Now Wait Just A Darned Minute On Oil

February 22, 2016 - 4:40pm

 by Gary Wagner

There is a moment when springtime is just about to pop and a beautiful warm day tells you, “Yes, yes… this is it!”

Oil booms, U.S. equities boom, Asian and European stocks also jumped, the dollar strengthens and the world seems right (except for gold’s plunge).

The compass naturally points sharply and insistently toward oil mainly because we had news that the U.S. rig count continues to drop; Iran is going to take a while longer to get to its max-out level of product of 7.2 million barrels per day, and the “output freeze” from OPEC and some of its non-OPEC cohorts like Russia.

Reports from the International Energy Agency (IEA) said U.S. shale oil production will drop 600,000 barrels this year and another 200k in ’17.

Sounds like a great scenario for even more rise in the price per barrel. Today, East Texas Intermediate roared ahead over 6.2% while Brent North Sea snapped up over 5.00%.

But before you break out the piñata and the mariachi band, ponder that world consumption has been dropping far faster than production for two years. And, because the U.S. shale industry has been roughly shaken out does not mean that U.S. production in more conventional fields is dropping. We have to recall that shale is very expensive to process into petroleum. Moreover, demand has slowed even further in January and now February.

Morgan Stanley said that low gasoline consumption is particular hurting energy prices. The big bank then went out of its way to say that, “China demand looks particularly challenged with several negative trends of late.”

With all that and more in mind, the IEA report also said bluntly: “Today's oil market conditions do not suggest that prices can recover sharply in the immediate future.”

All right – now comes piling-on time when critiquing today’s huge crude gains. Tomorrow is the end-of-month and so traders are trying to close the discount between the expiring (March) front-month contract and the nearby contract (April); March is/was nearly $2.00.

But in this case, what goes up must come down.

Whether equities will ignore these anomalies and the trick of the calendar is anyone’s guess as we watch afternoon trading in New York. Crude and U.S. equities have given back some gains, but nothing to suggest there is anything else afoot but some mild profit taking.

As if to support the more optimistic view of equities in the United States, two mega-companies, United Technologies and Honeywell are in serious merger talks.

We feel there are a number of headwinds, none problematic by themselves but rather capable of inflicting damage when bundled together.

There is still the China problem. It’s slow, verging on reverse. The EU has its handful with the so-called Brexit from the union, not a positive move from our vantage point. We are also considering that markets do not particularly like the way the American polity is acting and feel the election might be disruptive one way or another. Sentiment is an unpredictable animal.

Let’s end on some hard – and hard-to-take – news. The flash read on Market Manufacturing PMI for February in the U.S. was 51.0, down from the final January print of 52.4 and hitting its lowest since October 2012.

So, is it helium, hydrogen or just a case of the markets saying, “Look ma, no hands”?

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer

Gold Forecast: Proper Action

Last week we entered a long gold position at 1208.

Yesterday we recommended tightening the current stop to just under 1210 thereby protecting our initial equity on the trade.

We went long gold at 1208 and we covered our position at 1209 for a push on the trade.

Gold Market Forecast

Although we saw gold prices trade to the upside with a sustained rally throughout last week, the first real sign of any weakness came in on Friday, and carried over to the start of trading this week overseas in Australia, Hong Kong and London.

Inasmuch as it seemed that our current trade in which we entered a buy in gold at 1208 was moving favorably on the following day, the intraday highs achieved were not sustainable.

Upon seeing some real weakness in gold pricing as trading began in Hong Kong and London, we made the decision to tighten our stops and protect equity.

Trending Markets: Proper Action

This morning we sent out a trade alert recommending the initiation of long positions in the Standard & Poor's 500 vis-à-vis the E-mini.

Maintain your current long position at 1938. Maintain your current stop below today's low at 1906.

Trending Markets Forecast

We have been looking for technical confirmation that the recent intraday lows sustained in the US equities markets have signaled a tentative bottom in support, as well as a springboard for higher pricing.

Our initial target on this current trade could be as high as 2003, where we currently are pegging our long-standing resistance.