Crude Oil - Long Term
A Re-test of Long Term Support ?
Crude Oil this week was one big disappointment. This week's price action supports the sentiment that I have been expressing for some time now. The long term trend is up, but Crude is looking vulnerable to a downside correction that could test the bottom axis of the up-trending channel that extends back to 2003. Such a correction would mesh perfectly well with the idea that we are potentially setting up to post a 4 year cyclical low on the equity markets. GDP growth in the US is running at 2.9% annualized and GDP growth in Canada is running at 2% annualized. Both figures are down from what was being reported earlier this year which suggests rising interest rates and higher energy costs have had an impact. Is such a correction something to be feared? Yes it is, if you choose to maintain your investment positions in energy equities. On the contrary, if you elect to take money off the table and wait for the correction to occur, you will be in the enviable position of being able to take advantage of some quality energy stocks at some very attractive prices. Do as you wish. My choice would be the latter.
Natural Gas - Long Term
I recently had a lively argument with the CEO of a small cap firm that derives its income from natural gas production. He argued vehemently that Natural Gas was headed much higher. I countered by urging him to open his eyes and look at the trend line extending back to 2002. I cautioned him that if we dipped below this trend line investor sentiment in small cap gas producers would take a hit.
And dip we have. Take a look at this continuous front month futures chart. We have now taken an excursion below this critical trend line. For some time now, I have been warning that unless we get some serious storm action in the Gulf we would be heading into the September /October time frame with ample Gas in storage. I hate to say it, but my worst fears are coming true. I just plain do not like it when a long term trend line is broken. I see some turbulent times ahead for energy firms with a weighting towards Natural Gas. If our multi-year trend is to continue, we have to get back above the uptrend line that extends back to 2002. Storm action that causes drilling operations in the Gulf to be suspended would help accomplish this. Forecasts of a colder than normal winter would also be a plus. But, right now, neither prospect is in the cards. Be careful if you are holding energy stocks with a weighting towards Natural Gas.
Crude Oil - Intermediate Term
Support at $71 ...Now Becomes Resistance at $71
Last week I cautioned that we should be watching the fragile support that exists at $71. I noted that on the intermediate level we were looking prone to a setback.
This week we broke $71 basis the October Crude contract. We remain below the Lower Keltner Band. We remain underneath the 18 day moving average basis the October crude contract and we remain below the up-trend line that goes back to early 2006. RSI and DMI both continue to indicate poor momentum.
The $71 level now becomes resistance. Crude has some work to do to get itself back above this level. If there is a positive silver lining to this dark cloud, it is that we are oversold from a technical stance and the nuclear situation with Iran remains un-resolved. However, oversold markets can simply limp along and go nowhere. The nuclear issue with Iran could also fade away. Be careful.
Natural Gas - Intermediate Term
5th Wave Down?
The storm action that I spoke of last week turned into a real dud. Ernesto veered to the North and tracked up through Florida and into the Carolinas thus avoiding the Gulf altogether. Natural Gas prices quickly lost their shine and we finished the week below the $6 mark.
If there is a potential positive here, it may be in that we seem to be making the 5th wave down in an Elliott Wave style pattern. We are also deeply oversold technically.
The next 4 weeks are critical. If we are going to see some Hurricane activity in the Gulf, we need to see it now. If we fail to see meaningful storm activity in the next few weeks, we are going to see the deferred Futures months begin to trade down to come into line with the October front month contract. Market players will then turn their focus to amounts of Gas in storage and Natural Gas related equities could suffer. Again, all is relative in these markets as far as the major market movers are concerned. Be careful out there.
This Week - For my Regular Subscribers
Oil from shale ? This may not be all that far fetched. This week, US energy authorities issued research permits on land packages in Colorado to 2 large energy players. This week I provide some background technical information on oil shale and I take a look at the charts of these firms to see how they have been performing of late. Should these firms realize success in their trial endeavors to extract oil from shale, a whole new chapter in the energy story will unfold.
Hugo Chavez has again tightened his grip, this time taking a 51% control of heavy oil projects in the Orinoco Basin of Venezuela. One of the companies affected by this move is BP plc.( NYSE:BP) This week I take a look at BP to see how it has been holding together in light of the recent pipeline corrosion issue and now this move by Chavez.
Pipeline construction appears to be ramping up. This week, I discovered a company that is setting up to build a 1600 mile pipeline project. This stock could be a good trading candidate as well.
This week I again update readers on the broader energy equity markets by way of the 3 ETF's that I follow. All three have suffered this week.
This week I continue my look at alternative energy with a look at two more Uranium companies. One is in Wyoming and the other is active in northern Canada.
To keep fully abreast of what is happening in the energy markets, consider subscribing to Merv's Energy Central with Meridian. Visit www.themarkettraders.com for details.