Wednesday, August 5, 2015

The Oil Industry's Hangover

There's not much to say for crude this week as dampened spirits wait for some good news to turn the market around. No large movements out of the $40 price level look hopeful as supply data from the EIA's monthly report looms over traders. At the same time, executives and their employees of oil companies look stare at oil prices with their tails between their legs, one dreading major losses in revenue, the other praying he doesn't get laid off. Meanwhile, Federal Reserve representatives slowly inch towards forcing their own hands to raise interest rates, a move that will limit expansion in an already tough time for the market. While crude oil looks to rebound modestly today, the crowd will surely wait and pray for some stability to come out of the slump but not yet, as prices still need to lift off from underneath the pressure they have been experiencing. Many financial institutions are now lowering price projections to a meager $50, for some of those institutions, this prediction is $20 less than estimates made two or three months ago. The truth is, no one can guess where the wild ride will end. For one, price movements have been entirely unpredictable and volatility is at a disparaging high, but also, no one can really say what OPEC's next move might be. Yes, they've already shown they want market share and were willing to tank prices in order to keep their grip on their slice of the pie as the WTI benchmark for American oil is now well below the break-even point for new fracking ventures. After a year, some of the weaker exporting countries are beginning to feel the pain of lower revenues. Countries like Venezuela, Nigeria, and a fresh Iran will demand compensation for their loyalty to the oil cartel as they have paid the price for OPEC membership. So a lull has formed between second quarter earnings reports and speculation over OPEC production cuts and interest rates hikes, and it has become somewhat of a beneficial lull.



XOI is an index that tracks the performance of twenty oil companies that lead the industry. Exxon, Shell, BP, Shell, and ConocoPhillips are among the securities in this litmus test of the industry As of yesterday, the index lost 0.16% as 9 of its components declined and 11 gained. A rather neutral day was accompanied by very little movement as no security moved over or at 2% in either direction. This is the beneficial lull that is supported by weak momentum on the chart above. In the past two months, there were 5 crossover points with weak spread data in either direction. Oil is in an altogether unconvincing trend even though the MACD line is almost thirty under the center line. Supply and demand data has oil companies stuck in a downward trend, but it is weak. Investors are beginning to regain confidence in their positions after second-quarter earnings reports broke through the XOI low that was established after a slight bounce. With no momentum behind the speculation driven fall, emotional trading will dry up and, as the recent double bottom structure shows, a retracement of the losses in July should repair the established low and reverse the false breakout. The RSI indicator reveals a fiercely oversold market that should have some momentum out of the second bounce. There is no guarantee how long it might take for a rebound to turn to a break out or where the trend will go, but the oil industry should experience a small recovery with the support of friendly crude oil prices. As we move into market hours today, I predict a small crude oil increase will accompany an overall market gain looking positively on securities that found themselves fumbling over disappointing numbers. Look for XOI and maybe even WTI and Brent to beat the old low to establish higher resistance points until a reversal in momentum can lead to a breakthrough trend.

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