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Fundamentally Speaking

Readers know that we have been tracking the oil markets from the short side of the futures market for many months now.  Last month our forecast for oil equities went bearish as did our long term models for the entire crude complex. The current decline in oil prices and oil stocks will remain a persistent trend for some time, likely several months to a year or more.

The market has plenty of momentum to make our $45 near term price objective, but we do not foresee that happening overnight.  The current fundamental and technical constructs call for crude to stabilize at the $45 price level marking a near 33% decline from our 2nd  model sell signal at $65.

Defining a Bear Market

Most of the bearish fundamental analysis in our prior report still holds true with the exception of deteriorating sentiment, which has grown worse.  A few things to keep in mind when defining a classic bear market in either equities or commodities.

• Market tends to open higher and close lower
• Market prices print lower highs and and lower lows
• All 'news' type of surprises are sold to the downside
• Bullish news is mostly ignored

With only four bullets above, the current oil market and oil stocks are summarized.  It could be argued that Exxon and Chevron might decouple from their base commodity and perform in line with the major averages.  But that is extremely unlikely as the market itself has begun to stall, and is already richly valued based on our fundamental models.

In addition, neither the media nor the mainstream analysts have awoken from their numb slumber and pointed out the sharp decline in oil and its pending impact on equity earnings.  An item of particular interest to us is the speculative collapse in the smaller oil equities and wild cat operations.  Today, they are the most bearish small cap group in the market forecasting little hope of near term recovery in the oil patch.

What About OPEC?

Opec exerts some influence on crude oil supply but has little control over crude oil demand.  And we believe that it is the demand side of the equation which has awoken the current bear market.  Moreover, it does not help OPEC's cause when geopolitical risks are created wantonly by member countries:  it has the tendency to balkanize an already fatigued cartel. 

Fundamental Forecast?

As with our technical forecast, crude prices should stabilize near US $45-$47.50, with XOM and CVX trending down towards the low 50's, per our original objective.  However, long term crude could race towards $20 or lower, and no, that is not a misprint, just a simple market policy statement that has been accurate for over 100 years.  The flood of oil depressing energy prices would act more as a market share protection program against alternative energy rather than reflect real fundamentals with respect to supply and demand, but that is beyond the scope of this article.

Technical Update XOM, CVX, WTI Page 2

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