Take a Look at the chart below and you will see that the price of oil is breaking key support. Texas tea has now backed off $13 since the end of August, and lower prices beckon.
It turned out that oil made an initial peak with the Egyptian Army’s ferocious and bloody attack on the Muslim Brotherhood. I hate to sound cynical here, but count the daily bodies in the street, which has been trending down sharply since the 1,000 plus tally. Fewer bodies mean lower oil prices. This broke the back of the fundamentalist opposition movement, which has accounted for the $20 spike in oil prices since June.
We then saw a secondary peak at $112.50 with Secretary of State John Kerry’s harsh reaction to the Syrian gas attack. We were a day away from launching the missiles when the Russians delivered a last ditch compromise peace offering. That firmly put Syria on a back burner for several months at the least. Oil has been falling ever since.
This returns us to the longer-term fundamental trend for oil, which is sideways at best, and down big at worst. The US is flooding the world’s oil markets with energy in all its many forms. The driver here is American fracking technology, which will continue to upend the traditional energy markets for decades to come.
It’s just a matter of time before fracking goes mainstream in Europe, especially in the big coal countries of Germany, Poland, and England. Then they can thumb their noses at Russia, a major gas supplier over the last thirty years. China will follow. You could even frack in the Middle East.
In a crucial news item that wasn’t reported nationally, the California legislature voted down a measure to ban hydraulic fracturing in their state. It was defeated in a democratically controlled body. As the Golden State is the most anti energy state in the country, this gives the state a flashing green light to move forward against environmentalist opposition. There is a ton more of new supply coming. This is what the weakness in the price of natural gas is telling you (UNG).
We also received a new negative for oil this month, the collapse of the emerging market currencies, stock markets, and bonds, especially the Indian rupee. This reduces their international purchasing power in US dollar terms, thus raising the cost of oil in local currency terms. You see, oil is priced in dollars. As the emerging markets have seen the largest growth in demand for oil in recent years, this can only be bad for prices.
In terms of my own trading portfolio, I wanted to have a “RISK OFF” position, like an oil short, to hedge my existing “RISK ON” positions. US stock markets could be weak into October, and they will take oil down with them.
The energy inventory figures are another enormous tell, which indicate that the industry is choking on excess supplies. The summer driving season is now a distant memory, and winter has yet to hit. These are grim tidings for oil.
Finally, there is that last resort, the charts. Check out those for the (USO) and oil and it very much looks like we have a classic head and shoulders top in place. That is the straw that breaks the camel’s back.
The only way I am wrong on my oil call is if the Chinese economy is about to take off like a rocket. They are the marginal big swing player in this market. But there is absolutely no sign of that happening in the economic data. If anything, the collapse in emerging markets suggest that conditions in the Middle Kingdom are about to get worse before they get better.
This is not an ideal place to initiate new shorts, unless you are a died-in-the-wool momentum player. But we are only one headline away from more bad news from the Middle East, which would deliver an instant $5 pop in oil prices. That’s what you want to sell into.
I don’t have any brilliant option plays for oil here. So better to play the leveraged short oil ETF’s. Those would include the ProShares Ultra Short DJ-AIG Crude Oil ETF (SCO) and the PowerShares DB Crude Oil Double Short ETN (DTO).