Oil & Gas: Pivot Point Down

There is no economic recovery.

Fundamental data such as the latest EIA Report on crude inventories, were opposite of expectations. 

Opposite in a big way.

Inventories are building up as demand has evaporated.

At the bottom of that EIA link, is perhaps the most important data point of all. Global operating rig count is at all time lows … data since 1975.

Inventories are building up even in the face of collapsing rig counts.

Prior to that report, was anecdotal evidence (of the same) from comments made on ‘macro’ updates from Steven Van Metre.

Anecdotal evidence (if accurate) points to the possibility for investigation.  It does not, and can not (like macro itself) tell you “when”.

When is the move going to start?  When is the top or the bottom?  That’s where the technicals and reading the tape comes in.

What the tape is telling us now, is the ‘when’ may have been last week.  Specifically, the last three days of last week.

That’s when massive volume flowed into the inverse (2X inverse Oil & Gas Sector) fund, DUG.

From a weekly standpoint, volume was the highest since the week of February 9th, 2015.

Approximately $55-million traded hands last week as opposed to $25-million the week prior and $19-million the week before that (estimating average prices).

It’s evidence of significance with possible high volatility ahead.

The broker being used by the firm lists this trading vehicle (DUG) as “not marginable”.

The inference is, DUG is so volatile (both up and down) the broker is not willing to allow any of its own funds to be at risk for the trade.

That assessment is backed up by price action itself.  Just last month, on Monday, November 9th, DUG opened down -20% from the Friday before.

Even with the margin restriction, huge volume rolls in.

Moving on to the weekly chart of XOP (SPDR non-leveraged Oil & Gas fund), we’re at a confluence of trend-lines.

This is the low risk area or the danger point. 

Price action can go either way; the tape points to potential for a pivot point down (with DUG up) at or near this area on the chart.

At time stamp 16:28, in this report from Van Metre, the Put/Call ratio has exceeded the dot-com bubble levels of 1999 – 2000.

The XOP move higher under these conditions has the look of a huge short-squeeze.  Fundamentals are not there (in a big way) to support higher oil and gas prices.

There is no (and won’t be) recovery for years; even decades to come.

It took the Dow Industrials twenty five years (late 1954) to come back to 1929 levels.  

It’s highly likely we’re in a bear market set-up that’s an order of magnitude greater than ’29.

Stay Tuned

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Note:  Posts on this site are for education purposes only.  They provide one firm’s insight on the markets.  Not investment advice.  See additional disclaimer here.
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