Crude Oil prices appear to be range bound for now. After jumping from the February low around $27, prices rose to just over $50. This occurred amid world headlines about the over supply of oil.
The lesson here is that price does not necessarily follow supply and demand.
Rather distinct price patterns seem to govern oil price movements.
Now oil prices have fallen back just below $40. And the headlines proclaim that oil has entered a “bear market.”
Technically a bear market occurs on a 20 percent price drop in a stock or commodity. Even this Friday morning, headlines declare that “the two day oil rally has fizzled.” Not so fast I would counter.
This is the typical negative social mood that accompanies a potential market low.
Let’s look at a few other indicators.
The other components, heating oil and unleaded gasoline, are also trying to bounce. And this is occurring when technical indicators are making lows that resulted in recent rallies.
The percent of energy stocks in a bullish formation is bouncing at the 50% level. The big guy, Exxon Mobil XOM.
Has fallen from $95 to $86 and bounced.
The problem with XOM is that its cash investment and dividend payout far exceed its net income. Something will finally
have to give way in that stock.
Conoco Phillips COP has found some support at its previous $40 level. Chevron Texaco CVX is moving sideways at the $100 mark. So it is not surprising that the Energy ETF XLE is doing the same.
We look for a short term high this next week. That should be followed by a high in October.
In other good news, natural gas futures have turned their daily trend up. From the present level of $2.75, we look for a challenge of the $3.25 level.
The drop in oil prices has brought other consequences. Here in the Western Hemisphere, workers from Central America send their earnings “back home” to support families left behind. The same thing is true for Asian workers employed in the mid-East. About 30 percent of Nepal’s GDP comes from overseas remittances. Billions are also returned to Sri Lanka, Bangladesh, Pakistan, and India. So now we have the upside down prospect of the country of India forced to come to the aid of its citizens working in Saudi Arabia.
Thousands of Indians in Saudi have not been paid for weeks or months. The Indian consulate in Jeddah has set up food distribution center for some 10,000 Indians in the area.
And we remind readers of our past warnings about the overall stock market. We noted that the Dow Transports peaked in the fall of 2014. Other indexes like the Industrials have made new highs since, causing most, make that
near all, to dismiss the warning. But as the late Richard Russell used to write, the bear is much more clever than the bull. We have an unconfirmed Dow Theory advance, the Industrials are not supported by the Transports. And now the Industrials, Transports, and Utilities have all turned down on a their daily charts. The Industrials need a daily close under 18,247 to increase downward potential.
And, August is typically a seasonal topping month. And October-November are typically seasonal lows in the markets.
Significant stock crashes such as 1929, 1987, and 2001 all occurred in October. We are not predicting a near term crash, but stocks are no longer advancing.
Weakness is showing in the six year long weak economic recovery. Ford notes that auto sales have peaked. Energy is at a fraction of its former self. And evidence mounts that the final low in interest rates has now been seen. The markets are way late for an interest rate hike. We wonder if the FED will be ready when the markets, not the government, do indeed hike rates.