring.   We certainly do not believe that
will be THE low in prices.  The
market is reflecting  all time lows
in bullish sentiment and nearly complete 
wave structures.

Ask
your friends and neighbors, is anyone buying shares of any energy concern?    Would any banker loan money
on oil in storage at this point, now that prices have collapsed?   Patterson Energy, my informal
proxy for the Permian Basin Economy, is back to 2001 price levels. The market
is still selling PTEN. 

Market
bottoms take place amidst massive negative psychology.  People swear they will never ever ever
participate in said market again. 
PTEN is trading for 59% of book value.   It has no debt. 
Cash amounts to 53 cents a share. 
This means  the equipment is
priced  at less than half its book
value.  At this point, the market
seems to be saying……

Yo
Adrian!

Dennis Elam teaches at Texas
A & M San Antonio and can be reached at dennis.elam@att.net.