Professor Elam

Weekend Oct 19 2019

Energy Prices Headed for November Low

 

Excerpts from Energy Shares Decline Faster than Oil Prices

WSJ Today

 

Horrific, terrible, abysmal, the worst

 

Growing consensus that the exploration and production business model just won’t ever work for investor in a $50-$5 a barrel world

 

“I expect there will be a number of insolvent companies looking for help in six months”

 

“It’s under siege, almost, it’s tough to go in with conviction.”

 

For months we have warned that weakness particularly in the energy service arena, XES, was warning of just this type of situation. Now it appears that things are bad enough to set off a final climatic sell-off.

 

Several things characterize significant market lows. A rapid mark-down in price, shares falling to below book value, and finally doom and gloom articles such as the above usually days or weeks prior to a bottom. , We can now check all those early warning boxes. Expect more doom and gloom articles right up to the moment of a market low. Recall that maximum negative mood occurs at the end of just such a move.

 

Natural gas prices may have to fall to $2.00 before a bottom is made.

 

This is because changes in mood are unremembered; all assume the linear trend will continue forever. It won’t and rarely does.

 

RIG has risen from $4 to $4.80.   Energy service XES is dead in the water. Ditto for Halliburton and Schlumberger.

 

I have been positive on refiners. That is the preferred area for fund managers.   In the last two months that buying has pushed Valero VLO from $72 to $90.

 

West Texas Intermediate has managed to stay above support at $51 but expect that level to fall in a last ‘we give up’ dismay of negative market mood.

 

Meanwhile social mood in Washington DC continues to trend negative. Just yesterday Trump informed Speaker Pelosi she was a ‘third rate politician.’ Impeachment is having difficulty moving forward and not House vote is scheduled.

 

But investors have pushed the Transports higher which is a positive for the Industrials.   This may well mark the seasonal low in stocks. But the low in Washington DC mood will surely be much lower