With all of the news this week, the one amazing me the most is the continuous drop in oil after the Saudi oilfields were attacked. The short-term security of supply is ok as Saudi Arabia has been able to meet their supply agreements. On that news, oil traded on Wednesday and Thursday into the top of the previous range before the drone strikes. Back to a mere smoldering situation, my trading plan suggests watching a few charts and ideas below.
On the chart below, we can see the last two bars where oil tried to go lower but closed both days near the top of the daily range. Both days closed near the 200-day moving average. Perhaps we can find support here as these were both tests of the prior trading range.
A couple of other important trends are being broken. The price is now testing the uptrend off the August low which could help for a bullish bounce. The momentum trend shown on the PPO has been broken suggesting further downside in the short term. It’s not obvious which way this situation resolves.
All of the refiners have advanced on this move over the last month, but European and Asian refiners seem to dominate the top of the list.
While the market has adjusted somewhat and continues to adjust to the largest single day outage of crude supply, we should see volatility pull back. A few new things are on the radar now as the USA has started to put patriot missiles in Saudi Arabia as well as aircraft carriers in the Gulf.
If more shots start being fired this will add to the disruption of stable supply. It might not create any supply disruption, but it will add instability for crude oil moving through the Strait of Hormuz.
The changes in the crude oil markets have been disturbed but not broken. I was expecting that this would lead to tightness in supply over the next 90 days. I will continue to watch the oil markets for a situation of tight supply as the immediate focus has dropped. I don’t expect a significantly lower level of oil price any time soon.
That takes us back to the price of oil and the exploration and production companies. Waiting for the news is the slow way to watch it. By keeping an eye on Brent Crude, West Texas crude, as well as the domestic and international oil companies, we can monitor the market sensitivity to supply.
The surge and retreat of the oil price appears to be over. It might not be done yet but we are back to where we were before the attack. The real question is how will the big money behave? Do they move in on the pullback, or stay away? Charts like XOP, FRAK and CRAK should tell us more. What is important about commodities and commodity related stocks is you need to buy near the lows and sell near the highs. Commodities range in price and commodity stocks swoon and surge accordingly.
Here is XOP, the Exploration and Production ETF.
One of the important things to note is this ETF has already dropped below the price before the Saudi attack. That is easier to see in the zoom panel. Looking at the SCTR ranking on the top panel for ETF’s, the SCTR is in the bottom 1% for performance! Even a massive shock in oil could not stabilize the decline yet. We will be able to use the volume spike on the chart to identify when the attack on the oilfields happened.
The next chart is of the refiners. Notice the difference in response between the refiners shown below and the exploration companies shown above. The refiners have moved up almost every day for the last two weeks and are trying to break out to new three-month highs. The SCTR shows that this aggressive price response has changed how well the ETF is doing compared to other ETF’s. At least it is no longer one of the worst ETF’s out there.
Lastly is FRAK, the ETF for unconventional oil producers. If current inventory starts to be dramatically depleted, we should see this chart finally improve. Currently, it still says avoid as we are back below the initial surge.
Again, I don’t have the courage to short the energy sector. I own a few stocks related to it. This is a nice wakeup call to watch the sector closely for price improvement. These charts above should all start moving higher to help investors see a change in trend. That might be a better time to get onboard the pumpjack.