Oils, just a Trading Market for Now

While many money managers are trying to make a case for an Oil bottom, the fact remains that we have just seen the first indication that a bottom is forming.  Maybe the best way to illustrate our view is to walk you through some of our comments over the past 14 months.

Back on December 10th, 2015 we said this about Oil:

“Back in our February 10, 2015 blog post we said we saw the possibility of a $ 22 extreme low on oil         by 2017, that view still holds.

In our blog post of October 15th we confirmed the earlier view and said if you want to figure out when the low on oil is in, watch the ratio between the XLE and USO ETFs.  That relationship has been expanding since July 31, 2008 when it was 0.80, now it is 5.40 a new high.  What that says is that the oil bulls are still picking bottoms.  When we see that relationship drop to the 1.50 to 2.00 level, then you will have the much anticipated bottom.”

Then on January 15th, 2016 in talking about the stock market we said: 

“It seems that there is a lot talk about this bottom stuff, when the real issue is to face up to where was the Top , the Top that was built between February 2014 and May 2015.  Now why would anyone other than a short-term trader try to find a bottom?  This Macro decline hasn’t really begun yet.

A simple way to look at this is to look at the Oil ETF “USO” and the Oil Stocks ETF “XLE”.  In my view the XLE is a good proxy for the S&P, it is full of a lot of QE stuff.  The ratio between XLE and USO has gone from 1:1 in 2008 to 6:1 today.  My contention is that until XLE trades under USO you will not have a confirmed bottom.  Granted that this will probably not happen right at the bottom but lets just say it happens when USO goes up to 16.00 from the 8.75 today.  A drop for XLE to 16.00 from the 53.88 today will open some eyes.”

Here we are today with another update: 

Oil futures put in a trading bottom on Feb 10th, 2016 at 29.70, and then jumped up to 42.50 on March 18th.  That is a $ 12.80 pop. Impressive if you are calculating from the 29.70 low, i.e. 43 %, or not so impressive if one calculates from the May 2, 2011 recent high of 130.88, i.e. 10 %.

Anyway, the XLE/USO relationship that we have talked about is the indicator that is showing that the Oil market is making it’s first steps to finding a bottom. The ratio hit 6.80 on February 10th 2016, declined a bit, and then went up to 6.68 on April 4th 2016, kind of a double top formation. We continue to look for a move on the ratio down to the 2.0 level before the Oil market makes an investment bottom sometime in 2017.  What this means on price could best be summed up using a little market swing theory.  Oil bounced up 12.80 from the 29.70 low.  A swing down through the 29.70 low will setup the possibility of a move down of 25.60 (double the rally) or an extreme low of 16.90.

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