Saturday, February 7, 2009

Cramer Calls Bottom in Oil

This bottom call is strange. Jim bases it on "tell", that Exxon Mobil (XOM) is staying flat above it's bottom when oil is going down. The fact that oil futures can't break level of $40 for barrel also tells him that oil has bottomed.

Let's take a closer look at oil market. First of all, fundamentals. The only bullish development is OPEC cuts, which are really happening. But it doesn't look that OPEC cut enough to account for huge drop in demand. US inventories are full to the brim. A lot of oil is still stored in tankers by traders playing contango. US economy is not even close to recovery, ditto for Europe. I don't think China can change situation alone.

Next: fundamentals of the second order, or oil futures. I wrote several times already that because volume of the future market exceeds market of real oil by at least an order of magnitude, sometimes future markets disconnect from real supply and demand situation, they are driven by supply and demand of future contracts. The biggest disconnect happened in the beginning of the last year, and markets are still digesting results of oil futures bubble which burst. I outlined mechanisms here.

Last, but not least, technicals. You can't completely ignore technical analysis, because it shows you real market action. Let's never forget that markets are interactions between people. Technicals show us what traders are doing. Let's take a look at picture below.

This is a chart of U.S. OIL FUND ETF (USO) since January 1 (click on the chart to see bigger picture). This ETF represents oil prices even a little better than futures, because it ignores rollover effects. I don't see one bullish indicator on this chart. We have lower highs, lower lows and downwards triangle formation, it's as bearish as possible.

I don't see any oil bottom so far. Cramer's "tell" might be caused by some other action. Maybe hedge funds stopped selling Exxon, maybe some mutual funds are buying, who knows. There are no real fundamental or technical reasons to call bottom.

Full disclosure: at the time of publication author did not have any positions in USO or XOM. Positions can change any time.

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1 comment:

James said...

Agree with your analysis, Alex!
As for the technical analysis, there is no signal there for a 'bottom'; although we just might be seeing the biginning of a bottoming process. Formations like these usually follow the general direction of the broader markets!