The potential result of November 30th’s OPEC meeting is dominating oil trading and oil stocks for the next week, so while we continue to digest our Thanksgiving turkey and wait for that outcome, there are three important macro ideas I want to bring to you during the slow trading week to come.
First is about the meeting itself. As a trader, the first question that always needs to be asked and answered is: Do I have any edge compared to the rest of the traders out there? Now, an edge can come from anywhere; it can come from superior research – most hedge funds will rely upon their ability to get inside the numbers of public reports to understand the companies better than others. On the floor, being at the nexus of trade and seeing the flows of orders and where they were coming from constituted more than enough of an edge to make a living for more than 25 years. Nowadays, I use the experience and insight gained from decades of understanding the markets and pattern recognition to gain my edge.
In talking about the upcoming meeting, here is a case where you not only don’t have any edge, but are working at a definite disadvantage to many others. On November 30th, the decision will be made whether to extend production cuts and if they are, whether they will extend to March 2018 or beyond. If you are thinking about trading in front of the outcome of the meeting, no matter which way you go you will be at a disadvantage. The decision that will be made there, no matter what it is, will be clear to others inside OPEC well before it is to you. My advice is never try and ‘game’ an outcome where others have the ‘edge’. Position yourself as you would if there were no meeting at all, and take yourself out of playing someone else’s game.
Second, during this slow week is a good time to go over your fundamental energy investing thesis and see if it is still holding up to scrutiny. We have been operating under the idea that the lows in energy prices have been set and we have been positioning ourselves for a two to three-year bull market run. Here’s one of the simplest fundamental ongoing tests of our thesis – the chart for oil:
(Click to enlarge)
We can make a technical case from this chart that oil has been in a broad bullish trend as early as July. Further, since August it has stayed above its 50-day MA and since September above its 200-day MA. Stochastics have remained in positive territory as well since late July, and every minor ‘breakdown’ that indicated a short-term top has turned out to be a buying opportunity. This is a major upwards trending market now – and we should remind ourselves of this every once in a while. Until otherwise broken, this is a very bullish chart that indicates market dips should be bought.
Finally, we have the confirmation of our ‘shale boom is over’ thesis with the recent interview of ‘shale genius’ of EOG fame, Mark Papa.
We have been nearly alone in advising readers that the EIA (and IEA) forecasts for growth in shale for 2018 and beyond are way overdone. We have posited that their forecasts are based upon regressive analysis of growth during 2012-2015, an amazing era of production growth that I believe will never be repeated. Papa agrees, particularly when looking at the Bakken and Eagle Ford shale plays where much of the highest quality tier 1 acreage has already been spent. This argument, from one of the most successful shale players in history, supports again our thesis that only very specific, mostly Permian-based shale players will be in the unique position to take full advantage of this continuing price boom in oil.
The upcoming slow week for oil trading will good time to revisit the fundamental underpinnings of our investing thesis, and all indications remain that we are on the absolute right track.
By Dan Dicker