History may show us when to buy oil

January 21, 201514 Comments

oil long

 

My apologies for not posting a blog earlier this week. I am on a “working vacation”—meaning that I am enjoying some “sun and fun” bike training in Florida, but trying to get a little work in here and there between bike rides. I am back next week for the usual routine.

Oil is likely presenting a screaming buy opportunity shortly. I’m sure that many readers are of the same opinion – the only question is timing the buy point. Today I will look at the historical chart of crude—going back to the crash in the mid-80’s and the crash in the late 90’s – as well as the recent 2008 crash.

 

In December 1985, Saudi Arabia declared its intention to regain market share – oil prices began to decline, sinking to as low as $10.42 a barrel in March 1986 from a November 1985 peak of $31.72. Sound familiar?

Oil producers by the dozen folded tent, and a complex process of bottoming occurred as oil formed a double bottom through 1987.

 

The years 1998-99 saw another near-$10 / barrel test of oil prices during the “Asian Contagion”. Oil was finding support at the prior decade’s low point. I was a stockbroker with Merrill Lynch at the time, and I recall the default by Russia on its bonds, and the near collapse of its economy (again, sound like a familiar setup?). Oil had reached a peak in 1990 of nearly $40, before consolidating in the low-20’s for nearly a decade. As a younger broker, I recall wondering if I should buy oil in the $12 during the 1998-99 collapse. I didn’t, but I did learn an interesting lesson by observing the bottoming process. Although the chart below is only a line chart, you will note that the bottom took a good 2 years to complete its process through a series of volatile moves. Like the drop in late 1980’s, this was a complex bottom.

 

The drop in oil prices from their peak of $140 to around $40/barrel looks fairly v-shaped on this longer termed chart. Take a look at the shorter termed chart below for a better view of the volatility surrounding oils turnaround in 2009. The bottoming process took the entire winter of 2008-9, well into the spring of 2009. I don’t care what formation you wish to call that period of basing (head and shoulders bottom, perhaps?)- but I do care to note that it was complex and volatile. And that it took place over many months – just as the last two oil collapse bottoms did. I am happy to say that I learned my lessons from missing the 1999 drop – I bought oil during the spring of 2009 in the mid-high $40’s.

oil short

My thoughts regarding the timing of an oil trade: If prices of this commodity act as they did in prior collapses, we may test the 2008 lows (a few dollars away yet) before beginning a complex bottom. I do feel that we are very close to the lows (weeks away?). Perhaps we have already seen the current selloff’s low, but history suggests we may be in for one last run lower. Either way– Such a bottoming process will likely take place over many months. I will possibly nibble at buying through the basing process, but the safest way to buy oil and the oil producers will be to await a neckline break after a consolidation. That occurrence, which is where I will do the majority of my buying,  may be several months away from this juncture.

14 Comments

  • Keith,
    Good lesson on oil price history as we tend to have shorter & shorter memory.
    If one want to start nibbling away, do you recommend commodity over the producers?
    Do you have preferred EFTs in US & Canadian dollars to play this?

    Reply
    • Sukdev–see my comments under Andy and Kevin–and thanks for the positive feedback.

      Reply
  • Keith,
    A great article once again. So you are looking at about spring time before oil actually stabilizes. If and when it does would it be best to buy certain producers or just a ETF. I know you like the ETF’s so what could be a good one to look at.

    All the best
    Kevin

    Reply
    • Thanks Kevin–I answered your question under Andy’s question — my thoughts are still in the “wait and see the base happen”–but its good to be prepared. See the comments for Andy.

      Reply
  • ” I will possibly nibble at buying ”

    — But what looks best on the menu? Individual equities, ETF-plays on the commodity, etc… ? My worry is munching the wrong meal & getting a bad case of ‘natural gas’ (pun intended…)

    Reply
    • Andy–a good question, and another reader asked the same thing. It may be the case that equities will lag the commodity, but so far they have roughly moved in tandem. I’ll be looking at both–Horizons has an oil-commodity (non-leveraged) ETF, and iShares has a broad equity ETF (XEG)–plus there are some individual stocks we are looking at. At this point, I am waiting for the base to complete–so I don’t need to be too specific yet. I’ll blog on ideas closer to the time.

      Reply
  • Hello Keith,
    I enjoy your blog very much, and your appearances on BNN.

    My question is not directly related to your oil blog, but I was wondering if you use point and figure charting in your technical analysis? And if not, why? I don’t think I have heard any of the technical people on BNN refer to it.

    I appreciate your reply; thank you!

    Reply
    • I don’t use P&F–but I do appreciate its methodology. I “grew up” in TA after initially being taught by Ralph Acompora. He is a classic chartist, so I stayed with his style (if you read my book Sideways, I talk about the phases of the market–that is pure Ralph-talk!). So its something I haven’t relied on, but that’s not to say its not a great tool. P&F is a pure trend following technique. The biggest challenge is getting the box size and reversal criteria right. But it really does eliminate so much noise–to allow you see the forest through the trees, so to speak!

      Reply
  • Keith:
    Off topic for this blog but getting back to international ETF’s and specifically the BMO variety. Lately there has not been a market maker in the ZID and a couple others from BMO. Any idea what the issue is? I am unable to buy ZID in any significant quantity and it has a huge bid-ask spread. By the same token you would have difficulty selling it today as well. I have been asking BMO with no luck. Thanks.

    Reply
    • We do big volume with BMO and haven’t had issues in the past. I am going to forward your comment to my contact there–and will post what I find out.

      Reply
      • Terry–here is my BMO contacts answer to your enquiry–copied from an email he sent me:

        Thanks Keith for letting us know about this post. BMO ETFs values the input of investors and the chance to clarify. Liquidity is a key consideration for us and we want investors to have a positive experience when trading our ETFs. With ETFs, it is important to understand that the posted volume on a ETF is a not a good indication of the true liquidity of an ETF. If the underlying is liquid, so will the ETF be liquid. This is due to ability to exchange the underlying for an ETF and the ETF for the underlying. Professionals (called market makers) do this every day in ETFs to create markets where needed.

        With ZID the average trading volume is 28,000 shares or about half an million dollars a day. This is only a small portion of the true liquidity of this ETF. For example, we recently had an investor place a trade in this ETF for 1.7 million shares or $27 million dollars all in one trade. So there is good liquidity in ZID.

        Here is two quick tips for retail investors with respect to ETFs
        1) Often for retail investors they are only looking at the volume of the ETF as it is reported on the TMX. ETFs do trade on the other exchanges in Canada, depending on the tool, this other data may not be shown.
        2) As for the bid offer spread discussion, it is important to know that spreads can widen when markets trade after hours. So for this ETF, there are some securities that trade in London that can impact the spreads after 11 am.

        Reply
  • Hello Keith,

    I recently pruchased Sideways and Smart Bounce, based on your interesting appearances on BNN. Thanks for the Education….Robert!

    Reply
    • Thanks Robert–I wrote the books for “ordinary” investors–not for sophisticated money pro’s–I focused on cutting the fat and getting down to the skills that a real investor will need to get the job done. I’m particularly proud of Sideways–I think it got right to the most important elements – teaching what you need to know to be decently proficient at technical trading.
      Let me know how you find them when you are done (better still–post a comment to Amazon or Indigo!)

      Reply
  • Keith:
    Hope you enjoyed the sun. I really appreciate your interest in this issue and the response that you received from BMO as my questions to BMO were not answered satisfactorily. The information received about ZID is appreciated but leaves questions unanswered. ZWU is an ETF that I have followed since near its inception. Take a look to last Thursday, Jan. 22 when on multiple instances the price spiked 2.5%, 1.85%, 1.5%, 2.0% to fill modest even tiny purchase orders. After the first example I began watching this trade and the units were not available for sale causing the price spikes quoted. Something has changed with the trade of selected BMO ETF’s and unless or until I receive a plausible explanation, my confidence in BMO products is diminished.

    Reply

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