Bullish Signs from Oil

Oil has been in the headlines a lot lately and I’ve been watching from a distance until yesterday. My proprietary system issued a buy signal on USO yesterday but there are a few caveats I want to talk about before we go all in this sector. First off, we put in a higher low last week at 28.42 with volume being quite heavy during the selling of the last couple of weeks. We also have a reverse head and shoulder pattern forming which, if it plays out, should have this chart trading in the mid 45’s sometime in the next month or so. Individual issues in this sector should fare much better and a few I’m looking at are:

• Exco Resources Inc. (XCO)
• Continental Resources Inc. (CLR)
• Bill Barrett Corp. (BBG)
• EOG Resources, Inc. (EOG)
• BJ Services Co. (BJS)
• Devon Energy Corp. (DVN)
• Encore Acquisition Co. (EAC)
• Tidewater Inc. (TDW)
• Cabot Oil & Gas Corp. (COG)
• Range Resources Corp. (RRC)
• Cimarex Energy Co. (XEC)

Yesterday's buy signal was fairly weak and if this issue trades significantly lower today it will cancel out any buy signal I received yesterday. However if we can build on these gains I will feel more confident about opening some positions in this sector and in the previously listed stocks. Inflationary sectors like precious metals are also turning bullish now and that could help fuel additional speculation, driving oil higher in the short term.

If you refer back to a previous post I wrote regarding long term support you’ll see that we never dipped below my “lines in the sand” and a recovery in oil could be just around the corner.

Comments

[Mmarrkk:]

Quick question: how does a move in oil make for a move in EXCO, Range, etc? These are natural gas producers and while there is a correlation between oil and gas prices, that has been weak as of late. Natural gas is mired in a supply/demand imbalance that has only minimal relationship to crude.

Jan 27 01:57 PM

[Mosh:]

OIL dropped strongly today.
I truly think this 'bottom calling' should end until fundamentals will improve considerably.

Jan 27 02:59 PM

[Roger Knights:]

I don't think this was bottom-calling--it was just a heads-up (an alert to a possibility).

Jan 27 04:00 PM

[jimboburnsy:]

The correllation between natural gas and oil prices has always baffled me. Something else that has always baffled me is the apparent insistence that an operator whose stated focus is natural gas will not benefit from an increase in crude prices. PUDs are completely made up, albeit systematically and scientifically made up, and most of it never gets developed. It is not really very difficult to change tack and start producing oil in an environment that encourages oil production. In other words, if oil is good the benefits will be across the board.

Range has established a considerable position in the Marcellus shale that is looking like less of an asset right now, but they enjoy some modicum of protection by way of some favorable hedges through 2010. The problem is that the next round of bailout candidates will be hedge funds.


On Jan 27 01:57 PM Mmarrkk wrote:

> Quick question: how does a move in oil make for a move in EXCO, Range,
> etc? These are natural gas producers and while there is a correlation
> between oil and gas prices, that has been weak as of late. Natural
> gas is mired in a supply/demand imbalance that has only minimal relationship
> to crude.

Jan 27 04:27 PM

[Jeff Pierce:]

Roger is correct in that I was only pointing out one possibility. I wasn't even confident enough in it to call it a probability given there was potential for a sell off today. I normally wait until after the lunch hour to start buying stocks and by that time I knew all I needed to know about USO today to know to stay away for it for now.

The problem with trend trading is whipsaws and that's exactly what we're seeing in the recent market activity. One just has to accept them and do their best to stay attentive so when the real trend shows up it can be recognized. I think we're close with oil, just not quite there yet.

Jan 27 04:56 PM

[toobad41:]

It is rare to find a company that produces just "natural gas". The same is true with an "oil company" producing only oil. Generally gas reservoirs also produce liquids (oil or condensate) and oil reservoirs also produce some gas. Sometimes a lot of gas. To put it simply, gas and oil can exist in the same reservoir. A company will make money from both.

Jan 28 08:57 AM

[Mmarrkk:]

toobad41: while you are right that "most" gas wells produce some liquids, when you look at the revenue and profits of many predominately nat gas companies, >90% of their revenue/profit comes from nat gas sales. Check out CHK and HK. Oil prices don't really impact them, its nat gas prices, unless we have a good tight relationship between oil and nat gas prices which we haven't see.

Jimbo: not sure where to start with your post. On quickly changing tack from nat gas to oil, its a lot more difficult than you would think. When a company leases acreage/mineral rights in an area that is gas prone, they can't just snap their fingers and start drilling for oil. They've invest millions of dollars in a gas play and they just up and move to an oil play?? Don't think so. Your comments on PUD's are not reall factual, more of an opinion that for the life of me, I can't find any data to back it up. Perhaps you have some?? Since I've worked reserves accounting for years I can see PUDs being developed and moved to PDP all the time.

Jan 28 09:20 AM

[Jack Larsen:]

Methinks you should buy in when it feels right..Or flip a coin..

Jan 28 12:30 PM

[gordontravels:]

I say if you are bullish on oil then consider DXO. It closed today at 2.68 up 5.01%. If you are bullish on oil pushing up natural gas then consider EWC holding natural gas, gold and financials in Canada. If Canada does their proposed 50 Billion stimulus financials should move as ours and our stimulus will even help theirs. Seems to be near lows here too. I'll just say I hold them

Jan 28 07:37 PM

[parky:]

If anyone is naive enough to think that oil won't retrace its path to former highs (and above), then they are missing a sure thing, Alternate fuels will not become viable as oil substitutes for a least 2 or 3 decades and during this period a lot of money can be by simply buying oil companies (STO for example) and sitting on the stock.
Of course I'm a rookie that's only been the market for 40 years so what do I know?

Parky

Jan 28 11:32 PM

[Kunst:]

USO at the time of the article (January 27): 32.14
USO now (February 11): 26.08, down 19%.

Flip the other coin next time.

Feb 12 12:06 AM