Big Oil's Big Test

Brian Hicks

Written By Brian Hicks

Posted June 30, 2011

Yes, I know this is usually Chris DeHaemer’s spot, but he’s still stuck somewhere in the hinterlands of Central Mongolia, so I am going to step in and bail the poor guy out.

Most entries here at Energy and Capital usually pertain to small, little-known oil and mineral outfits and the like that are about to break out for one reason or another.

I must confess: I don’t do small.

The sort of memetic analysis I do requires large pools of data in order to have any sort of validity at all. So I like to look at really big companies, larger sectors, or even entire economies.

But that doesn’t mean I can’t come up with the answer to THE critical question for E&C readers: Is Big Oil on the verge of a major bust? Or will it break off its tumble and return to its wild ways?

Technical Double Talk?

The technical answer is yes.

No, really!

Now before you start hating on us poor technicians, let me explain why that’s actually really useful information…

The Long Story

Oil is pretty much trying to run in two directions at once right now — and yes, that is just as painful as it sounds… especially to speculators.

The driving arguments are as follows: “Long Oil” theorists figure there ain’t but so much crude available on any given day, and China and India want it all (or at least as much as they can get their hands on). And then there are the Peak Oil folks who believe we are actually running out of the black stuff.

I am not taking up this argument today, as I want to focus on a shorter-term time horizon.

The Short Story

“Short Oil” theorists have decided high-priced oil spells the death of, well, high-priced oil. They calculate a thriving economy drives up oil prices until the cost of this crucial commodity begins to drive inflation.

Eventually, that inflation collapses the economic boom — and the price of oil.

Quite frankly, I tend to agree with this sort of cyclic argument. But again, I want to focus on the short-term today. Right now, that’s where your best opportunities lie.

And the Real Answer

Short-term (and perhaps long-term too, but again another argument for another day), it is the dollar that is moving oil up down and sideways right now.

Forget all those “there’s more of it or less of it today than yesterday” arguments. Day to day, it’s just the dollar moving oil and nothing more.

Oil and the Dollar
click image to enlarge

Oil is bought sold and priced globally in dollars, and is therefore the actual metric we see on the side of most any oil price chart. Lately, the dollar has been rising on the whole “Greek-Default-Will-Destroy-the-Euro” meme.

However, the recent vote in the Greek parliament to accept the World Bank’s stiff loan terms — Ah, come on, who are we kidding here? These are Germany’s Lutheran austerity demands and we all know it! — means the European Union and its currency the euro will survive another week.

So this week, the dollar is once again falling. And this week, oil is once again rising.

This could change again by next week if the Greek mobs have their way. But that’s the situation on the ground right now.

Big Oil’s Real Test

There is a way to draw a slightly less chaotic forward view for the big oil companies like ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), et al. The trick is to draw up a technical chart for the XLE, S&P’s big ETF that gangs the bunch of them together in a nice bundle.

Big Oils Big TestThe chart at right reveals both Big Oil’s original angle of attack at the beginning of the post crash recovery and the super steep “ladder to the moon” it acquired when Washington deliberately drove the greenback into the gutter.

It also shows Big Oil’s sag, when the dollar began to rise on the whole “Euro-PIIGS” crisis (that’s Portugal, Ireland, Italy and Spain, for those you who were on vacation for the past 18-months or so).

The Next Move

Most importantly, this chart uses cyclic analysis to map out the most probable outcome of the current scenario. It posits that further collapse is possible, but unlikely in the short term.

And once the index passes this support test, this scenario analysis states the ensuing upside breakout will slam into a brick wall at the previous high of XLE $80.80.

If you wish to speculate on this brief upside episode, I suggest you purchase XLE September 75 Calls (XLE1117I75), which is trading as I sit to write for $3.15 with a posted delta of 0.5619 and open interest of some 17,826 contracts.

A move to XLE 80.97 over the next few weeks ought to push this contract as high as $5.98 for gains in excess of 106%.

Good luck and good hunting,

Adam Lass
Editor, Energy and Capital

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