Signs Today—Not of a Bottom in Oil—But of a Bottoming Process

01/08/2015 5:31 pm EST

Focus: ENERGY

Jim Jubak

Founder and Editor, JubakPicks.com

Even though crude has stopped plunging today, MoneyShow’s Jim Jubak is reluctant to call a bottom in oil prices, though he does highlight some developments he sees forming in a bottoming process.

I’m reluctant to call a bottom in oil prices today, even though crude has stopped plunging (for a day) and US benchmark West Texas Intermediate closed up a huge 17 cents a barrel to $48.82.

But I do see some things today that the market needs before it can put in a bottom.

I’d guess you could call these developments necessary but not sufficient.

Cash flows into oil ETFs have turned positive in the last month with $1.23 billion flowing into the four largest oil ETFs in December and another $109 million in January through January 5. Meanwhile, short positions in the largest oil ETF, US Oil Fund (USO) have dropped to 3.93 million shares as of January 5 from 9.53 million shares in December, according to Bloomberg.

Today, Briefing.com is reporting the kind of analyst capitulation that we also need to see before the energy sector can bottom. Citigroup analysts announced a mass downgrade of their opinions across the sector. Anadarko Petroleum (APC) went from buy to neutral according to Citigroup. So did Chesapeake Energy (CHK), Pioneer Natural Resources (PXD), and Concho Resources (CXO). Oasis Petroleum (OAS) and Marathon Oil (MRO) took even bigger hits from Citigroup, with both going from neutral to sell. Remember that these are stocks that have sold off strongly—Pioneer Natural Resources, for example—traded at $232 at the end of July 2014 and closed at $138 yesterday, January 7. So this kind of mass downgrade is really an admission that Citigroup’s analysts can’t stand the pain any longer, even though we’re now much closer to a bottom than we were at the end of September, when shares traded at just over $200.  (By the way, this is a time when you should be watching the market reaction of individual stocks to see which are still market favorites, they’ll go up most on a modestly up day like today. (Pioneer, for example, closed up 2.52% today.) And to see which stocks may need more time to rebuild investor interest. (SeaDrill’s (SDRL) New York traded ADRs were up only 0.1% today, for instance.)

Also, keep an eye on where future futures prices are headed. Right now, West Texas Intermediate for April delivery is priced at $49.78 a barrel, just about even today’s price for February 15 delivery. Oil for December delivery is at $55.12 a barrel.

Those futures prices are lower than the projections from commodities desks such as those at Goldman Sachs at $60 to $80 in the second half. In essence, futures traders aren’t yet willing to put their money where commodity desk projections are. Look to see when that gap starts to close (if it does).

Related Articles on ENERGY

Keyword Image
Seasonal Trading in Oil
12/13/2017 5:00 am EST

Oil companies typically come into favor in mid-December and remain so until late April or early May ...

Keyword Image
Saudis, Oil and ETFs
12/11/2017 5:00 am EST

Under the guise of clamping down on “widespread corruption,” Prince Mohammed bin Salman ...