Oil and Gas Update
Since the last column, oil has surged higher on the Iranian/British crisis, and fallen to its' current price of $61.77 this evening. This is a great example of how news will trump Technical Analysis every time. When I wrote the last column I had an entry of $64.84 with a target up to $67.03, with overhead resistance at the time being $64.27. Well, when Iran gave England a little shove oil surged on March 27 to a high of $68.09, from an open of $62.83, a move to the upside of $5.26. If you had long oil contracts at the time you did quite well that day but you had to be quick. On March 29 oil opened at $64.03, hit a high of $66.50, and closed at $66.03. Subsequently we have see closing prices of $64.64, $64.38, $64.28, $61.51, and a current price of $61.77.
In short what this means is oil is held hostage to the geo-political risks that come with importing oil from that part of the world. There was no real threat to oil supplies but the perceived threat (read: a great opportunity to throw some volatility into the price and make some serious money) was enough to send oil traders off and running. What the market giveth the market taketh back and those who bought the high contract's at $68.09 (someone did) now see $6.32 shaven off their purchase at the high end.
The end result of this I think, although we have been through similar situations before, is the west has to realize we need a supply of oil which is not going to have a $20.00 per barrel threat cost built into it. Unfortunately, the threat premium is part and parcel of what makes the current boom in the Canadian oil sands so lucrative. Without the perceived threat to supply, many smaller companies would see their investments threatened by the lower cost of oil. So the threat in the mid-east is a boon to the oil sands, keeping the cost of oil high enough to make it a viable investment. In other words, the terrorist threat is great for business. Without it, the oil sands development might be a few years behind the current climate.
On the other hand Natural Gas is still experiencing its ups and downs. The drop off in prices put a hold on many drilling projects, so much so that many drilling companies like Precision are fully expecting lowered earnings expectations as drilling activity falls. However, this is good for the price of NG as demand will slowly eat into inventories without additional shipments contributing to the past historical storage highs. While this may not be good news immediately for drilling and drilling supply companies, it will be good news for NG investors.
What you will find interesting from the below chart is this. My last column provided the long entry for NG at $7.73 with a move up to $8.03. On March 30 we closed right at $7.73, after experiencing a number of down days. We would have needed to see another green day to validate the move higher if the volume and price had converged together and we did not. Subsequent closing prices were $7.67, $7.42, $7.51, $7.60, $7.54, and the current $7.53. The projected price we set for a long entry, which is also overhead resistance, was bang on the money to the penny! The chart below will better illustrate this.
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July 13th, 2020
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