Category Archives: XOI

Reader Q & A

A reader asks:

“Is this a bull case for oil, uranium, or all of the above?”

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NYSE Oil & Gas Stock Index Downside Targets

This posting will cover the downside targets for the NYSE Oil and Gas Stock Index using Edson Gould’s Speed Resistance Targets.

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NYSE Oil & Gas Stock Index Update #OOTT

Review:

On July 6, 2022, we said the following: Continue reading

Deconstructing Mike Wirth Claims 1/N @derek_brower

On October 12, 2022, Chevron CEO Mike Wirth was featured in a Financial Times article titled “Chevron Chief Blames Western Governments for Energy Crunch.”  In this piece, we attempt to deconstruct the many ways that the claims by Wirth are inaccurate.

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To embark on a discussion of this nature, it is important to understand our take on the topic of oil companies and the government’s role in economic affairs.

In the past, we have bought and sold energy companies as part of our investment portfolios.  Our track record has been a mixed bag of modest successes and failures.  In terms of our macro analysis, we’ve had more luck in analyzing market trends.  One aspect that we’ve been consistent with is a non-narrative approach to the energy sector.  This means that we do not emphasize the glowing prospects or the dire nature of the industry.  Instead, we focus on the price action and the historical precedent and not much else.

As outlined in many twitter postings, we are for as little government involvement as possible.  We believe that price will, as it always has, dictate the needed direction for markets.  However, we’re cognizant of the fact that “government happens” and therefore are accepting of the role that government plays on many economic issues.

Anyone who has stumbled across our twitter feed @NewLowObserver in the last two years will notice that our strongest claims are against government involvement with markets and that solid economic analysis and conclusions begins with data from exceptional precedent.  With this in mind, we will go back in time to help draw upon what we believe is a more accurate view of the government and oil industry’s role in the current environment.

Our Thoughts on the Oil Sector

It has been our contention that if you want to know all about a business or industry, you only need to look at the stock index or the stock price and you can infer enough to make some reasonable assumptions for now and the not too distant future.  In the following examples, we highlight what we’d like to always accomplish when assessing markets. Basically, these are exceptions but they are what we strive for when examining any industry or market.

2012: Chesapeake Energy

We didn’t know much about Chesapeake Energy other than they were in the shale fracking business and the CEO was very popular in the industry.  On April 26, 2012, we wrote a short piece on Chesapeake Energy outlining the prospects.

We opened with the line, “While it appears that Chesapeake Energy  (CHK) has seen all the punishment that could possibly lay ahead, we’re concerned that the previous technical pattern in the period from 1993 to 1999 is about to repeat” and warned that “If CHK falls significantly below the $4.94 level, then the stock has a high likelihood of going all the way $0.67.”

What you should notice is that we did not talk about industry trends, emerging headwinds, possible decline in earnings, proven/probable reserves, life of wells, age of rigs, etc. We only focused on the stock price. Chesapeake filed bankruptcy in 2020.

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2015: NYSE Arca Oil and Gas Stock Index

In September 7, 2015, we reviewed the price structure of the NYSE Arca Oil and Gas Stock Index and concluded “...we hazard to guess what would happen globally to the oil market in order to decline to such a low point.

Again, we didn’t assess the market based on the political climate, global warming regulations, growth/decline of global demand.  Instead, we simply looked at the price and gave our opinion.  In March 2020, the price of oil dropped to negative levels in the near term contracts.

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2020: SPDR S&P Oil & Gas Exploration & Production ETF

Finally, in April 2020, we highlighted the need to consider $XOP after it was clear that that prices in the oil sector had gone too low.

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The point of the historical look at our work is to emphasize that our goal is price and not narrative. We don’t care about the political arguments of either side of the aisle as they don’t rely on evidence that can be substantiated.  This absence of evidence then relies heavily on narrative which, if well crafted, can be effectively used regardless of the reality.

In this vein, we have hammered away at the narrative of those who claim oil is running out and therefore we are obligated to craft policies that don't consider the frictional costs for bridges to nowhere. With this in mind, we hope you’ll indulge us with a rebuttal to the remarks made by Mr. Wirth.

“Western Governments Have Made a Global Oil and Gas Crunch Worse”

“Western governments have made a global oil and gas crunch worse by ‘doubling down’ on climate policies that will make energy markets “more volatile, more unpredictable, more chaotic”, the head of US supermajor Chevron has warned.”

There are several narratives based on the above claims that require full examination in this critical opening paragraph.  Without going too far back in time, we shall demonstrate how the opposite of Mr. Wirth’s claim is the reality.

If we look at the trajectory of oil prices since the 2008 peak, the trend has been down.

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Most notable in the decline of the price of oil is the price of almost every other commodity from 2011 as highlighted in the Invesco DB Commodity Index Tracking Fund.

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If the claim is that oil is the largest component of the commodity index then look at the 2011 peaks experienced by gold, silver, copper, platinum, natural gas, heating oil, corn, soybean oil, cotton #2, orange juice, etc.

If climate policies favoring alternative energy pushed down the use, consumption, or investment in fossil fuels then why is the laundry list of other commodities struggling under the same weight of the 2011 peak?

Let’s invert the question and ask, is it possible that government’s “doubling down” in support of the oil industry caused the price of oil to go negative in 2020? How could this be?

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From 2016 to 2018, Federal land sales for drilling oil and gas increased at an exceptional rate while the overall trend of all commodities was in decline, a mistake that pushed the industry to glut conditions.  Can we not say that government has been very supportive of the oil & gas industry and the consequences of such support has actually been more disastrous than the push for the “renewables.” [Don’t get us started on renewables]

We couldn’t help but notice that Chevron is experiencing a surge in the stock price to new highs after getting through oil prices going negative, presumably due to the government’s eager intervention that helped defy the declining trend of the market from 2011.

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From the price history, the trajectory of Chevron shares seem to be a continuation of a trend that has been in place since the 1974 lows.  It appears that the bonuses that will be given out to Wirth in the coming year will be well earned.   However, we cannot accept the claim that Chevron has suffered at the hands of the government when the market says everything appears on a trend that has been in place since 1974, a period when government policy has strongly favored the oil industry.

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XOI Review $OOTT

This posting will cover the scenario for the NYSE Oil and Gas Stock Index using Dow Theory.

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NYSE Oil & Gas Stock Index Downside Targets

This posting will cover the downside targets for the NYSE Oil and Gas Stock Index using Edson Gould’s Speed Resistance Targets.

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2015 Reprint: Consequences of Falling Oil Prices

It was merely an observation at the time.  However, we find it necessary to reprint a piece from 2015 on the outcome of falling oil prices and our thoughts about it at the time.  Please click on the image or the following link: Consequences of Falling Oil Prices

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Review: Oil and Gas Stock Index

On January 6, 2015, we said the following of the Oil and Gas Stock Index (XOI):

“The conservative downside target of 1,454.79 has been constructed while the mid-point of 1,015.10 is also indicated.  However, we did not include the extreme downside target of 575.41.  We did indicate in red the 812.08 level which was the extent of the decline in the period from the 2008 high to the 2009 low.”

On September 7, 2015, we said the following of the XOI:

“…lurking in the background is the extreme downside target of 575.41.  Since our experience has been that the extreme downside target is commonly achieved, we hazard to guess what would happen globally to the oil market in order to decline to such a low point.”

Unfortunately, we made the following mistake on December 27, 2017 regarding the XOI:

“Assuming that the primary movement is still a bear market, then the expected upside target should have been from 1,210.15 (3/8) to 1,313.37 (½).  With the XOI above the 1,313.37 level, Dow Theory suggests that a bull market is on the way as the balance of losses sustained by the buyers near the previous peak is giving rise to optimism that breakeven on their investment is possible.”

We incorrectly interpreted Dow Theory in the belief that a bull market was on the way.  It could be argued that as the prior peak was not achieved then a bull market wasn’t signaled and therefore the analysis was somehow right.  However, we’d like anyone who uses both Dow Theory and Speed Resistance Lines to know that it is the interpretation that is incorrect and generally not the tools.

XOI Index: 2008 to 2020

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The descending 575.41 level on the XOI Index is the equivalent of 375 (it continues to decline over time).  That will likely be the point when the XOI bounces.  From the 375 level it is uncharted territory.  However, that is the point when values will come into play and investment can be done with relative abandon.  Keep in mind the effort for many countries to phase out oil consuming vehicles.

Oil and Gas Stock Index: March 2018

Below is the updated Oil and Gas Stock Index (XOI) for March 2018 and the performance of the respective fundamental categories.

Oil and Gas Stock Index: December 2017

On January 6, 2015, when the Oil and Gas Stock Index (XOI) was trading at 1,269.40, we said the following:

“…we expect the XOI index could easily fall to 1,015.10 and subsequently to the 812.08.  Those interested in the oil sector should start initiating positions at or below the ascending 1,015.10 level.”

The 812.08 would have represented a decline of –52.95% from the 2014 peak.  Instead of declining to 812.08, the XOI declined to 900.52, a decline of –47.83%. We were off by 5.12% in our projection of the downside.  However, our advice on the initiation of positions below the 1,015.10 has provided considerable investment gains.  Below is our update on the direction of the XOI.

Oil and Gas Stock Index Update

On January 6, 2015, we said the following about the NYSE Oil and Gas Stock Index (XOI):

“The conservative downside target of 1,454.79 has been constructed while the mid-point of 1,015.10 is also indicated.  However, we did not include the extreme downside target of 575.41.  We did indicate in red the 812.08 level which was the extent of the decline in the period from the 2008 high to the 2009 low.

“Suffice to say that we expect the XOI index could easily fall to 1,015.10 and subsequently to the 812.08.  Those interested in the oil sector should start initiating positions at or below the ascending 1,015.10 level. ”

At the time, the NYSE Oil and Gas Stock Index was trading at 1,287.66.  The September 4, 2015, XOI close was 1,085.81, down –15.67%.  At least from the perspective of the last posting, the SRL achieved the expected downside target.

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However, lurking in the background is the extreme downside target of 575.41.  Since our experience has been that the extreme downside target is commonly achieved, we hazard to guess what would happen globally to the oil market in order to decline to such a low point.

For now, we’ll resign ourselves to the idea that the 812.08 is the next downside target.  If that target is achieved we believe that the 575.41 level is highly achievable.  Given our concern for the downside risk, oil sector stocks should be bought in three stages at 958, 812 & 575.

Oil and Gas Stock Index Downside Targets

In the period from 2002 to 2009, the NYSE Oil and Gas Stock Index (XOI) presents us with a possible template for what to expect in the current decline in the same index.  Below is Gould’s Speed Resistance Lines (SRL) for 2002 to 2009 of the XOI Index.

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The above chart shows the conservative downside target of 1,326.48 and the extreme downside target of 543.36.  The mid-point of the downside targets is 934.92.  In the case of the XOI index, it managed to achieved the conservative and mid range for the index.  However, the extreme downside target was not achieved.  The full extent of the decline is indicated in red at the 761.30 level.

Our guess is that the XOI index will accomplish a similar pattern of “performance” on the downside in the current run as was the case in the 2002 to 2009 period.  We’ve charted the progress of the XOI Index in the period from 2008 to the present with Gould’s SRL.

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The conservative downside target of 1,454.79 has been constructed while the mid-point of 1,015.10 is also indicated.  However, we did not include the extreme downside target of 575.41.  We did indicate in red the 812.08 level which was the extent of the decline in the period from the 2008 high to the 2009 low. 

Suffice to say that we expect the XOI index could easily fall to 1,015.10 and subsequently to the 812.08.  Those interested in the oil sector should start initiating positions at or below the ascending 1,015.10 level.  Two funds that trade in line with the XOI index are PowerShares DB Oil ETF (DBO) and Direxion Daily Energy Bull 3x (ERX).  One ETF that trades the opposite of the XOI index is the Direxion Daily Energy Bear 3x (ERY).