Crude oil is testing a major turning point, which if it holds could have broader market implications, reports Jeff Greenblatt.
When markets opened Sunday night, the world learned about Saudi Arabia’s plan not to cut production but instead flood the market as they would increase production by 2.5 million barrels a day starting on April 1. While there is some good retail price based news, it is a mostly bad news scenario. Consumers will get a break at the pump, at least those who are not quarantined. But the bigger picture has the U.S. shale industry in a tight spot since production costs are much higher for U.S. producers than it is for the Saudis. According to an Aljazeera story from March 10, Saudi Aramco has a cost of $2.8 per barrel while US shale oil producers need a price that is more than 14 times higher just to cover costs (more common reporting put the Saudi’s breakeven around $20 and U.S. shale producers above $40). So, we are looking at $40 per barrel at least just to break even (many producers more). If prices don’t recover soon, there could be a massive industry-wide impact in states such as Texas, New Mexico and others.
But I may be able to provide some good news because we all need some right now. On Monday morning I took inventory of the oil chart and found the recovery off the low is hitting at 610 (Fibonacci) weeks off the 2008 top. Here we have an important time window coinciding with a major headline event. Could this represent a bottom? Not many people think so but it would be prudent to take it one step at a time. One can be a hero making predictions or make money but chances are you won’t do both.
At this point there is likely some short covering. That has to transition into real buying before we can start talking about a real bottom. But look at the 610-unit window, in any time frame is a challenge because its so close to 618. Many times, we’ll get a 610 turn (either high or low) and send it in a new direction only to see it reverse again at 618 which is now just over seven weeks away. We have a weekly chart showing the 618 window and the monthly for a larger perspective (see charts below).
That’s the hopeful news.
Then we had a market day for the record books on Monday. By Tuesday the President started talking about stimulus. This would be Helicopter Ben on steroids as it appears, they want to bail out key industries like cruise ships. What struck me was the proposed payroll tax cut. At first the market went for it but within an hour they figured it out. On Tuesday at one point the Dow Jones Index was up about 945 points and just about all those gains evaporated before recovering. By Wednesday the market had its doubts about stimulus.
President Trump met with GOP leaders in both the House and Senate concerning the payroll tax cut. When this news came out, was it just me or did you think the same thing? Didn’t anyone tell him the Democrats run the House and there is not one chance in a thousand they’ll go for tax cuts. So, the market had a mighty bounce which is typical bear market behavior. We’ve gone from complacency to riding the slope of hope in just three short weeks. Why was the market down again on Wednesday? In case President Trump doesn’t realize it, the market does. Let me repeat, there is not one chance in a thousand the Democrats are going to cut taxes.
Last week I floated the idea professional sports leagues might have to play without spectators. Now we have our first test with the San Jose Sharks. Santa Clara County put a ban on public gatherings over 1000 people until the end of the month. The Sharks have three home games scheduled starting next week. They have a choice of playing on the road or in an empty arena. Lebron James said there was ‘no way’ he’d play without his fans present. When he found out an actual ‘conversation’ was taking place, he changed his tune. I suppose his agent told him that if he doesn’t play, he doesn’t get paid. More importantly, it reveals how quickly events are moving. When James made his initial statement, it was an innocent reaction to an unlikely hypothetical, soon it became much more real. (UPDATE: The NCAA just announced that its annual “March Madness” Tournament would be played in empty arena and the NBA suspended its season after a member of the Utah Jazz tested positive for the virus).
Same problem appears to be looming for much of the country if America were to go on the kind of lockdown being experienced in Italy right now where they just announced the suspension of mortgage payments. Its hard to imagine the economic impact if major regions of the United States were to go on lockdown. What we do know is that the approximately half of the 12,000 Dow points gained since President Trump was elected have been lost. It took three years to accumulate those gains and now the market has gobbled up half of it in less than three weeks.
Regular readers of this space know I’ve warned that a President who lives by the fortunes of the market can also be buried by it. That now appears to be the case. President Trump is now in deep trouble and reelection in November is now highly questionable. According to oddsshark.com, on Feb. 27 Trump’s odds were near an all time high, at 64.29% probability. Only 12 days later, they’ve shrunk to 54.55%. President Trump really needed the market to stay up until convention season in the summer. It didn’t happen.
It appears the only thing that could save Trump now is the 610-week window in oil and the fact the Dow is sitting at the 200-week moving average. A breakdown here would greatly increase the odds of a recession. If there was ever a place for the bleeding to stop, this is it.
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