Ride crude bear by shorting RBOB

November 15, 2014 12:14 PM

Energies – The Elephant in the Room

The biggest stories this week again came from the energy sector. On the week crude oil was down another 4%, briefly breaching the $75 level, and natural gas was down more than 8%. Over the past six months crude oil is down over 25% and the trend remains bearish for now. There are a number of factors driving these developments including slowing demand worldwide and a supply glut as the world gets used to significant increases in U.S. energy production. OPEC and other producers continue to produce at high levels in order to protect their market share and domestic policies. The supply side is the bigger driver and will continue to play a key role at least until OPEC meets in late November to discuss production levels.

Some argue that low crude prices are a sign of deflation and therefore a sign of economic weakness. This school of thought took a hit today on Nov. 14 with the release of U.S. Retail Sales came in better than expected and Wal-Mart earnings showing an increase in same store sales. The headline Retail Sales number was a touch better than expected but more importantly the less autos & gas measure was also better, suggesting that the money being saved at the pump is being spent in other areas. The average gasoline price at the pump according to Gasbuddy.com broke through the $3.00 level this past week and today was at $2.91, a level not seen since late 2010. To put this in perspective, during the peak of the summer driving season price at the pump was pushing $3.70. Not talked about much are the future consumer savings from other petroleum products such as plastics and fertilizers. Perhaps the real silver lining is that low income earners will benefit from these changes directly as it affects their discretionary spending potential. The longer energy prices stay low or move lower the bigger the positive economic impact, so the question now is how long will all of this last?

While lower crude oil prices may be good for economic growth, it has painful side effects too. A lot of the new drilling methods such as fracking and deep-water drilling have much higher breakeven prices compared with traditional technologies. Rest assured, there will come a point where drilling will see forced cutbacks; with this in mind know, also that markets can remain irrational longer than most investors can remain solvent.

Late in Friday’s session Congress voted and passed the Keystone Pipeline Bill; it now goes to the Senate and they are expected to deal with it on Tuesday Nov. 18. The wild card is what the President will do when it lands on his desk.

Looking at the charts, CLZ14(NYMEX:CLZ4) on Thursday broke through and managed to close below the psychologically important $75.00 level, even though it climbed back above it on Friday. The mid- to long-term trends remain bearish with an objective of $67.15, the retracement low from May 2010. Adding to the bearish theme is the fact that Brent F15 also closed below the key psychologically important level of $80.00.

Depending on your own market sentiment, there are plenty of ways to trade these markets individually using WTI Crude or Brent Crude futures or against each other using spreads. I like looking at RBOB Gasoline(NYMEX:RB.C), a refined product of crude oil. There restrictions on exporting crude, dating back to the 1973 oil embargo (and under review) do not apply to refined products like RBOB. The medium- to long-term trends in RBOB Z14 are both bearish with the 2010 low of 1.8241 as an objective (see chart below). 

There are plenty of ways to express energy market sentiments; take a look at RBOB Gasoline if you don’t already follow the market.


Outlooks and opinions included are those of the author and not necessarily RCM

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