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Crude oil not indicating a reversal of the downtrend

Hi Lou,

What is your analysis on oil? Has it bottomed? What do your charts say about the potential price movements and targets up and down? Your analysis on Delphi Energy?

Thank you,

Adam

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Hey Adam,

Thanks for the assignment. This will be the first time that I examine the case for the commodity itself. I have cited crude oil when conducting studies of energy producers, transporters,and refiners, but never the commodity itself.

Crude oil has been suffering from a severe case of excess supply as a number of themes have been playing out.

The first is Saudi Arabia looking to push high cost non OPEC producers out of the market. One of the standard practices in the universe of business is price competition. The Kingdom has opened the taps, driving prices lower and putting high-cost shale and oil sands producers into a tough spot. The name of the game is making the competition hemorrhage cash until they layoff staff and close the doors.

Another theme is the political conflict that has the Saudis using oil as a weapon against Iran and Russia. Russia's support of Syria has riled the House of Saud and the tensions with Iran have to do with the religious abyss between their differing Muslim theologies.

The third thing to consider is that the sell-off we have been witnessing isn't just a case of simple supply and demand for the commodity but a market with significant financial interest. Refiners are only a portion of the demand side for WTIC while a very large number of participants in the market are speculators.

A review of the charts for West Texas Intermediate (WTIC CME) will add a technical view for your evaluation.

Desktop users click on image to enlarge

The three-year chart indicates that WTIC has been in decline since June of 2014, when it traded just above $105.00 per barrel. A breach of support along the 50- and 200-day moving averages in late July followed by a death cross that formed in September laid the ground work for continued selling. The gap down in late November of 2014 came on the announcement that OPEC would maintain their production levels.

Also evident is the resistance along the moving averages through the second half of 2015, leading to a 52-week low of $27.50 in mid-January of 2016. Finally, it is observable that WTIC has offered a number of trading opportunities along the decline.

Desktop users click on image to enlarge

The six-month chart illustrates the resistance along the 200-day moving average in early October of 2015 and the breach of support along $40.00 in early December. The failure to hold $40.00 signalled that a rout was in the offing. WTIC caught a bounce off the 52-week low in January but is now meeting resistance at $34.00.

At this point, there isn't sufficient evidence to indicate that we can expect a trend reversal in the near term. There will be opportunities to trade WTIC for profit, but you'll have to be on your game to harvest them. Given that low prices have only reduced global output by 0.1%, it may take longer to squeeze out the competition, punish adversaries, and get prices rising again.

Next time I will look at Delphi Energy Corp. (DEE TSX).

Make it a profitable day and happy capitalism!

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