Crude Oil Plunges, Drillers Break Support

12/15/2011 10:31 am EST

Focus: COMMODITIES

Thomas Aspray

, Professional Trader & Analyst

Following this week’s sharp decline in oil prices, a look at the charts for oil futures and a few top energy stocks helps to better define the short-term outlook for the energy space.

The stronger dollar (plunging euro) and OPEC’s decision to keep output of crude oil at current levels was a double whammy on Wednesday. As if that wasn’t enough, the US Energy Information Administration later reported higher-than-expected inventories, as well as demand for crude oil that was almost 9% lower than last year.

Given all this, the 5% decline in oil prices was really not that surprising. Of course, the key question for most is what this means for crude oil prices and energy stocks going forward.

On a seasonal basis, crude oil typically bottoms in February, so if the seasonal pattern works again this year, can we look for crude to bottom above or below the $90-per-barrel level?

The oil and gas drillers have been hit especially hard this week, having declined by 10%, and there are some key support levels that should be watched in three prominent oil stocks.

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Chart Analysis: Despite Wednesday’s sharp drop, the daily chart of the February crude oil contract still may be forming a continuation pattern with the 38.2% Fibonacci retracement support at $92.75.

  • There is more important chart support as well as the 50% retracement level in the $89.50-$90.90 area
  • Volume was heavy on Wednesday but the daily on-balance volume (OBV) is still above both its weighted moving average (WMA) and its uptrend, line b
  • The weekly OBV (not shown) formed a slight negative divergence at the recent highs, but it is still above its weighted moving average
  • There is initial resistance now at $97.30-$99

Enerplus Corp. (ERF) is a $4.3 billion western Canada independent oil and gas producer that currently yields 8.8%. Its payout ratio is 87%, meaning that 87% of its current income is paid out in dividends, making its yield look a bit less attractive.

  • ERF hit a high of $28.97 in early November (line c) but closed Wednesday at $23.75, down over 21.8% from the highs
  • The daily uptrend, line d, has been broken, and the pattern of lower highs and lower lows is negative
  • The September low was at $21.65 with support from 2010 at $20.10
  • Relative performance, or RS analysis, shows a well-defined downtrend (line e) and dropped through support (line f) as ERF was peaking in early December
  • The new lows in the RS suggest that ERF will also drop below its September lows
  • A similar downtrend is evident in the on-balance volume, which has already dropped below the September lows

NEXT: 2 More Oil Stocks Near Key Support Levels

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Noble Corp. (NE) is a $7.75 billion offshore drilling contractor that has a current yield of 1.6%. It dropped below the November 25 lows (line a) on Monday.

  • NE had a high in March of $46.72, and the recent rally failed to overcome the 61.8% Fibonacci retracement resistance from this high
  • The potential double-bottom formation in the relative performance, line b, was broken on Wednesday. NE has been weaker than prices since early November
  • Daily OBV was quite strong at the September lows, and the uptrend, line c, is still intact
  • The daily OBV has dropped below its recent lows (see circle). The weekly OBV (not shown) still looks very strong
  • There is next support in the $29.50-$30 area with more important support at $28.55

Weatherford International Ltd. (WFT) is a $10.1 billion Swiss company that provides equipment to the oil and gas exploration companies. The stock made a yearly high of $26.25 and is currently down almost 49% from those highs.

  • WFT is still barely above the November 25 lows at $13.01, line e. A break of these lows will suggest a drop to the October 4 lows of $10.85
  • The low in 2008 was at $7.75
  • The RS line has dropped below its November lows, line f, which is a short-term negative. The recent rally in the RS failed below the resistance from last summer
  • OBV broke its uptrend last week, line g, and now shows a pattern of lower lows

What It Means: The oil and gas drillers are acting weaker than crude oil prices, which may be an indication of the bearish demand outlook held by many going into 2012. The weekly and monthly analysis for crude oil prices remains positive, and this week’s close may help determine how deep a correction we will see.

How to Profit: Clearly, Enerplus Corp. (ERF) looks most vulnerable despite its high yield.

On the other hand, Noble Corp. (NE) has the most favorable long-term outlook, and we will look for new buy signals on a successful test of last summer’s lows.

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