Oil Makes a Comeback

Thursday July 20, 2017

 

Our bell weather indicator has been Apache APA and yesterday it did exactly what it needed to do jumping 5% to the upside.

Note the doubling of volume in the lower pane.Price shot above the down trend lin in convincing fashion. RSI hopped over the 50% level.

The US Energy Information Administration  said inventories of US crude oil and gasoline dropped more than expected last week.

Crude is up 18 cents again this morning in pre market trading. We are dropping our bearish expectations. A daily close over $47.32 argues for a trend reversal in the oil price.

As Transocean RIG trades for 22% of book value while making money and Frontline FRO trades for 72% of book value while making money, social mood towards the falling oil price changed this past week. As I write Thursday Morning July 20, West Texas Intermediate WTIC is trading at $47.40. A daily close over $47.32 is need to turn the trend up.

We don’t usually make specific recommendations in this column but the two companies just mentioned bear watching. Both recently bounced off multi-year lows. It would be impossible to construct the off shore drilling capacity of Transocean, this is the moat that Warren Buffet likes to see when he invests in a company. Which makes duplicating the balance sheet near impossible for another firm. RIG does not pay a dividend.   Frontline is a shipper, the world’s fourth largest tanker company. Its current dividend at this price is 9.69%. If a firm trading below book value, and earning money is not a buy, I don’t know what is. Did I mention over 50% of the shares are controlled by its Norwegian billionaire owner? I doubt he will cut his dividend payment.

Oil prices have been creeping up since my last column. As we technicians like to say, there is always a fundamental event to validate the technical picture. That event occurred yesterday. The US Energy Administration announced that inventories of US crude oil and natural gas stockpiles dropped by 4.4 million barrels to 231.2 million barrels.

The prices of some of our bell weather stocks jumped nicely validating the feeling that oil prices are bottoming. Previously mentioned RIG jumped 6.47% Wednesday. Apache APA popped 5.1%. Frontline FRO has risen from its multi-year low of $5.40 in early June to $6.40.   The oil and gas energy service ETF of XES, another bell weather particularly for the Permian Basin, rose 5.07% yesterday. And the best Texas bell weather for energy service is Patterson PTEN which jumped 6.33% yesterday.

No doubt many speculators were short all many of the companies just mentioned. Those speculators had borrowed shares and sold them betting on lower prices. But to take profits on the decline to date, short sellers must buy back the previously sold shares. The rush to do so is the reasons behind big jumps in one day such as those cited above.