Oil Prices Indicate the Bear Is Alive and Kicking

We are inside a major recession and Oil price is too high. It is known that during a recession, commodities are the first to go down, followed by stocks. And it is also known that the first trend inversion signals are given by commodities.

The break even price for oil, as reported by the Gulf Cooperation Council countries, is about $30. Now the Brent price is about $50, which is 60% more than break even. Every day we hear that the oil stock is increasing, since the demand is weak, and there are a lot of probabilities that the demand will get weaker and weaker during next months, since recession is starting to bite even our real life (unemployment, consumer goods going down, steady revenues by corporations, etc.).

The real key of this new Bear movement is the oil price: if it goes down, it drags down the energy and oil stocks, and especially the oil stocks like ExxonMobil (XOM) and Chevron (CVX) weigh more than 6% on the S&P500 index. If you look at the chart, the trend of S&P500 (green line) is in direct correlation with the price of this two stocks. It means that if XOM and CVX goes down, the S&P500 goes down too, at least with the same percentage decrease, or at worst with a greater decrease.

Let's analyze from a technical point of view the price of oil (Brent). The support at $41.83 is crucial: a break of this level could push the oil price to $38 the last support before the nightmare. If the recession is deep and long, the break of $38 could smash down the oil price near to next support at about $23, very near to break even price. I am quite sure that the oil price will go down to at least $38, since the last rally has happened with decreasing volumes. This means a decrease of about 25% from the actual price, and this could drag a similar or even greater deacrease of S&P500 level, that is from 850 to about 640.

In conclusion, to evaluate the real health of S&P500, carefully watch the price of oil, not the stock prices. The oil price is the real indicator of the state of our economic situation! And for now, there are a lot of signals that the Bear is alive and kicking!

Comments

[Van Gastel:]

Nice take, kind of confirms my thinking, although I'm more of expecting a double dip, not a further decline below 42, of which you are so "quite sure". I've sold off all my energy stocks (solar and wind) yesterday after the recent huge gains and expect to come back following the proven "leave in May and come back in September" strategy.

Apr 21 05:28 AM

[basehitz:]

The following is from Jim Rogers in an interview with Barron's:

"I can make money with commodities. In the 1970s, commodities went through the roof even though stocks were a disaster. In the 1930s, commodities rallied first and went up the most long before stocks pulled it together"

The full interview:
online.barrons.com/art...

What can be shown is historically commodities are not synchronous with the stock market. I am shunning most stocks now (I did play the March bounce), but have multiple commodities on my watch list, including oil. It is currently oversupplied as is NG. Dramatic cutback on drilling is quickly changing. But difficult times continues to impact demand and therefore I am still trading. Eventually, I'll look for the next leg up. The tricky part is not all ETFs are created equal, especially when contango is as strong as it is today. USO has material negative roll yield. USL is better but is thinly traded. So holding these is more complicated than the price of crude.

Apr 21 07:51 AM

[Ferdinand E...:]

The oil price is too high for me, but I doubt whether the gentlemen at the OPEC meetings in Vienna share my annoyance. Now, if we could reverse the situation and I could sit in a conference room in wonderful Vienna, I would put on my 'leading academic energy economist in the world cap' and send word back to the OPEC governments that they should make sure that the floor-price of oil is never lower than $__/b, because less would interfere with their diversification out of oil.

I hope that our political masters understand the meaning of the expression 'diversification out of oil', because I do not hear it as often as I should.

Moreover, since it happens that they are as smart as I am these days, I suspect that they are going to do as I suggest above.

Apr 21 09:54 AM

[The Greates...:]

They can only create only so many man made shortages, there is a lot of crude just sitting around waiting to go to market. Thats what happens when you kill the goose that was laying the golden eggs.

Apr 21 10:18 AM

[kelm:]

Break even may be $30 (though that is lower than I have heard) but the Middle Eastern Oil producers need %$50 for their economies so expect supply to continue to tighten. I agree that demand in this country is likely to remain weak. I am not so sure about Asia though. In America we focus on the Asian export story almost exclusively but the China domestic story is getting set to surprise everyone based on anecdotal accounts that are coming out.

Apr 21 10:40 AM

[WayneS:]

We, as a nation, are addicted to gasoline vehicles. Right now roof shingles, lubricants and polymers are making money. But we will ensure that gasoline will again be profitable.

Apr 21 10:46 AM

[Dr. Charles...:]

I believe Mr. Nanetti is correct in the short term. I own an oil exploration company and have studied supply and demand for over thirty years. Low prices cause cutbacks in finding new reserves which are already far below what is needed to supply world needs in 2011. As a consequence I can guarantee you that oil prices will reach a minimum of $150.00 a barrel by mid 2011 and likely reach $80.00 a barrel by December 2009 because excess stocks will be abosrbed at the same time production supply will decline pushing prices upward. Dr. Charles Laser President Laser Exploration Inc. Deerfield Beach, Florida. P.S. I might note that within three years likely we will find an oil field or oil wells similar to Saudi type production in Nevada USA as a result of eighteen years of study and millions of dollars spent studying source rock conditions that are similar to Middle East Fields.

Apr 21 11:00 AM

[jupenya:]

Dr. Laser - I hope you are correct on the future big find in Nevada or US - that would be the "alternative energy" we are looking for. The current adm. - will not let that play out - . The price fluctuation of $80 Dec09 and $150 for 2011 would be terrrible for the economies. In fact a $150 will then bring a low again in $30-40. The Saudi prod. cost is much lower - avg. $3.50 (Aramco) + transp. - which now is quite low - they use their own fleet. Remember 1998-9 - prices were low teens - and the supply/demand diff. was about the same as now. The problem is that there are too many speculators playing this commodity market - What is needed price stabilily - or price relecting true supply/demand - that did not exist in the last 2-3 yrs due to the speculators. ( OPEC the early 2000s - wanted ranged to $25-30 optimum.)

Apr 21 02:17 PM

[doubleguns:]

Dr. Charles Laser, It is my understanding that it would still be several years after discovery that we would actually see the first drop of that oil.

What would be worse is this administration would want to tax it and the green eco-terriorists would not want us to drill it.

Oil, oil every where but not a drop to spare.

Apr 21 06:31 PM

[toobad41:]

I sure hope Dr. Laser is correct with reference to a Giant oil field in Nevada because we won't find it in the Permian Basin of West Texas. I also agree with Dr. Laser that oil prices will steadily move up into the $75 to $80 range by the end of the year. My view is shared with most of my fellow petroleum geologists and reservoir engineers. But that is just for old oil...oil that is readily available. Drilling for new oil at those new prices won't happen for several months into 2010. It takes a major effort to ramp up on drilling and re-hiring people who were let go during this current slump. The price of oil will go out-of-sight by the end of 2010. I won't even guess what it will be then.

Apr 21 10:22 PM

[Freya:]

You are absolutely correct in saying that in a recession Commodities go down followed by stocks.

The Recession started in the last quarter of 2007 not yesterday. Commodities did go down as well as stocks.

When coming out of a Recession, the first things to go up are commodities followed by stocks.

Commodities... not just oil are going up... Oil will follow as will stocks. 2010 and 2011 loom with around $700 Billion in infrastructure spending.

Basic Materials, energy intensive projects of all sorts. You can wait til they kick in. I'll buy now.

Apr 21 06:24 AM