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Black Gold, Texas Tea


We had a huge move in the price of oil today, up 5.5%. Oil is now at its highest price in 2015 and back to December levels. I’ve drawn a horizontal blue line on the price graph above so you can see what the move looks like.

From a technical standpoint, oil has moved fast and furiously into an over-bought status. You can see the blue circles I drew on the short-term indicators we follow – below the price graph those indicators are in over-bought status and above the price graph the Relative Strength Indicator is about to move above its upper threshold.

From a fundamental standpoint, has much changed? The world is still producing more oil than it uses – however many fields have been shut down and several off-shore rigs have been taken out of production. That is having an impact at the margin, as is the sale of larger cars, trucks and SUV’s far outpacing smaller fuel efficient cars, hybrids, and electric vehicles.

At $56 per barrel, oil is still low by comparison to the past few years – yes you might see the price at the pump head up a bit, but it will take a lot more reduced drilling and a lot more gas guzzling vehicles on the road before we get to the point where demand is outpacing supply. How long will that be? Definitely not 2015 – likely not 2016 – probably not even 2017 – but never underestimate the power of humans to jump headfirst into something, like shuttering too many wells or ignoring the recent past’s gas prices and buying gas guzzlers they can’t afford at minimally higher gas prices.

From a technical standpoint, the overbought status will correct itself, either by a pull back in the price of crude oil or by it trading sideways for a period of time. Given how low it still is at current levels, and that the intermediate trend indicator on the graph above ( the MACD which is not annotated ) is showing an upward trend has been established, I would not anticipate a significant pullback in price.

Oil and oil stocks have been significantly shorted by hedge funds and other institutional investors, so a lot of this price movement up has been their buying to cover their short positions so that they stop the losses that began when oil started to move up a month ago. The trading since Friday looks suspiciously like short covering driving the price higher rather than any fundamental change in the value of oil. That sort of human reaction to stop the pain of losses can overpower both fundamental and technical aspects of investing much like a stock market crash is driven by panic selling – in this case its the opposite of that, panic buying.

Anything can happen to a commodity that is impacted by supply, demand, heavily shorted positions, and geopolitical forces – the best thing to do is invest according to your preferred methodology (if you are a trend follower, continue to follow your trend; if you are value investor or growth investor, follow your valuation or growth metrics) and try to avoid getting caught up in either panic buying if you believe that the bottom was put in on March 16th and you are under weight energy or panic selling if you see that your oil stock has gained 20% since March 16th and you believe that it can’t run any further.

As I’ve written on this blog many times, invest what you see, not what you believe. I see the shorts panic buying and pushing some of the bottom fishing positions I purchased in mid-March higher (for example, our Baker Hughes is up 24%, our Concho Resources is up 32%, our Occidental Petroleum is up 13%) higher, yet they are still undervalued on a historic multiple basis so I see no reason to sell even though I believe they could pull back some in the near-term. You have to make similar decisions in your portfolios, just make sure you keep the emotion out of it.