An avid reader of the blog stated the following in the comments section: "I just am dubious that all of your charts coalesced the same day, and oil buyers and sellers coincidentally decided to apply lower prices to oil the same day W said we'd finally act like Norway when it comes to oil drilling."
To this, I offer an alternative explanation as to why the precipitous drop in oil/energy/commodities. As Addison Armstrong, Tradition Energy Director Of Market Research explained tonight on Fast Money:
We’re seeing liquidation pure and simple, which is being driven by the weak balance sheets of the banks. They’ve been cleaning them up by raising cash and they’re doing that by selling oil and other commodities.”That suggests at least some investors are selling crude contracts even though they really don't want to be sellers
OK, listen, companies report earnings on a quarterly basis. A large number of companies, including some of the big financial institutions reported this week. The large brokerages, such as JP Morgan, Merrill Lynch, Citigroup are reporting (or have reported) earnings. These brokerages are (or were) invested heavily in commodities, including oil. Now, as you know, the stock prices of any financial company has been in absolute free-fall for the past year. So, how do these huge companies stop the bleeding? They sell what was working (commodity positions),
raise cash, improve the balance sheet, and report earnings that are better than expected. The selling of energy stocks/ETFs is the reason why the price of oil and energy started dropping, as shown in the chart in the previous post, well BEFORE President Bush made any announcements on offshore drilling. And, sad to say, this implies that the price of oil is NOT completely dependent on supply and demand, but instead was artificially elevated by speculators/investors. You cannot tell me that demand dropped and supply rose that precipitously in the past 2 weeks to cause the marked fall in price.
Also, for those who doubt the power of technical analysis, and for those who refer to the big price moves as "all of the charts coalescing in one day", I submit this point. Technicians (half of active traders) follow price action, and when something moves, the buying or selling is amplified if a key technical level is breached or broken.
For example, look at the chart of this stock, VVUS, below. It doesn't matter what the company does, but I will tell you that the company has nothing to do with oil or energy. Anyway, what caused it to move dramatically up in the middle of May and then the end of June into early July? Are you telling me that the fundamentals of this company changed TWICE within the span of 2
months? NO WAY. It was trading on technicals....the market watchers saw it "break out" of its trading range and piled in with loads of cash and scooped up this stock. Then, after taking a breather (consolidation) it resumed its remarkable run upward. This is classic momentum of a trading vehicle. And, all of oil and energy and commodities are publically traded, thus their price can move dramatically based on the money flow from hedge funds, mutual funds, institutional investors, and individual investors. So, I will give GW Bush ZERO credit for dropping the price of oil.
P.S. I don't want to clutter this with a new post, but 2 things Don. First, why does this chart of Freeport-McMoran, a gold and copper mining company, look almost identical to the oil/energy chart I posted? All of the commodities are moving together, nothing to do with the plan to drill. Second, the "sell signal" on the XLE energy ETF was made not on the day Bush made the announcement. It was made at the beginning of June when the price fell from 90 down through the 50 day moving average (the blue line that was in an uptrend). When it broke below 85.56 on June 3rd, that was a major bearish move, and the ensuing weakness was not unexpected. These are fundamental principles of technical analysis.