Weekend Oct 18, 2015
Anticipating a Bottom In Oil Prices
This is the third or fourth time we have seen oil go up and it gets smacked in the face again. Everything will come back to the fundamentals sometime.
Tariq Zahir, Managing Member Tyche Capital Advisors
Poor people think about Tuesday all day Tuesday.Rich people think in terms of decades.
Gail Sheehy, Pathfinders
Our position has been that the oil price would rebound in an A B C up-down-up fashion. And indeed that is just what has happened. We reined our optimism in over reaching $55 last week. We suggested that probably the best we could hope for would be a return to the previous high at $50. Sure enough, price poked just over $50 and then retreated to the $46 level. Which makes our forecast a good bit better than Boone Pickens $70 estimate by year-end.
We follow a variety of technical indicators to form our opinions on price direction. Yesterday Thursday October 15, on the continuous price chart the parabolic stop and reverse PAR SAR indicator I (how’s that for a mouthful?) generated a daily sell signal. This indicator will be in place unless price exceeds $50.92, the high set five days ago. The up down pattern from the $37.75 August low appears complete giving this indicator a higher than usual confidence level. It is not necessary to explain how PAR SAR works, think of it as a usually reliable black box. The price also is turning down on the more important weekly chart.
Business news abounds with headlines such as Low Prices Slam Schlumberger. Schlumberger’s third quarter earnings declined 49%. In a battered market the stock price of SLB has held up in great fashion declining a mere 15% this past year. Considering smaller energy firms are now trading below book value and have fallen more than 50%, the largest firm in the business has held up fairly well. Expect lower earnings from Halliburton and Baker-Hughes who will report next week. But we all know the bad news is in place, what should we be anticipating
In short let’s take Gail’s advice and think like rich people. Market wizard Jim Rogers notes that commodity markets usually have to fall below the cost of production to make a final bottom. That flushes out the weak players with too much debt or not enough cash. Assets move from the weak to strong hands. The nature of a bear market is to clear out the excessive speculation from the previous bull market. And that is certainly happening with personnel lay offs, capital budgets slashed, and over the top speculation in housing and hotels in what were boom towns just months ago. Notably we were sounding the alarm in this space when the rest of the ‘experts’ were wildly bullish.
We need look no further than the gold and silver market to have a road map to follow on how this will end for energy prices. Gold began its twelve-year run must under $300 in the late 1998-99 time frame. It ran to $1,900 in 2011 amid wildly bullish predictions of a coming collapse in various world currencies. It then corrected half that advance falling to yes $1,100 this past July. Shares of mining companies were pounded. The XAU index of gold miners lost 80% of its value from the 2011 top. Just a few weeks ago a Wall Street Journal Columnist referred to gold s a ‘pet rock’ suggesting investing in the metal was the equivalent of a fad with no real value. Since then gold has jumped about $100 or 9%. The point here is that market lows are occasioned by massive negative mood often bordering on outright derision.
Recall natural gas prices bottomed in summer 2012 around $1.92. At the time I reported on articles suggesting the price would literally have to drop to zero, given the excess supply in the world. That in itself was evidence of an impending low. Sure enough natural gas prices hit $6.50 just eighteen months later. It is this massive negative mood coupled with the human instinct of herding (following the crowd) that makes buying such lows difficult.
Gold and silver are perhaps the first major commodity market to bottom. We expect most other markets, like energy to follow with bottoms occurring over the next six months. The XES energy service ETF has fallen already lost 64% of its value from the April 2014 high. I expect it will bottom in coming months just over the 2009 panic low around $12.50. It’s not too early to brace for an attitude adjustment’ as Hank Williams Jr put it, when everyone else will still be expecting lower prices.
Professor Elam 