Energy Equities Outlook and Trading Plan for January 6-10
Jan 5, 2020 Trading Blog
What a day to return to Twitter on Friday. I debated not returning after spending a few weeks away from it, and I probably should have stuck with that plan. It was so relaxing being in my own world with my own thoughts. For me, I think Twitter has finally “jumped the shark” as the old saying goes. I’m done with it. The level of bias, virtue signalling and sheer stupidity has become epic. It’s as if everyone is more concerned with agreeing with everyone else and protecting their pride than the are about promoting new and exciting ideas that could be useful. If everyone all says the same thing, then what’s the point?
If anyone is interested, I’m still going to write here on my blog and I’ll post a link when I do, but I won’t be on Twitter. It’s been a great ride and has filled in many hours of boredom, but it’s starting to cause me more harm than good. It has become a psychological distraction for me, as the way I see the world just doesn’t seem to mesh with the masses. Maybe it’s because I’m just way older than a majority of users, I’m just not sure.
Also, I think it is finally time to back away from energy for awhile. I’ve pretty much switched all my trading to IWM and the results have been surprisingly good. As I’ve stated in some of my posting, I’m a big believer in focus and standardization and trading one vehicle at a time is the best way for me to trade.
OUTLOOK FOR OIL PRICES
As for energy itself, the volatility is going to be fairly large for awhile, but the inevitable endgame is new lows. After the actions on Friday, I think Trump has a longer range plan that nobody is seeing yet. The killing of a single Iranian general in itself was NOT significant, it happens all the time and has been happening in every administration. Targets are taken out all the time, however they usually aren’t done publicly with advertisement. The real significance was how it was received and propagated in our media, and how it is being promoted socially on sites like Twitter and Facebook. The snowflakes are losing their minds right now calling for the end of the world. The significant thing to me wasn’t the actual event, but rather the surprising way it was interpreted by the masses. As for the sheer Twitter stupidity I was talking about, I’ve actually seen people defending evil. So many have forgotten September 11, 2001. Watch how fast those same individuals change their tune if an event happens on US soil and they demand to be protected from evil. Can’t have it both ways snowflakes.
My guess is that the events aren’t leading to an invasion or expansion of US involvement, but rather they are leading to an intentional isolation of the US from major sections of the rest of the world, which has likely been the plan all along. I could see Trump taking out numerous dangers around the world and then pulling the US back into its homeland and then raising the figurative walls around us as protection. Destroy the power structure (and the energy structure, refineries) around the most unstable part of the world and let them kill each other while we stand by and watch. That’s what the Democrats want, right? Bring all the troops home they say. Even Iraq is voting on asking US troops to leave. If they ask us to leave their country, you think Trump isn’t going to ask them to leave ours? Trump might be more than happy to grant everyone’s wish, as he’s backed them into a corner. He’s letting others make the call so he doesn’t have to, which is genius. He’s baited them all, and they are falling for it. We’ve been through the immigration bans and border walls before and this is likely just the latest method to achieve those ends.
The really sad part is that an attack here in the US is inevitable, and if it happens it will be used to further our isolation even more. No good crisis should ever be wasted, right? The snowflakes will lose their minds when any terrorist attack happens and the event will have proven Trump correct in his views all along. He’s forcing the Democrats to side with the terrorists, and they are blindly taking the bait as they always do. Talk about firing up the voter base. Any terrorist event on US soil probably wins the election immediately for Trump. After any such event, everything outside the US will then become evil, immigration will halt immediately and the immigrants who are here will be attacked until they decide to flee. It probably won’t be long until those immigration bans show up in the news. Next you will see news of current immigrants being attacked and harassed here in the US. When you see it, that’s part of the endgame.
The problem with this approach is what happens to oil longer term? Who do we sell to? What do we do with all this light oil that our refineries really aren’t equipped to use? Without regulation of oil producers outside the US, what do you think those producers are going to do? They know how to put US Shale out of business, would they turn on the taps and do it? On the other hand, if they decided to target the overall economy what would be the best way? An oil price spike? As I’ve been saying for awhile with regard to inflation, any spike in oil is going to kill this economy a lot quicker than it has in the past. If the outside world uses oil as a weapon, the US is going to feel it in the overall economy. That price spike would likely crush demand, which in turn would crush US producers. Leaving oil prices in the hands of outside forces is a no win situation for the US.
TRADING PLAN AND OUTLOOK FOR US E&P’s
So what to do with the XOP? At this point, the safe play is to do nothing at all. Let the dust settle for a couple of weeks and then re-evaluate. This kind of volatility isn’t suited for 90% of traders and it will just cause you to make mistakes. But, if anyone does decide to ride this wave, here’s my take: I think what we saw on Friday was a bit of an anomaly. I posted before the market opened that the buyers from December would be selling into this demand to take their profits, and that’s exactly what happened. The real question now is how many of those guys are left and what happens once all those profits are taken and that supply is dumped. I don’t think we will get a true picture of where XOP is going until those guys are out of the way, and I don’t know how long that might take. Volume in the first two hours on Monday will be a big signal.
The oil market and XOP sent a clear signal Friday that the geopolitical events were not significant. You can have differing personal opinions, but you have to listen to what the market signal is telling you. Right now, most traders’ personal opinions are deviating from the signal that the market is sending, and that’s a situation where you should probably be out of the market. Maybe the market changes its signal to match personal opinions, I have no clue, but you have to wait for that to actually happen before trading it.
My opinion is that the XOP is hitting the top of a fairly well defined range and has stalled into large supply. Under normal circumstances, I would have been all over that short, but getting short into events like these just ignores every rule of risk control and money management. The XOP has the potential to really pop to the upside if things escalate. Just think of the reaction in XOP if major portions of the ME energy infrastructure and refineries got taken out. But until that happens, you have to keep the powder dry. There will likely be a great short setting up in a couple weeks, but you have to be patient enough to let things play out and let the climax happen first. I have no desire to get caught short in this manic geopolitical environment.
On the other hand, trying to get long this market could leave you hugely exposed in a market that has already run 20+% in the last few weeks. Did those buyers have advanced warning of Friday’s events? There have been reports that the attacks were discussed with other nations, such as Saudi and MBS. You think he wouldn’t front run the market on this information? So the trap you could step into on the long side is buying AFTER a runup created by buyers who had advanced warning. You would be cashing those guys out, and that’s never a position you want to be in.
If this whole situation dies out (as I think it probably will), then you just bought the hype and the panic. You bought the emotional extreme, not good. At this point, I just don’t think we have enough information to make a call either way in this market. While either trade could work, the risk is multiples of what it usually is for the XOP. I just don’t think the reward in either direction is worth the elevated risk.
I’m going to be on the energy sideline this week with 100% of my attention focused on the IWM. If you guys do decide to jump into the mania surrounding oil, be very careful and please use those stops. This thing could make a VERY large move in either direction.
Also, I’ve still got some general trading articles coming, so I’ll post the links on Twitter. I’m always around if anyone has questions or comments. Good luck this week.