Oil Market Update

originally published Monday, February 20, 2017

Printable Version

Current Oil Market Update

The last Oil Market update posted on 1st January highlighted a number of contradictory indications for oil, and what has happened since is mostly nothing – a standoff. The purpose of this update is chiefly to point out that oil’s latest COT readings have risen to record bearish extremes, which does not bode well for the oil price at all, especially as, in contrast to oil itself, oil stocks have retreated significantly so far this year, which is another bearish omen for oil.

On the 6-month chart for Light Crude we can see that it has barely moved since the start of the year, and is actually little changed from its price at the start of December. So this standoff has been going on for quite a while. With a trend of higher lows and moving averages in bullish alignment, it looks at first sight like the price will soon break to the upside, but oil stock prices and the COTs are telling a different story.

Oil stock prices have generally been weakening since the start of the year as the 6-month chart for the XOI oil index makes plain, which normally leads to weakening oil prices.

Considerably more serious is the trend to bigger and bigger Commercial short and Large Spec long positions on the COT charts, and since the Large Specs almost always end up on the wrong side of the trade, this is viewed as portending a break to the downside by oil…

Click on chart to popup a larger clearer version.

But it is the long-term Oil Hedgers chart that looks really scary. On this chart going way back to the 90’s we see that the current extremely negative readings exceed even those of 2014 – right before the oil price plummeted, although the other occasion in recent years when a somewhat less extreme condition existed, early in 2011, did not lead to a particularly serious drop. Nevertheless, it is considered foolhardy to go against this now very extreme reading, which is viewed as having the potential to trigger a potentially big drop in the oil price.

Click on chart to popup a larger clearer version.

Chart courtesy of www.sentimentrader.com

Since it would be unlikely that oil would drop hard if the dollar dropped also, a corollary of what we are seeing here is that it may imply that the Head-and-Shoulders top that we are seeing approach completion in the dollar index may abort, although we cannot rule out entirely that they might drop in unison. Certainly the chart below for the dollar index does not look positive, and it is known that Trump wants to eliminate the competitive advantage afforded to other nations by a strong dollar.

Finally, it is worth mentioning that while a drop in the oil price is likely to adversely affect the prices of oil stocks generally, two of our oil stocks, Jericho Oil and Torchlight Energy, are special situations which have a good chance of escaping collateral damage from a falling oil price and could even rally despite it.

End of update.

The above represents the opinion and analysis of Mr Maund, based on data available to him, at the time of writing. Mr. Maund's opinions are his own, and are not a recommendation or an offer to buy or sell securities. Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications. Although a qualified and experienced stockmarket analyst, Clive Maund is not a Registered Securities Advisor. Therefore Mr. Maund's opinions on the market and stocks can only be construed as a solicitation to buy and sell securities when they are subject to the prior approval and endorsement of a Registered Securities Advisor operating in accordance with the appropriate regulations in your area of jurisdiction.