Mood Growing Positive on Oil Prices

Friday July 28, 2017 Confidence in Oil Prices Slowly Building Shell Chief Executive Ben van Beurden coined a new phrase for describing the direction of slumping oil prices: “Lower forever,” reports The Wall Street Journal’s Michael Amon. Mr. van Beurden was riffing on rival BP PLC CEO Bob Dudley’s “lower for longer” quote from 2015, a description that stuck as the realization set in that the oil-market slump wasn’t going to turn around soon. But Mr. Dudley at least held out hope for a recovery. Mr. van Beurden does not. “We have achieved reductions by cost cutting, but also by changing our company’s culture with a lower forever mindset,” Mr. van Beurden told reporters during a conference call discussing the company’s second quarter financial results. Wall Street Journal Energy Report, 7/27/17 Nothing could be more bullish for oil prices than this quote from the CEO of Shell. Here is why. Financial markets make new highs amid widespread positive social mood. Those same markets make significant lows amid massive negative mood. Perfectly good companies with Warren Buffet style moats making start up competition near impossible are ignored. As noted above, a lower forever mindset ensues. My experience is that the worst forecasters in the energy industry are typically the individuals closest to the business. The herding mentality of all causes a stampede in the wrong direction. Remember, mood moves the markets, and contrary to Mr. van Beurden’s remark, there is plenty of evidence a low in the oil price is or has formed. A move up in share prices of energy companies typically precedes the move in the actual price of oil. Bell weather Apache APA moved up ten percent off its lows this month. Now the price is breaking above the downtrend line and the 50-day moving average. The energy ETF XLE has done the same. XES the energy service ETF has not quite made the same break out. I would like to see it in lock step with the energy producers. FRAK, the shale producer ETF, has also broke above a downtrend and its 50-day Moving Average. The United States Oil Fund USO made a similar move this week, rising from $8.75 to $10. Since the June low. The same cannot be said for UNG the natural gas fund. It is holding above the recent lows of $6.40. Our position is that the energy sector either is making higher lows since the February 2016 low or will by October. The reluctance of the service sector to join the party gives us some caution and reason to think this may take another two or three months. The fact that copper has nicely broken to new highs is another positive for the commodity sector. Meanwhile there were some significant reversals in several market sectors yesterday. The Transportation index reversed, falling over 3%. Low energy prices have made the airlines a good recent performer but the XAL index dropped % yesterday. Taken together this is a positive for higher energy prices; apparently that is what these two indexes are broadcasting. The QQQ representing the NASD (the tech stocks) was hit hard down 1.5%. Apple dropped 2.72% after reaching a lower high than the 156 posted in May. Google and the SOX semiconductor index also reversed direction. The message here is that the tech rally is ending. But that is not The End. Rising interest rates could shift focus to bullish bank stocks. And that focus might well also shift to commodity based plays, including the energy