Oil Futures Crack Below 50-Day Moving Average
by Dr. Joe Duarte
|Wednesday, June 09, 2004
The mainstream media in the U.S. is once again ignoring an important story in South America, which has the potential to affect the U.S. oil supply, as well as to redefine the political and strategic environment in the Western Hemisphere.
Venezuela's leftist president, Hugo Chavez, is about to face his stiffest test, as Venezuela has scheduled a referendum on his presidency for August 15, 2004.
Chavez has launched a high profile campaign aimed at keeping his office. Featuring rallies and wanting to make daily speeches, the embattled Venezuelan president is, at least outwardly, confident.
According to the New York Times, the announcement of the referendum came just in time, as Chavez' "opponents learned Thursday (June 3) that they had collected enough signatures to force a referendum but had worried that with administrative or legal challenges, he could push the vote past Aug. 19, the fifth anniversary of his coming to power. According to the Constitution, a vote to recall Mr. Chavez at that point would allow his vice president to run the country and permit Mr. Chavez to run for re-election in 2006."
According to the Miami Herald: "Chavez had accepted that he would face a recall and has launched a campaign in which he predicts he will trounce his opponents in ["a decisive battle."] The Herald added that "some surveys say a majority of Venezuelans will vote against Chavez, citing high crime and a floundering economy. Others say Chavez, boosted by high oil revenues, will win a vote. Some polls put his support at 40 percent, extremely high by regional standards."
To be sure, the latest turn in a bizarre saga, could well end up where it started, with Chavez as president, since he's vowed to run for re-election if he is unseated by the referendum.
Nevertheless, if Chavez were to lose, the picture in Venezuela remains uncertain. There are some very interesting things that have been in place in the country for some time. For example, it is well known, and confirmed by the Venezuelan government, that 10,000 Cuban "doctors" are dispersed throughout Venezuela, doing what the Chavez government calls humanitarian work. According to intelligence sources, and hints from unnamed U.S. sources, these are not doctors, but Cuban mercenaries put in place by Chavez and Fidel Castro in order to provide military support for Chavez in case he loses power.
Chavez has also been rumored to have associations of some sort with Colombian rebels. Some of these rebel groups are allegedly involved in drug trafficking, and may have at least loose associations with Islamic militant groups.
Chavez is openly defiant of the U.S. and has insulted President Bush on the record in front of the press, having used profane terms to describe Bush.
As a result, Chavez' recent acceptance of the referendum, a clear change in his tactics, raise several questions about what he may be up to and make this a very worthwhile situation to keep an eye on.
First, who will run against Chavez? One of the major reasons the coup against him failed a couple of years back, was that the opposition could never agree as to who would be in charge. At this point, no real prime time names have been put forth.
Second, if Chavez loses, will he really go quietly? Chances are he won't. Chavez has systematically purged the Venezuelan armed forces of any serious opposition for sometime. He also has the covert support of the Cubans, and may have other surprises ready to spring in case he loses.
And third, if indeed he does lose and go away quietly, will there really be any sustainable change in Venezuela? Or will Chavez just wait and be re-elected once more during the regular election cycle?
Finally, what if he doesn't lose? If he wins, he will more than likely truly consolidate his power and begin to attempt to expand it into other areas of South America, covertly and overtly.
A Chavez win in the referendum will have significant repercussions. But a Chavez loss, will by no means leave as clear a set of options available as his opposition seems to think.
We are entering what could be a defining moment in the energy markets, from a price trend point of view.
The API and the Department of Energy supply data will be out on mid morning, on 6-9, and is almost certain to set the stage for some kind of big move. This will be an important report, since crude oil has been selling off in anticipation of a steady rise in production. According to CBS Marketwatch, the U.S. Department of Energy's information arm, the Energy Information Agency (EIA), announced, late on 6-8 that "it expects third-quarter oil production from OPEC of about 1 million barrels per day above last month's [report] estimate, and about even with the expected second-quarter average of 28.5 million barrels per day."
That was good enough to send the July futures contract for Light Sweet crude below the key technical support area of the 50-day moving average, below which it remained in early trading on 6-9.
Reuters, on 6-9, before the market opened reported that "the U.S. government is expected to report later on Wednesday that oil stocks expanded last week more than five million barrels, as crude imports remained high and the country's refineries ramped up production to meet summer demand for gasoline."
This sets up an interesting situation. Subscribers will note that on 6-8, we issued a warning that oil stocks looked ready to break out to new highs. That did not happen on 6-8, as the charts suggested was possible. But, a look at the charts does not show as clear a break in the stocks as is visible on the futures charts.
Thus, we maintain that the future direction of crude and gasoline still depends on the price action in the stocks. Until we see a clear and unambiguous trend develop in the stocks, we suggest that traders keep a very close eye on the possibility of having to trade the oil stocks aggressively.
The Philadelphia Oil Service Index (OSX) fell, but did not break to new lows on 6-8, remaining below the 100 area. A break below 94.75, its 200-day moving average, could send it plummeting to the 88 area in a hurry. 110 is still key resistance. The index did successfully test its 200-day moving average, but is still clearly diverging from the price of crude and predicting some kind of pull back in the market. For more details on trading the energy sector visit our energy timing page, featuring our highly effective OIH timing model and our Top Ten Energy Stock List.
The Amex Oil Index (XOI) did not advance, but remained above the 610 area on 6-8, and could still make a new high in the next few days. That would be a signal that oil prices may have made their lows for the near term, although, it may not mean that prices are going to surge. This is still a crucial juncture for the entire oil sector, as a continued failure in the near term could lead to a major top forming. A close below 600 would be a very negative technical development. For immediate analysis, including stock picks, and the latest in technical analysis of the entire energy complex, our subscriber section has a full complement of recommendations in oil service and the rest of the energy complex.
Wall Street Under The Hood
Oil Stocks Not Confirming Futures Break Yet
Crude oil futures have clearly broken their intermediate term up trend.
Unless there is a reversal, it looks as if $40 oil is history for now.
But, the oil stocks, which clearly predicted that $40 oil could not last, by not making record highs to confirm the records on crude, are now saying that prices may not fall much further, or as much as some are saying.
In other words, while crude may fall to the $34-$36 area in the near term, the stocks are saying that a fall to the $10 area, as in 1998, is not in the cards, at least not yet.
A slight change in perception is required here though. The refining stocks, such as Valero (NYSE:VLO), are showing some weakness, which makes sense.
Refiners make big money with higher crude prices since they can pass on the costs directly.
A six dollar break in crude, is certain to impact a refiner's margins. Watch Valero for a more decisive break, which would confirm that $40 oil won't be back for a while.
Gas stations, though, will make big bucks even if gasoline falls below $2.00 a gallon at the retail pump.
That's why Exxon Mobil (NYSE:XOM) is just near its recent highs and did not break with the price of the futures.
A break in Exxon, though, would suggest that maybe oil prices can fall below $35.
Burlington Resources (NYSE:BR), is a pure resource play, oil, natural gas, and timber. This stock is acting quite well also. A break here would suggest that there may be a glut in energy that is just around the corner.
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Dr. Duarte's book predicted many of the current developments in the economy and the energy markets, and provides an excellent set of benchmarks and trading lessons for what could be in store for the future.