Thursday, July 17, 2008

Rebuttal

Oil plunged again today (as did natural gas, steel, coal, ag names- basically anything that has had a tremendous run over the past several months).

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.


7 comments:

Don said...

Your chart showed perhaps the most precipitous drop in months on THE day W made the announcement. Now, maybe all of the companies were poised to sell their oil, and I am by no means saying W deserves all the credit.

BUT

I am not going to be blinded by W hatred just to prevent him from receiving any credit. It is too much of a coincidence that all of those companies decided to sell the same exact day. I also don't believe the 3 million extra barrels we found in the US did not help.

But, I know you will not agree, so I will let you chalk it up to the phantom forces (because it apparently wasn't market forces) that is causing the drop.

And, if you think speculators are immune to supply and demand, you are crazy. Speculators try to fight supply and demand, and often the gamble pays off. Eventually, however, speculators who bite off more than they can chew end up taking a bath. The market is imprecise and poor market actors, people without good market information, and speculators often get distortions for awhile. It is the risk of an organic market.

Unless, they're banks bailed out by the government, though.....

Don said...

I don't care how many charts you show me. When the price of oil dramatically plunges $9 a barrel immediately after President Bush announces more drilling, that decrease is attributed to his action. Now, that may be as much as he can get out of that announcement. It probably scared speculators holding onto oil for a future that suddenly looked less lucrative. But, it is too big a coincidence to just wave away.

Cocameister said...

Don,

See the original post, I updated the post with a paragraph and an image.

Don said...

I like how the man who sites socialized medicine in Italy to criticize American healthcare is lecturing me on fundamental principles of analysis.

And you wonder why I think you might have a bias?

Nothing is more fundamental than --

President announces more drilling

DURING SPEECH

Oil begins a significant drop that had not occurred in the days before.

All your conditions were in place the day before, two days before, etc.

The fact that you cannot concede that the President's speech triggered a $9 decline in the price is absurd. Sure, maybe the price dropped some the week before (although you couldn't tell that this expected decline was coming from anything you'd read on this blog -- why did you have me so worked up if this was so expected?). Maybe the price is dropping now for other reasons as well.

But there are no charts you can chow me to prove to me that the sell-off that began on oil by speculators DURING HIS SPEECH was unrelated to his speech.

Without his speech, the sell-off is not that large and the price may not have dipped at all that day.

This is a minor point, and others are correct that we should not squabble over such a minor detail. But, I have seen nothing showing me that this huge sell-off has to be pure coincidence.

Bob said...

I will agree that Bush's announcement probably pushed an overly inflated price of oil down. But it was more of a trigger of the inevitable than an actual cause of the price drop.

I think the price action over the next month or two would ultimately have been the same without Bush's announcement. It just would not have been so violent and quick.

Just my opinion.

Bob said...

Pelosi wanted Bush to tap into the 700+ million barrels of oil in Strategic Petroleum Reserve. Suggested 10%. Bush didn't want to tap into the reserves and also didn't think another 70 million barrels would have any effect on the price of gasoline.

I dont know how much oil they are expecting to get from the future drilling but if an immediate increase in our oil supply of 70+ million barrels won't effect gas prices, then 3 million has absolutely no effect.


"Bush said Tuesday that he is against any release from the reserve, saying that stash is for emergencies only. He also disputed that it would have any effect on lowering gas prices."


http://www.cnn.com/2008/POLITICS/07/17/pelosi.interview/index.html

Cocameister said...

Don,

I'm not going to post any more charts for you, but let me make some predictions (based on technical analysis and not on supply/demand).

The price of oil will likely bounce up from $131 per barrel to about 133-134. It will likely fail to rise more at that point and resume a downtrend down to about $110-111 over the next 1-2 weeks.