Expecting These Names To Move

The oil names have been idling for the last month. With Friday’s sudden drop in crude, the oil names barely budged either way. They didn’t drop on Friday and they didn’t rally on Monday. Quite frankly I am a little surprised.

First of all, for those that missed the move, here is the oil chart.

So what could possibly cause oil to lose $18 in a month? The street rumours abound. The Biden global initiative to suppress oil prices with SPR releases, Iran bringing more oil on, COVID slowdown in Europe, Omicron variant closing borders, EV vehicles, carbon taxes, and a China slowdown to name a few.

What happened to running out of oil that was oh so last month? Statements like OPEC+ spare capacity is limited, shale drillers can’t get access to capital, demand is surpassing 2019 and we still have the jet fuel market expanding but below prior levels.

Envisioning the global oil business is a difficult task. Political sanctions, OPEC+ control, and China’s erratic data all add to the difficulty.

Is all we have is price with millions of investors positioning to supply the global view of oil. It is truly amazing that we can take all of the variables and put them into one or two charts. Brent crude is considered to be the global price of oil, whereas $WTIC above is the North American reference price.

Based on the oil charts they see a serious shock coming in the economy. Whether that happens or not, is a great question, but oil investors usually sense pressure in the economy and don’t make $10 mistakes pricing oil as a routine occurrence.

The fact that the oil company stocks fell on Friday but one of the exploration and production ETF’s closed flat on the week last week was really a paradoxical response to oil’s move in my opinion. However, Monday’s response was also quite odd. Oil rallied meaningfully Monday morning, but the oil stocks opened higher and traded lower early in the session.

I like the fact that oil pulled back and the oil names held up ok. The fact that they didn’t rally much on Monday is a bit of a surprise for me. But it does lead me back to one fact. Oil investors don’t usually miss on the price of oil. If oil can turn back up by the end of the week, that will be promising. If not, beware the message of oil traders. Something is cracking out there and they are starting to see it. It’s probably the macro economy, not just an oil trade.

Good trading,
Greg Schnell, CMT, MFTA