Trader’s Narrative

Crude oil prices have dropped more than 70% from their top in the summer. It is almost ancient history to think of a time when people were running around in panic that the end of oil was upon us. Peak oil theorists, or POT heads, were everywhere.

While some disagree that the price of oil was a bubble, the chart certainly looks like one. The aftermath saw oil stepping into an empty elevator shaft, taking the 150 day rate of change to levels which we haven’t seen in a long, long time:

In fact, I think the pendulum has swung a bit to the other side. Just today there was a report from the International Energy Agency that for the first time in 25 years there will be a decrease in global oil demand.

While I get giddy at the thought of OPEC countries, who are often pariah states, being financially humbled, I think oil prices will stop going down for a while here. OPEC has already been caught with their pants down and are scrambling to cut production as fast as possible. But they are caught between a rock and a hard place since the more they cut, the less revenue they will have.

Interestingly enough, for a few months, oil stocks have been doing better than the underlying commodity. Here’s a chart comparing the CBOE Oil Index and the futures price of crude oil:

When the ratio increases, it denotes that equities are outperforming crude oil itself. My call in mid September was, to be kind, horrible. Both oil prices and oil stocks continued to fall. But oil stocks soon after started to go sideways, refusing to fall along with crude. Here’s an interesting video from the WSJ: