Weekend Strategy Review November 30, 2014

Posted by OMS  at November 30th, 2014

The Dow was flat on Friday, closing at 17,828.  The SPX and OTC markets were mixed, closing down 5.27 and up 4.31 points respectively.  The big loser was the Russell 2K, which dropped over 17 points.  Post holiday volume was on the light side, as most markets closed early.

The Dean’s list, PT indicators, and The Tide remain positive. As long as these indicators remain positive the indexes will likely maintain a Bullish bias.

The A-D oscillator closed at 40.13, its lowest reading in a week.  If the A-D oscillator starts to fall below zero, we need to start watching for a Tide change.

One of the things I’ll also be watching in the weeks ahead will be the shares of energy-related companies.  Most of these shares have been taking a pounding recently in response to falling crude prices.  But things could be ready to change.

Here’s the problem:  With U.S. drillers now fracking domestic crude at record levels, there is way too much crude oil on the market now.  Last week, representatives of The Organization of Petroleum Exporting Countries (OPEC) met in Vienna to discuss the issue.  After much jabbering, they decided to keep output targets unchanged.  Actually, the OPEC-12 countries didn’t decide; the Saudi’s decided for them.  Most of the other countries in OPEC wanted to reduce production, but no individual country ever wants to do this because it results in lower oil revenues.  They all wanted the Saudi’s to make the cuts.  But the Saudi’s, who are by far the largest crude producer, essentially told the rest of OPEC to get lost!   They alone decided to maintain current production levels and let crude prices drift lower.  Why?

The Saudi’s want to knock out the marginal players.  Specifically, they want to stop or reduce U.S. fracking.  It’s hurting them!

U.S crude oil is not only hurting the Saudi’s, its now impacting world markets, resulting in lower revenues for the rest of OPEC and the Russians.   To give you an example of how much this has impacted the smaller OPEC nations, two years ago Nigeria used to export 100 percent of its oil to the U.S.  Today it doesn’t sell any oil to the U.S.  None!

So on Friday morning, when OPEC announced its decision to keep production unchanged, crude prices fell about 10 percent to just under $70 per barrel. 

Just so you know where I’m going with this, my target for North Sea Brent is near $60 with WTC probably in the low $50s. 

The Saudi’s can produce conventional crude for about $20 to $25 per barrel. It probably costs the rest of OPEC somewhere between $30-35 a barrel.  Nobody knows what it costs the Russians to produce crude, because the state supports the cost, but it’s likely in the $40 to $45 range.  The cost for most U.S. frackers varies between $50 to $65 per barrel.  So as you can see, when crude was trading between $90 -$100 a barrel, everybody was happy and making money.

But now that the Saudi’s have decided to let crude prices float, it will likely impact international economies and markets throughout the world.

Countries like Russia won’t have a lot of extra money to spend on adventures like the Ukraine.   Even ISIS will find it tougher to buy weapons and feed its terrorists.  Here in the U.S., drilling is close to becoming unprofitable for some explorers, especially the new shale drillers. Many of these drillers are surviving because they managed to hedge the prices they get for their oil at about $90 a barrel.  However once those options expire, margins will shrink.  When this happens, they will start decreasing production and  laying-off workers.  A lot of the newly created jobs in states like North Dakota will vanish.

So what to do?

Well.  Let’s think about this… First of all, I believe that the current crude shake-out will be a good thing for the two oil field services stocks I follow.  I believe that both Halliburton (HAL) and Schlumberger (SLB) will be survivors.  If anybody is going to drill for oil, they will need the equipment these companies provide.  These companies are just like the companies that sold picks and shovels to the California gold miners.  They were the ones who got rich; not the miners.

If you look at the chart of HAL you can see that it turned Red in early August at prices near 70.  On Friday, the stock closed at 42.20.   Same for Schlumberger.  It turned Red in late July near 112.  Now it’s near 86.  If you look at Oil Services as a group, you will see that the PT indicators on OIL are still RED. 

If you look at the oil explorers-producers, you will likely see companies like Marathon Oil (MRO), with RED indicators.  MRO also has a negative Hockey Stick pattern that suggests a price target near the 26-27 level.  On Friday, MRO closed at 28.92.

The indicators on most of the refiners, like Marathon (MPC) and Valero (VLO), have turned Yellow after pulling back a few points.  The refiners usually benefit from lower crude prices. MPC is still in an Uptrend with positive PT indicators AND now because of the pullback, its 2-period RSI Wilder is oversold at 6.03. Aren’t these the conditions for a potential Rifle Trade? Hmmm?

So all I’m doing now is waiting.

At this point, the PT indicators on MOST energy related issues are negative. However most of these issues have formed TLB patterns at a time when the P-volume is starting to show some positive divergence. It still way too early to determine if energy shares are about to start making a move to the upside, but with March- April only a few months away, I’m starting to watch energy.

In the weeks ahead, look for energy issues to start appearing on the Dean’s List.  The first issues that will likely turn positive will be the refiners.  Then look for the oilfield service providers, like HAL and SLB.  Then finally look for the explorers and producers.  Once this starts to happen, look for DIG to appear too.  Then watch for the PT indicators to turn positive. 

Remember, it is NOT in the interest of any oil producing country to have crude prices under $70.  Most want to see it above $90.  They would ALL love to have it stabilize near or over $100.   $50-$60 crude is ONLY being done to shake out the marginal producers.  Once this happens, prices will return to $100 or higher!  Halliburton is a $70+ stock with crude near $100.  Think of it as being on sale now that it’s priced in the low 40s. Same for many of the others.  

Don’t pay any attention to CNBC.   Back in late July, the commentators on CNBC did NOT tell you that energy stocks were going lower.  But the PT indicators did. 

There’s a lesson here:  Watch the PT indicators!

Have a great weekend.

That’s what I’m doing,

h

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