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Maybe Oil Goes to $70 on its Way to $40
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
A retrace that fills open gaps and kisses the 50-day moving average surprises everyone who was confident oil was heading straight down to $40/barrel.
When the conventional media ordains oil inevitably dropping to $40/barrel, I start looking for something else to happen--like oil going to $70/barrel. There are number of reasons this isn't as farfetched as it might seem at the moment.
1. The huge gap begging to be filled on the chart of the Energy Select Sector exchange-traded fund XLE and a bunch of other energy-sector stocks and etfs. Gaps like this usually get filled sooner rather than later.
2. A bounce back to the 50-day moving average on the WTI oil index around $73 would be unsurprising. As the old saying has it, nothing goes down in a straight line, and since oil fell in a parabolic curve down, some sort of retrace to a key technical level of resistance is to be expected.
There are many ways to calculate Fibonacci levels, but a retrace to the 38.2% level equates to the mid-$70s. By my reckoning, the natural starting place is the recent high around $116 in 2011 to the recent low around $53. The 38.2% level is $24 + $53 = $77.
Maybe price doesn't retrace all the way to the mid-$70s, but the possibility shouldn't be discounted.
3. Too many punters have bet on oil dropping straight to $40/barrel, and all those put options offer the big financial players an incentive to spark a short-covering rally that outruns stops and scoops all the money by options expiration on January 16, 2015.
The more puts there are at $70/barrel (and equivalent levels in energy etfs, oil services stocks, etc., the greater the incentive to push the short-covering rally higher than expected.
4. The parabolic drop in oil resulted more from the panicky unwinding of a crowded and overleveraged trade than supply-demand. As I explained in my series on the financialization of oil, the financial pyramiding of oil is much less visible than supply and demand, so the mainstream media focuses on what's easy, i.e. supply and demand issues.
The Oil-Drenched Black Swan, Part 4: The Head-Fake Disruption Ahead (December 4, 2014)
The Oil-Drenched Black Swan, Part 3: Multiple Risks, Multiple Unknowns (December 3, 2014)
The Oil-Drenched Black Swan, Part 2: The Financialization of Oil (December 2, 2014)
The Oil-Drenched Black Swan, Part 1 (December 1, 2014)
Crowded trades (trades where almost everyone is on one side of the boat) unwind in precisely this sort of freefall. Once the trade has been unwound, however, the selling cascade exhausts itself and insiders who know better start buying. Buying begets buying, shorts start covering, and voila, a retrace that fills open gaps and kisses the 50-day moving average surprises everyone who was confident oil was heading straight down to $40/barrel.
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what? no chicken entrails?
Fib levels for WTI are at 72, 80 and 86, assuming a temporary bottom has been reached.
Anytime I read the words "Fibonacci" or "Elliot Wave" what I actually understand is the author saying "I am an idiot".
Oh Charles stick to telling us about how everything is going to fall apart
You did miss the best downdraft of 2014... Oil and xle.....nice try.
"Lookin' for the dead-cat-bounce", in other words.
on it's way to $10.
bad juju
Cramer said $52 the other morning on CNBS, bottom ticked it to the minute almost... the kike who knows everything about every industry - thanks Jim!
"As the old saying has it, nothing goes down in a straight line"
Make sure to remind:
Bear Stearns
Lehman Brothers
Enron
Long-Term-Capital-Management
Amaranth
Bernie Madoff
Tyco
Worldcom
Countrywide Financial
Northern Rock
Fannie Mae
Freddie Mac
Any rally into gold for the last 2 years
etc, etc, etc
This isn't over until people feel their shit ripped from their throat.
Oil went down in a straight line in 2008, as did the markets.
Yes, no demand so tax that pig to 70..
“How soon will the economy adapt if the prices remain at the current level or even go below 60 [USD/barrel], 40, or whatever? For us it could be any figure, the economy would simply have to get structured."
http://failedevolution.blogspot.gr/2014/12/putin-confirms-that-seeks-fur...
No retrace in 2008, no reason for one this time either.
Also, notice how the Saudis drop bombshell comments right before oil's opening on Sunday, they want it even lower.
gaps get filled.
Not the 47 that are on the SPX, or the 34 on the RUT or the 28 on the DOW.
Those gaps are massive and are not filled. Or the plethora of gaps on any of the emergence market indexes.
we filled some folks' gaps
"Maybe Oil Goes to $70 on its Way to $40"
Just check the Zionists' playbook for the conflagration in the Ukraine, Syria, and Russia.
I don't think it does. Not until Putin says "Uncle Zion."
The banksters need to repay us.
Nice December call. What was the Black Swan again? The stock market would crash?
Not a trader but sure would like to know why a trillion dollar "real" market would implode by fifty percent in a matter of months in the first place. What are the knock on effects here?
$40 oil makes my Escalade positively giddy.
I was at the Esso station this morning filling up with ethyl and Vladimir Putin himself topped off the tank and cleaned my windows!
of course when Amerikan Patriot says "my Escalade" he is refering to his 1977 oxidized yellow Gremlin with black racing stripes.
and 'giddy' is Amerikan Patriot's code word for nutzy.
After countless talking heads on MSM telling me oil sub $50 - $40, friday, i took that exact same contrarian point of view and made a small wager.
Follow Comments
Last week, I wrote an article reviewing the events of the past year in Ukraine and laying out what we can expect in the future. As luck would have it, on Monday, the ruble crashed, prompting Russia’s central bank to hike interest rates up to 17%.
The proximate cause seems to have been a sweetheart deal that issued 625 billion rubles in bonds to oil giant Rosneft, run by Vladimir Putin’s close confidant, Igor Sechin. Yet as I explained back in April, Obama’s sanctions made a crash inevitable. Russia has more than $600 billion in debt, far exceeding its reserves. Without the ability to refinance, an economic collapse has always been in the cards.
Nevertheless, the exceedingly fast drop in energy prices (Russia now sells its oil at about $60 a barrel, while its budget assumes $100 a barrell) has accelerated events. Now, Russia’s banking system may very well be insolvent and a full-scale economic meltdown appears imminent.
So a follow-up seems in order. Just to review, in my previous article, I laid out three key points that I believe are key to understanding the crisis:
1. Putin will not be deterred: Despite what many hard liners believe, there’s nothing we can really do to make Putin back down. To get an idea of his thinking, take a look at what he said at his recent press conference:
Sometimes I wonder, maybe the bear should just sit quietly, munch on berries and honey rather than chasing after piglets, maybe then, they would leave it alone? But no, they wouldn’t, because they will always try to chain it up. And as soon as they chain it up, they will pull out its teeth and claws.
By all indications, Putin seems to believe that the current crisis has nothing to do with Ukraine and Crimea, but is part of a devious western design to keep Russia down. For him, it’s an existential struggle and giving in is not an option. Moreover, as Masha Gessen points out, there really is no power in Russia but Putin, so an overthrow by a mythical oligarchy doesn’t appear to be in the cards either.
So forget about getting Putin to back down. We can affect his calculus, but not his intent.
2. Everyday old Soviets die and new Ukrainians are born: While Putin and Russia may be stuck in Soviet times, Ukraine is moving on. They see their neighbors to the west, such as Poland, prospering and that’s the direction they want to head.
At the same time, no one under 35 in Ukraine has any memory of the Soviet Union and few have any nostalgia for it. Ironically, Putin’s incursions into Crimea and Eastern Ukraine have only exacerbated that trend.
Today’s young Ukrainians are more likely to be working for a multinational, freelancing on Elance or building a startup to market Ukraine’s ingenuity to the world than harkening back to Soviet glory. They want to be a “normal country,” with the rule of law, strong human and property rights and a government that works for them, not against them.
These trends are only likely to strengthen over time.
3. Energy prices are likely to stay down: Nobody saw the price of oil crashing the way it did, but it’s been clear that prices would fall for a while now. Moreover, the shale boom in the US has meant that Russia’s stranglehold over European gas supplies is in its death throes as well.
Although oil may rebound somewhat in the coming months—it really depends on what the Saudi’s decide to do—it is unlikely that we will see $100 oil for quite some time, if ever. Back in March, Barron’s predicted $75 dollar oil and that’s probably a reasonable expectation. A year from now, US will be exporting gas in large quantities, so that will be a drag on Russia’s economy as well.
None of the events over the past week change these underlying factors to the crisis, but the extremity of the ruble crash, its obvious parallels with the 1998 ruble crisis and the fact that it was sparked by bailout for one of Putin’s cronies, limits the Russian leader’s options.
Here’s what I think Putin does now.
1. De-escalate: While Putin will not back down, it makes sense for him to de-escalate the crisis. This won’t be hard to do, especially since he’s the one who’s been escalating it in the first place. Moreover, Petro Poroshenko, the Ukrainian President, has his own set of problems and would also like to the fighting to stop. Their respective teams know and understand each other well and should be able to get a deal done.
There are already signs this is happening. Russian Foreign Minister Sergei Lavrov recently said in an interview that the issue of federalization—a major sticking point—is up to the Ukrainians to decide. Further, as Bloomberg’s Mark Champion reports, Putin himself appears to be taking a more conciliatory tone:
Putin may not be rational, but he’s not crazy either. Dead Russian soldiers, much like a crashing ruble and spiraling inflation, do not bode well for any leader, even a thuggish despot. He knows that he’s in a bad spot and he needs some breathing room. He’ll look to cool things down for awhile.
2. Shift Blame: Scapegoating has long been a time-honored Russian ritual. Putin, throughout the crisis, has been vocal about nefarious American designs and “fifth columnists.” We can expect him to continue in this line, blaming “external factors” for his troubles.
However, there is a problem with this tactic. It implies that Putin is too weak to keep the wolves at bay. He has taken great pains to humiliate US President Barack Obama, to portray him now as some kind of all-powerful mastermind has its dangers. The Russian public may tolerate corruption and incompetence from their leaders, but not weakness.
So Putin is likely to find others to blame as well. Former US Ambassador Michael McFaul thinks that Putin will reshuffle his government and might even sack his Prime Minister, Dmitry Medvedev. Like scapegoating, palace intrigues have long been a time-honored Russian tradition.
3. Wait For An Opportunity: While many in the west think that Putin is a master strategist, most people with inside knowledge of the Kremlin believe otherwise. At best, he appears to be a talented tactician, seizing opportunities where he finds them, but operating without a concrete long term plan.
Evidence would seem to bear this out. Like a drunk poker player, at each stage Putin has consistently doubled down on his bets while facing a decreasing expected return. When the crisis began, his aim was to create a Eurasian Economic Union to rival the EU. Today, he’ll be lucky to avoid a complete collapse of the Russian economy, if not his own government as well.
So Putin’s options now are very limited, but they will likely get better in time. No one knows what will happen in six or twelve months. It is quite possible, even likely, that an opportunity will present itself and Putin is looking to pounce.
He will also, if history is any guide, overreach once again and the story will go on.
Interesting analysis but the Ukrainian part seems to ignore the fact that it is probably the most corrupt country in Europe since populations got the vote. It is rapidly turning into a battleground, sometimes literally, between oligarchs with the Government trying to keep a lid on it.
Also it has virtually run out of money with no hope of extracting more from the EU, US or IMF until it sorts itself out, but it doesn't have time or seemingly the intention, to do that. The civil war will be continued for as long as possible, it is still going on by the way just at a lower intensity, as a distraction for the locals and as the basis of continuing appeals for money from everyone else.
I think Putin is playing it long, waiting to pick up the pieces after the collapse, to the gratitude of the world!
Putin needs $100 per barrel for his budget only to the extent that it's balanced. How much per barrel would the U.S. need to sell its oil for to balance its budget, $1,000? That probably wouldn't even do it. And Putin is correct in that the West will not leave Russia alone, but rather than keeping Russia down, I think the West just needs to keep gobbling up countries to "feed the beast".
Regarding Poland, I was there recently and their success is mainly due to a huge influx of "free" EU money. This wall of money for their development is the reward for giving up their independence, to become part of the empire. In the future, after assimilation is complete, they will find that resistance is futile.
Americn Pastriot: "He will also, if history is any guide, overreach once again and the story will go on."
Ah, American Pat., you are earning your paycheck tonight. I congratulate you for the nice little, off-hand lie to finish up your post. ( Around here, we know propaganda when we see it -- to wit: accurate analysis laced with the well placed lies). I espeically appreciated the words "once again." That's worth a bonus from Tel Aviv.
Please remind us where Putin overreached the first time.
It is characsteristic of minions of the Government Entity in Washington to accuse others of carrying out tactics that they follow.
If it goes to $40, I am stacking barrels.
already stacking hard from ~75 down, will continue to do so. SA isn't selling low to lower their profits, it is all political, and won't last long. buy the dips and keep buying.
WTI Oil may in fact do this according to the weekly
http://bullandbearmash.com/chart/wti-oil-weekly-closes-deflation-continu...If the USD pulls back, it certainly improves the odds. What's more likely is a weaker bounce in oil for an extended period of time - ie: a bear flag
The fucking stock market has been going up in a straight line since 2009. Any "correction" is squashed and lasts mere moments based on the long term chart.
Where are the retracements on the way up?
If the only reason oil goes back up is because of a fucking line on a chart it proves oil trading along with just about everything else needs to be removed from the gambler's den. What demand based argument can be made on a Fibonacci line? It moves because it is supposed to move. Feels like Who's on First.
Why is beef so expensive? Bacon? Gas?
Because some fucker who has no business dealing with any of it wants to make money off trading a piece of paper. You want a futures exchange, force delivery and remove the speculative leveraged plays based on junk debt.
If a marriage worked like the stock market every man would need to trade a Coach purse for a blow job and a diamond ring for sex.
Oil may retrace to $70 or $80 but the jig is up for awhile as all that would do is reduce demand even more, at a time when the oil tanks are so full they are starting to spill over the top. I say $75-$80 oil will bring $35 oil eventually!!! Unless somebody turns those pumps off!!!
http://investfts.blogspot.co.uk/2014/12/weekly-closings-stocks-oil-gold....
Dead cat bounce.
On it's weekly chart XLE is clearly in a downtrend - below it's 8, 14 and 28 day moving averages. Over the last 15 years when it's been below that, it's spent about 24 months below it.
Dead cat bounce.
I'm sorry, I have a hard time taking technical analysis advice from someone who doesn't even have a professional charting platform.
Not to be a DB, but if you are so inclined to purchase an actual technical analysis charting platform with backtest capability, you will find that most common technical indicators are NOT profitable--as in trading based on readings like the above will not increase your net worth, and in most cases you will lose money. Trying not to be a douche bag, but if you don't trust me, get 10-20 years of data and code in your indicator and test and you will see that I'm right.
Hey chart daemon, where was your chart for the huge drop from $100 to $50? Nowhere, can't you people give it a rest, everything is geopolitically driven nowadays and your chart are pretty much useless in a non banding environment.
Oil dropping like it did from 105 to 55 is extremely unusual, a bounce to 70 would be normal and expected.... In a real Market. Flip a coin Bitchez.
Maybe oil goes to $35 on its way to $40. Hello? The world is in a RECESSION. $70?? My ass! There's NO demand. If the Saudi's didnt initiate the price cut, it would have happened anyway. Buh-Bye Venezuela. Buh-Bye, Vladimir. Buh-Bye, US fracking industry. (For now)
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