Picking A Bottom In The Price Of Oil
Peter Degraaf
14 November 2008
The title suggests a practically impossible task. Bottoms are never obvious, except with hindsight.
Nevertheless, with the help of charts, we can look for signs that a bottom may be near in the Oil Patch.
As I drive the freeways in and around Detroit, I can't help but notice that traffic on the freeways is almost back to the volume of 6 months ago. The panic of oil at $145.00 a barrel and $4.00 gasoline at the pump is largely forgotten.
"We have only two modes - complacency and panic" - James R. Schlesinger, America's first energy secretary.
No doubt there are more hybrid cars and flex-fuel cars on the roads today than last year, but it will take a long time for fuel consumption to fall noticeably as a result of this change-over.
The International Energy Association has just issued a report based on studying 800 oilfields including the 450 largest oilfields in the world. The report included the oilfields in Saudi Arabia, and since westerners are not permitted to view oil well data there, the researchers used a computer model wherever access to the wells was prohibited.
The report concludes that oil consumption on a world-wide basis continues to rise at a rate of 4 - 5 barrels of oil, compared to the discovery of 1 barrel of oil. The percentage increase in oil usage worldwide is estimated in the report at 1.6% per year.
The world's oilfields are being depleted at 6.7% per year. Current oil production is estimated to be 84 million barrels per day, but by 2013 (just 5 years down the road), production could be as low as 52 million barrels, unless a lot of oil is discovered in a hurry. At present oil demand is 85 million barrels per day. The 1 million barrel shortfall is made up from oil reserves.
The conclusion we draw from this report is that the fundamentals for crude oil are very bullish. More and more oil experts are coming to the conclusion that 'Peak Oil' is at our doorstep.
Chart courtesy www.simmonsco-intl.com
Note: if this chart does not show up clear enough, visit the Simmons website and click on Matthew Simmons latest speech for this and other charts.
The USA uses 24 million barrels of oil per day. Mexico uses 7.5 million barrels, China 2.3 and India 1.1 million.
If China and India become as oil-addicted as Mexico (not all that far-fetched), then world oil supply would need to grow by 49 million barrels per day. Production at Mexico's Cantarell Field is dropping precipitously, and Mexico could very well become a net importer of oil within a few years.
Featured is the 10 year crude oil chart. Price is now 27% below the 200Week Moving Average, while having landed in a support area marked by the thin green lines. This is the furthest below the 200WMA it has been since the current bull market in oil started in 1999. The MACD at the bottom of the chart is the most oversold in ten years, (green arrow). The blue lines connect low points near the 200WMA, with perfect buy points in terms of price. Conclusion: If we're not sitting on a major bottom here, we're awful close!
Featured is the chart that compares the DIG, oil and gas ETF, to the price of oil. This chart usually bottoms a few weeks before the oil price bottoms. The blue arrows point to upside turning points in this combo chart. The green arrow points to confirmation that happened yesterday, in the form of an 'outside upside reversal' (green arrow). The green dashed lines indicate that the supporting indicators are positive. Conclusion: This chart has just issued a buy signal for crude oil.
Featured is the OSX oil services index chart. The oil services sector often puts in a bottom before oil itself, and here we are looking at an ABC bottom anchored by two upside reversals (green arrows). The supporting indicators are positive (green lines), leading to the expectation that this index is ready to rise up from this bottoming process, and lead the way for oil to bottom as well.
Featured is the Amex, oil stocks index. Price completed an ABC bottom yesterday, with an 'outside upside reversal' (blue arrow). This chart also quite often predicts a bottom in the price of oil, by acting as a leading indicator. The supporting indicators are positive (green lines).
Before I rest my case, here is one more chart.
Featured is the Adjusted Monetary Base chart, courtesy St. Louis Federal Reserve. The amount of money that is being added to the money supply is unprecedented. While most of this money is initially destined to relieve pressure in the banking sector, much of it will dwindle into the resource sector, as that is where the true 'bargains' are at the moment.
Unless and until the world finds some large oilfields that can be tapped into and put into the supply chain real fast, the price of oil and the companies that service and supply oil and gas products have very little downside and a lot of upside potential from here. The incoming US administration has given off vibes that they are not interested in drilling for oil, opting instead for solar and wind power. Long-term the latter solutions will benefit mankind, but they will not solve the short-term oil shortage, and it will take years to convert the current oil-based infrastructure, into a different transportation mode.
Caveat: Technical analysis is fine, but it has to be used in conjunction with fundamentals. If the reader is convinced, after studying the 'black gold' market, that the fundamentals are bullish, then technical analysis is telling him or her that the time to get back into this Power Sector is 'near at hand'.
Note: For an explanation of the terminology used in this article, visit www.pdegraaf.com and click on 'archives', then scroll down to 'explanation of the terminology'.
To view several dozen long-term charts of other commodities, visit www.pdegraaf.com and click on 'long-term charts'
DISCLAIMER:
Please do your own due diligence. I am NOT responsible for your trading decisions.
Peter Degraaf is an online stock trader with over 50 years of investing experience. He issues a weekly E-mail alert to his many subscribers. For a free, past issue, send him an E-mail at itiswell@cogeco.net or visit his website www.pdegraaf.com
Happy trading!
Peter Degraaf
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