• August 24, 2019

ELAM: Interpreting the News - Odessa American: Business

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ELAM: Interpreting the News

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Posted: Sunday, August 11, 2019 5:00 am

Consider this ‘news’ all from the same article in today’s Wall Street Journal.

Headline Oil Rebounds from Near 2019 Lows

Article US Crude futures advanced 2.58% to $52.24 a barrel, Brent added 2% reaching $57.38.

Which sounds great until the next paragraph. Thursday’s uptick left Brent down 7.3% on the week with U S Crude down 5.6%.

In short our prediction the last few weeks, brace for lower stock and oil prices, continues to come true.

This column is all about the longer view of markets. It is important to look at the market action, not the day-to-day spin on the news. In the long run, oil topped at $140 in 2008, then plunging in six months to just over $30. A second high occurred around $110 holding until 2014. Then a lower low occurred below $30 in 2016. A lower high occurred last year around $77. Now price is beneath all four moving averages.  Lower highs and lower lows are the definition of a bear market. The oil market is suffering from its own frantic, more supply than demand state.

Last week we thought the XES Energy Service ETF would take out $8.50; indeed today it is $7.46. Again this extreme weakness below the 2009 low is telegraphing danger ahead. The XLE Energy ETF is down 5.9% for the month.

If one takes the traditional supply and demand point of view, no wonder prices are declining. From what quarter will there be a growing demand for oil? Major European cities are banning internal combustion cars by 2025. The utility plants will surely burn natural gas, not coal or oil. Automobiles continue to get better mileage while millenials drive fewer miles.

Firms are in trouble for flaring so much natural gas, essentially it is a free commodity. This is due to the lack of pipeline transportation to the coast. Headlines suggest years of lower prices which may in itself be predictive of a bottom sooner than all think. After all, natural gas is far cleaner than coal.

Energy and stock prices have tended to trade in the same direction. The Transport index is the more important as it is more economically sensitive. Now trading at 10,187, a break of 9,900 will turn the trend down. The US stock market is leading the world with Emerging Markets and Asian markets much more in retreat.

Gold continues to soar now trading at $1514.90. Silver is breaking above $17 perhaps finally ending its long bear market.

Our take is that the rate of increase in economic activity in the Permian Basin is slowing A break of $50 in crude would likely challenge the prior low of $42. Trade wars slow commerce and increase the chance that equally pugnacious President Xi just might start buying oil from Iran. Stay tuned.


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