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Update on Oil, Gold and the USDX

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33

March 19, 2009 – Comments (28) | RELATED TICKERS: USO , UCO , DXO.DL.DL

This post is an update to my last 3 posts on oil. Please read these first to understand where I was coming from. They are: Short Term Oil, Short Term Oil - Update, Short Term Oil - Update 2 (Intraday).

Oil has definitely formed a bottom (at least of for this cycle of monthly declines and retracements) and is in a new uptrend. The long term historical support that was identified has held. Oil has been on a new uptrend that is several weeks strong at this point. The weekly MACD has triggered up, but it is not in positive territory yet. However it looks very strong to me. See the chart below

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What I am doing. I started buying oil (the commodity mostly in the form of USO, UCO and DXO, and not producers) at $40/bbl. Averaged down when oil got to $35/bbl and have been slowly accumulating. Now that we are in an uptrend, I am buying on all pullbacks. I haven't bought any in the last couple of weeks and I am posting because I think we will be getting a pullback soon.

The daily chart looks overbought and oil is running into its first real resistance zone around $50-55. I bet we will get some kind of pullback from this level. I am waiting to time my next oil purchase until I see how far we pullback.

So what are some reasonable targets for oil in the coming weeks and months? Now that the bottom has been established (at least of for this cycle of monthly declines and retracements), lets looks at where we were. Oil topped out at ~147 and bottomed ~35. Doing just a 38% retracement (which I think is very possible) puts oil around $77/bbl. That is what I am targeting and where I plan to start selling. All kinds of things can happen between now ($50) and then ($77), but that is a loose gameplan and I will adjust mine as the chart unfolds.

....

So that is the technical picture for oil that I see. And I know that I said in my first post that this blog and account will be focused on just the technical picture as much as possible, but I have to do a little fundamental analysis here too. I just can't help it. It is how I think. I use both tools all the time (TA and FA) just on different timescales. This move in oil though will straddle the line.

There have been some really good discussions by all of Caps recently, but by StatsGeek and Tastylunch in particular regarding oil and inflation. The common line from CNBC is that rising oil prices is a catalyst / precursor for economic growth and the this rise is seen as a good omen.

....huh?.... Because that is completely false. Rising oil would be detrimental to the economy, and rising oil prices are a function of OPEC output and inflation.

So lets talk about the inflation aspect, because this one is a doozy. Based on the events yesterday (the Fed making a huge announcement about buying a HUGE amount treasuries directly) Quantativie Easing is kicking into high gear. Now does this mean inflation happens automatically and immediately? No. There are still short term deflationary forces at work. But I have become conviced for a long time that this is a Deflation Scare. And we have to be very careful about how inflation and deflation is defined. Please see several of my recents posts (from binv271828) about both inflation and deflation:

Steve Saville: Market Value, Money and Credit
- John Mauldin: The Endgame

My opinion (obviously all of this is) is that behind the backdrop of decling asset prices (what almost everybody calls deflation, even though in and of itself, it is not) money supply has been growing substantially. It is in fact politically desireable to spur inflation to fight "deflation", for Congress, the Treasury and the Fed to be seen as doing "something / anything". Inflation just got kicked into a higher gear yesterday, but based on Savilles arguments and historical correlation, there is a lag between the increase in True Money Supply and everyday asset prices. So by the time that increase is actually felt by the public the Fed and Treasury will have already massively overcorrected. Estentially this next leg of inflation will be largely hidden from the public.

But there are some obvious early respondents: namely gold and the US Dollar

The USDX has a 3% drop yesterday!!!! If you have any idea how large the FOREX market it, you will be absolutely shocked by how much money that represents. Gold at the same time zoomed from 890 to 950 per oz. (Gold and the USD are very largely inversely correlated).

I think the USD has finally suffered a deathblow. Take a look.

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I think being short gold and gold miners here could prove to be a very costly mistake. I will not tell anyone what to do, I am just saying that I am not.

So in summary:

- I think oil is heading up the next few months.

- Despite the fact that there will be a very good bear market rally for the next several months in the equity markets, high oil is NOT good for the economy and will prove detrimental in the long term

- I think the dollar has made a very important high recently, and the way it made it (and with the accompanying Fed policies) suggests real weakness for the foreseeable future.

As always I would love to hear your comments!

The binv standard disclaimer: This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ulimately be comfortable with their own investing decisions.

28 Comments – Post Your Own

#1) On March 19, 2009 at 11:03 AM, GoodVibe4Ever (< 20) wrote:

Great post as usual and a well timed follow up!

GoodVibe

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#2) On March 19, 2009 at 11:06 AM, helicopterfool (25.28) wrote:

Great post/ great analysis.  Oil = black gold.  As the dollar corrects - oil will rise.

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#3) On March 19, 2009 at 11:15 AM, binve (< 20) wrote:

GoodVibe4Ever, Thanks man! I really appreciate that!

helicopterfool, Thanks! Yes, I agree that oil is an inverse dollar play, but gold is the more obvious one. Oil being a commodity trades inversely to the dollar but also is subject to consumptive demand. Gold, being money and not a commodity, trades much more like a currency (which it is. And I know this will spark lots of debate from a lot of people, which I am not interested in engaging in. That is my opinion), and trades as a much more clean inverse to the Dollar falling. Thanks for the comments!

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#4) On March 19, 2009 at 11:25 AM, darroj (33.26) wrote:

thanks for the update! I had been waiting to see what you had thought about this. I held my UCO, and added a tiny bit more when it was getting low.  The uptrend is looking nice :)

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#5) On March 19, 2009 at 11:53 AM, binve (< 20) wrote:

darroj, No problem! Yes, definitely a good call on holding and adding. The was a lot of volatility in the $35-$42 area, but it looks like it is definitely moving above that now. Thanks!

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#6) On March 19, 2009 at 12:27 PM, Lenokis (21.61) wrote:

Binve. Excellent post. You really bring value to CAPS. Much appreciated!

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#7) On March 19, 2009 at 12:28 PM, Lenokis (21.61) wrote:

Binve. Excellent post. You really bring value to CAPS. Much appreciated!

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#8) On March 19, 2009 at 12:33 PM, Tastylunch (29.54) wrote:

Binve

you are not going to believe this but I fully agree. No reservations(well expect the gold being currency only bit, I think it can be but sometimes it's not) . :)

I've been buying Oil since last week, it looks to me to be time to back up the truck. Shorting Dug and DTO have been good for my CAPS score :. rigs are shutting down left and right we have a major supply crunch coming in about 15-18 months.

Gold's actions of late have convinced me that it will hold up and likely bust through the old high. Looks like it basically held the channel. I'll wait for confirmation though.

 man I was going to do a mega post on Oil tonight but i guess now I don't need to :)

Nice post man.

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#9) On March 19, 2009 at 12:59 PM, binve (< 20) wrote:

Lenokis, Thanks! Very nice compliment, I appreciate that.

Tastylunch, Holy cow. Stop the presses! We are usually in agreement on most things, but to be in 100% agreement (okay, based on the gold thing lets say 99.5%, but we will round it up to 100% ... :) ), now that is a rare thing. That absolutely positively lets me know that I am calling this correctly now. :)

Yeah, that is why I am neutral to bearish on most of the producers (I still like COP and STO as partial green plays and because they are both reasonable efficient operators), because the rigs are in very tough shape right now. A forget drillers and explorers. But because of this fact, and with the OPEC cutbacks, I completely agree with your assessment. Big supply crunch coming.

Seriously, thanks man.  

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#10) On March 19, 2009 at 2:09 PM, Tastylunch (29.54) wrote:

That absolutely positively lets me know that I am calling this correctly now. :)

 Haha or at least you'll have company regardless. :)

Yeah I think the producers/servicers will lag asmmuch as a  year or two but will eventually rally hard when people try to frantically increase production.

Btw have syou seen what PEMEX is up to? mexico looks like they are going to do something depeserate and possibly cause their oil output to just vanish (worse than they already have).

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#11) On March 19, 2009 at 2:32 PM, anchak (99.86) wrote:

Great post binve.... and I was pretty certain you were going say the comment on Gold & miners short...this current move is very very telling by the Fed....

However, there's a strange fait accompli to it - they think the need is to do this intervention - obviously to keep rates down to drive refinance volume..... question is how much of that would show up in reality over time ( not the immediately blip in the 10 yr - which I think corrected 60 bps in like 30 min s - a new record or something!)

I have a small GLL position to hedge my miner longs.... 

 

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#12) On March 19, 2009 at 3:01 PM, binve (< 20) wrote:

Tastylunch,

Haha or at least you'll have company regardless. :) 

Exactly man. But based on your score rise the past several months, it makes me confortable to be aligned with Tasty's view :)

Yeah, that whole scenario with producers cutting production now to try to keep up with demand destruction is exactly the scenario that is playing out in our discussion on my first Oil blog post. Supply redcution is overcorrecting, and you can be sure that they are going to be reluctant to fully open the spigots again.

No I haven't been paying much attention to PEMEX. But Mexico's peak output was dropping off substantially over the last several years. What will be an interesting question is: If demand really picks back up in the US in the next couple of years, with Mexico be able to supply what they used to? I suspect the answer will surprise many people.

anchak, Thanks man!. Yeah, you know me :) I can't let a warning go by about gold and miners :)

Yeah, I think the American consumer / homebuyer is not going to be enticed back very easily. But what is really interesting if you read my  Steve Saville: Market Value, Money and Credit post, in the credit booms and subesquent busts over the past 100 years, there was always a reflationary impulse. Money supply was always increased. But when the private sector debt did not increase (and the fractional reserve multiplier effect was not kicking in), there was always inflation. The key public sector debt. I know municipalities are hurting now, but if they can't sell bonds to the public, perhaps the Fed will start buying them. That is why I think no matter how much the consumer resists, Fed actions are going to be inflationary big time, and I think we will see it soon rather than later.

So, gold for me please :) Thanks man. 

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#13) On March 19, 2009 at 3:34 PM, innerflame (< 20) wrote:

Thanks for this post Binve- excellent- easy to understand. Have been watching oil but not completely understanding all of it- GV helped a little. I know where to go now! So I've been watching UCO and DXO- can you give me the kind of pullback price you are looking for? Maybe a heads up in GV's blog as we slog through...

I appreciate your knowledge-there are a few of you guys I try to keep up with...

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#14) On March 19, 2009 at 3:55 PM, binve (< 20) wrote:

innerflame, Thanks! As far as oil pullbacks, the first real test will be of the 50-day MA. the 50 MA was resistance for months and it finally broke through (definitively) a couple of weeks ago. I bet it will retest that. As far as what dollar level? We will need to wait and see when the pullback occurs.

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#15) On March 19, 2009 at 4:15 PM, amassafortune (29.67) wrote:

binve, I was buying oil with you, but sold COP and BPT today. I'll sell others before $70/bl. OPEC admits to an 80% compliance rate to production targets. With 5.5 million workers (documented-only) not commuting each day in the U.S., and a slew of lousy earnings coming in three weeks, I think the price increase will be short-lived. Increasing active rig counts would change my mind. If rigs are being reactivated, that indicates owners think the price will hold. I know you had some good rig data in the past. Do you have any rig count updates?    

 

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#16) On March 19, 2009 at 4:23 PM, binve (< 20) wrote:

amassafortune, Hey, no I don't have any more updates on that end. But I think the really telling story here is the new uptrend and the (officially) new inflationary policy by the Fed. I am certainly not expecting smooth sailing between here and 70/bbl. I think there are going to be lots of hiccups. But I still think risk/reward favors being long right now. I am significantly more bullish on the commodity and much less so on producers (in fact I have no producers in my trading account at the moment).

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#17) On March 19, 2009 at 4:38 PM, bothisellhigher (29.13) wrote:

Too much Binve...your comments to comments are even better than your original posts...which are great because they are so timely and informative and helpful to it seems...everyone.  I'll say "me" in particular.

 

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#18) On March 19, 2009 at 5:10 PM, binve (< 20) wrote:

bothisellhigher, Thanks, I am very glad to hear that!

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#19) On March 19, 2009 at 5:24 PM, madcowmonkey (< 20) wrote:

My only addition has already been said, "I am certainly not expecting smooth sailing between here and 70/bbl."

Oil is going to be moody for the next year. I have been following it just like everybody else here on caps, but your opinions are all relative and informative. Much appreciated for the update. 

I am still in the $70 oil camp. Hoping it doesn't peak out at 140 again. 

There are still so many factors to consider with oil, but I would be curious if the need for oil starts going up rather quickly between competing countries what the more near term outcome is. I guess if I had the answer for that I wouldn't be hanging on your blog:)

Nahhhh. I would still be here.

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#20) On March 19, 2009 at 5:39 PM, binve (< 20) wrote:

madcowmonkey, Hey my man! Heh: "I am certainly not expecting smooth sailing between here and 70/bbl." That was probably the biggest understatement I could make :)

Yeah, I think there is going to be a lot of volatility, and I think this will end up being a longer term "trade" than I was orginially anticipating for the binve account (and my real life trading account). But I feel pretty confident we have seen the bottom for this cycle. That doesn't mean of course that we can't revisit the bottom one more time before we head up. But the 50 day MA I think will be strong support. Should be interesting.

I guess if I had the answer for that I wouldn't be hanging on your blog:) Nahhhh. I would still be here.

LOL! You better be man, don't make me come up to MI and drag you back to my blog ... :)

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#21) On March 20, 2009 at 12:38 AM, herztical (28.31) wrote:

Its a race to see who can devalue their currency faster; US in the lead but once EU follows, dollar will strengthen.  Wait to 1 day before next ECB meeting to short EUR or long dollar.

I'm thinking we trades as high a 1.40 EUR/$

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#22) On March 20, 2009 at 1:55 AM, falang1 (96.52) wrote:

I like the analysis and agree with the projection (around 70 or so) but do you really like UCO for the ride?  I bought it back when oil was under 40 and the volatility killed it, or maybe the contango.  I am worried this will happen again and would rather do a straight play.  Back in December UCO/DXO worked great because the correction was quick but now I'm not sure I want to play with them.

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#23) On March 20, 2009 at 9:20 AM, binve (< 20) wrote:

herztical, Yeah I have been thinking a lot about currency devaluation wars that will be happening. So here are my thoughts. US has a head start but everybody will be following suit. So I am definitely not suggesting that the USDX goes below 70 here in a straight line. In fact (based on how fast it is currently dropping) we will get a relief rally in the dollar in a few weeks. At this point, I would be very surprised if any rally takes it past its recent high of ~89.

But the more useful (for me at least) way to look at it is via Gold. Fed and the Treasury now have an official and implementent quantitative easing policy. So if all of the other currencies need to implement similar policies to keep up in the currency war, then they might keep up with devaluation relative to eachother. But they will all be devalued relative to something that holds values. Commodities for sure. But gold especially.

Thanks for the commments!

falang1 , I like both UCO and DXO at this level, becuase oil is still relatively oversold. In the coming weeks, I am watching UCO closely to see how it starts tracking on the upside. So far I have been happy with it since it bottomed. But it is a young ETF so there are unknowns. I like DXO much more. The reason being is that it is based on the July contract. And like Tasty above, in about a year or so I see real supply crunch possiblities. That doesn't mean much for July, other than the fact that the contango penalties that DXO was paying on the way down will become an advantage (because now it is relatively undervalued in my opinion) as oil starts trending up and demand trends up (well, really supply trends down) and contango becomes less of a concern. Thanks!

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#24) On March 22, 2009 at 3:01 AM, TheGarcipian (58.28) wrote:

binve, excellent blog entry, man. I've not been paying attention to oil nor gold for the last couple of months. Too busy with work these past 3-4 weeks. But I do get to add something new to my resume from this past week's business trip: Humvees! Yeah, I got to sit in a fully armored Humvee (one showroom model & others), complete with drop-down video screen for the driver fed by a nightvision camera, gun turret, super-thick steel wrapped all around that puppy, and other cool military stuff.

I'm with you on the trends. Couple the draw-down from OPEC with the super-high inflation we will be seeing in the next 2.5-3 years, and there's really only one direction for oil to move (though OPEC won't keep supply at these levels in 6 months; they'll push it up some but not enough to keep up with summer demand, as is the usual case for summer). Plus, when China starts cashing in those Treasuries, all that money will flood home, further weakening an already-damaged dollar. Did you see last week(?) where the Chinese are already shifting their mindset to going with shorter-term 90-day Treasuries, rather than anything longer? If anyone doesn't think we're going to have hyperinflation in 3 years, I wanna know what they're smoking...

Like madcowmonkey, I too liked your statment: "I am certainly not expecting smooth sailing between here and 70/bbl."  Ha. Good CYA statement, but one I happen to believe in too.

In looking at the USO, DXO and OCU charts, I do think we'll see a pullback in the coming 2 weeks. If DXO drops back to the $2.50 range, I'll definitely be a buyer in RL. OCU would have to drop back to about $8.25/share for me. In the meantime, I'll be watching the SlowStochs for a bottom. Hopefully, I've not missed that boat yet!

Thanks for the knowledge and insight. Keep up the excellent postings,

--Gar

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#25) On March 22, 2009 at 12:27 PM, binve (< 20) wrote:

Gar, Thanks man! Did that is so cool! That is awesome about being able to sit in the Humvee with all of that slick equipment. I bet that was a real treat! My closest (but not as cool) experience like that: I was down at the Naval Research Laboratory in DC for environmental testing and in one of the high bays there was a set up Humvees that were all decked out with recon hardware (huge antenna radomes that were about 6 feet in diameter, telescopes and other cool gear). I could get a good look, but that was about it :).

Yeah, the China-Treasury situation gets more interesting by the day. I think this commodity correction was a gift for people to buy some hedges against inflation (well not quite a gift for those like me who bought before the correction :). But I am not worried about being negative in my long term account if I am holding commodities, which I am. I think eventually the trend will be way up for inflation.

Yep, same deal here. I think we will be getting a nice pullback in oil in the next 2 weeks and I will be making my next set of purchases when it finishes its correction. And when it comes to oil, I think a bit of as$-covering statements are definitely warranted :)

Thanks man, I appreciate that and all the feedback!

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#26) On March 23, 2009 at 2:47 PM, darroj (33.26) wrote:

binve, since I'm in the green on my UCO, I'm tempted to hop out since we're hitting $10/share.  I don't want to wait too long and get sucked into that pullback.  What are your thoughts on the more immediate market (with UCO currently at 10.16)?

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#27) On March 23, 2009 at 3:26 PM, binve (< 20) wrote:

Hey darroj, I think right now is a good place to take partial or full profits depending on your comfort level / risk tolerance. Some may want to wait for a turn down in the current trend. I sold a small amount this morning and mostly just watching the trends.

This current rally in oil is starting to get overextended (unhealthy). I suspect we will get a pullback in the next couple of days based on the move of the last 6 trading days.

You'll never go broke taking profits :)

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#28) On March 23, 2009 at 5:10 PM, darroj (33.26) wrote:

Yeah, I got out today to ensure that I stay 2/2 on UCO.  Hopefully this plays out and I can make a run at 3/3 :) Keep on updating binve!

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