The recent volatility in oil prices has been staggering, and traders that have played the swings correctly have made a killing.
After WTI prices recently dipped below $40/bbl for the first time since 2009, prices snapped back by more than 20 percent over a span of three trading days. Oil bulls argue that the bounce signals the bottom of the crude collapse, while bears argue that the new multi-year low is a bad sign.
From a fundamental perspective, the valuations of many oil stocks have certainly gotten much more appealing in recent months, but the oil supply glut has persisted. After the recent crude oil whiplash, what’s the next crude oil trade?
Here’s a look at what the charts are saying:
The first chart that tells the story of where oil is headed is the global oil rig count. It’s likely that oil prices will remain depressed until the massive global oversupply is eliminated.
The first step in removing oversupply is to dial back production, and rig counts are a good indicator of how aggressively producers are scaling back on production.
According to the latest numbers from Baker Hughes, the U.S. reduced its rig count by eight (8) additional rigs during the week of August 28.
It’s clear that the U.S. is drastically reducing rig counts, but perhaps the more telling aspect of this chart is the clear indifference by OPEC. While the U.S. has shut down about 1,000 rigs, OPEC has stubbornly added eight (8) additional rigs during the biggest market downturn in years.
At this point, OPEC’s determination to retain/regain market share is a big positive for oil bears, but the U.S.’s willingness to shut down productive rigs is a positive for oil bulls.
Supply and demand is at the center of the price collapse, so a chart of where this imbalance is headed from here is certainly important to look at.
According to the U.S. Energy Information Administration (EIA), the global crude oversupply in 2014 that led to the downfall in crude prices was about 1.09 million barrels per day (BPD).
As huge as that number is, the latest numbers out of the EIA project that 2015’s oversupply will total 2.00 million BPD, and 2016’s oversupply will remain around 1.10 million BPD as well.
In the short-term, this is not the type of supply and demand balance that sends prices higher.
From a technical perspective, there’s not much to be excited about in the near term when it comes to oil. Credit Suisse analyst David Sneddon recently discussed oil’s near-term chart in a technical analysis report.
Sneddon believes that oil prices are likely headed lower, and he is calling for Brent prices to bottom somewhere between $40.95 and $34.55.
Sneddon sees long-term technical support in this range dating all the way back to 1990, and he predicts that Brent will likely test this support before everything is said and done.
Credit Suisse’s estimate implies more than 20 percent near-term downside for oil.
In addition to approaching long-term technical support levels, Brent is also nearing the average decline (in percentage terms) of the past four major declines dating back to the 1900s.
Of course, nobody knows for sure where oil is headed, but looking at the evidence leads to a couple of conclusions.
First, despite the recent bounce in oil prices, there is a case to be made from both a fundamental and a technical standpoint that the bottom is not yet in for the current oil price cycle.
Traders that believe that Brent will soon hit Credit Suisse’s target of $34-$41/bbl should consider shorting oil ETFs such as The United States Oil ETF (NYSE: USO) and The United States 12-Month Oil ETF (NYSE: USL).
However, as the charts of past oil downturns indicate, the oil price cycle eventually always swings back in the other direction.
Patient, longer-term investors willing to risk near-term downside can consider buying the dip in attractively-valued oil majors such as Chevron Corp (NYSE: CVX), Exxon Mobil Corp (NYSE: XOM) and Royal Dutch Shell Plc (NYSE: RDS-A).
Each of these stocks has a PE and forward PE below 15.0 and a dividend yield above 4.0 percent.
Lime Brokerage LLC is not affiliated with these service providers. Data, information, and material (“content”) is provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lime Brokerage LLC does not endorse, offer or recommend any of the services provided by any of the above service providers and any service used to execute any trading strategies are solely based on the independent analysis of the user.