Wednesday, November 25, 2015


As we all know, oil, the world's most important commodity, has been mired in prolonged bear market that has spent much of 2015 threatening to test the lows of the 2008-2009 financial crisis when Crude bottomed out near $30/barrel.  Below is a weekly chart for Crude and we see that since moving in a big sideways range ($80-$110/barrel) from 2011 to 2014, oil has fallen off a cliff and now sits down near $40/barrel.

Kimble Charting Solutions notes that Crude's current streak of being below its 200-day moving average is its longest ever.

This type of action begs the question: Is there any support in place to allow oil to bottom here and head higher?  Or is it bound to revisit the 2009 lows and potentially even lower?

Goldman Sachs thinks the commodity is destined to head toward $20/barrel based on surging supplies.  This from Ambrose Evens-Pritchard in the Telegraph:

"The world is running out of storage facilities for surging supplies of oil and may soon exhaust tanker space offshore, raising the chances of a violent plunge in crude prices over coming weeks, experts have warned.

Goldman Sachs told clients that the increasing glut of oil on the global market has combined with mild weather from a freak El Nino this winter. The twin-effect could send prices plummeting to $20 a barrel, the so-called ‘cash cost’ that forces drillers to abandon production. “Risks of a sharp leg lower remain elevated,” it said.

Oil has fallen from $110 a barrel early last year and is hovering near $40 for US crude, and $44 for Brent in Europe…

It is estimated that at least 100m barrels are now being stored on tankers offshore, waiting for better prices. A queue of 39 vessels carrying 28m barrels is laid up outside the Texas port of Galveston, while the Iranians have a further 30m barrels offshore ready to sell as soon as sanctions are lifted...

“The world is floating in oil, and commercial stocks on land are at a record high,” said David Hufton, head of oil brokers PVM Group. “The numbers we are facing now are dreadful. Stocks have been building continuously for two years. This is unprecedented.” 

“What has saved us so far is that China has been buying 200,000 to 300,000 barrels a day (b/d) for their strategic reserve,” he said."


Making matters more complicated for oil, and all commodities for that matter, is the strength of the Dollar.  As the weekly chart below shows, the US Dollar is near a long-term high and to our eye is doing either one of two things right now: 1) Putting in a big double-top at this level which, if rejected, will send it falling or 2) consolidating here before busting through higher and creating even more problems for the commodity sector. 

The ratio chart below shows the UUP (Dollar ETF) vs. USO (Oil ETF) and the inverse relationship they've had over the last year.  The Dollar's strength has been a negative for oil and its attempt to find a firm bottom.  What's also interesting is the potential double top in the spread ratio (yellow line). 

How oil resolves itself will have a meaningful impact on the global macro markets (stocks included).  Energy names have been decimated this year and that's most definitely contributed to some of the S&P's lackluster behavior.  As for which way it ultimately breaks, we'll let the pundits argue over that.  For now, we're content watching and observing free of biases.  We can participate once a definitive trend has been established.

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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