It’s no coincidence that when my momentum reading turned green last week, oil prices started pushing higher. Oil production stocks have helped lead almost every positive momentum turn in the last 18 months… and optimism has returned to portions of the economy.
There’s still a lot of uncertainty in the global markets. JPMorgan Chase CEO Jamie Dimon is warning of a possibility in 7% interest rates. The Commercial Real Estate (CRE) fears will reemerge in the fall. And the government’s spending habits will either lead to another big round of inflation… or severe damage to the short-term budget outlook.
That said… oil is pushing higher.
Oil traders have been short the sector due to concerns about economic weakness and demand expectations. But something happened today that woke up the oil markets a little more than usual.
A warning from the Middle East.
Saudi Arabia Warns the Short Sellers
The short sellers took a hammer to the banking sector in March and April – and turned their attention to energy in the process. Oil prices and oil stocks dropped sharply.
But savvy investors – with a long-term perspective – swooped in and bought names like Occidental (OXY), Devon Energy (DVN), and Permian Resources (PR) at lower levels during the selling.
The concerns about oversupply for many economists is starting to shift toward questions about inventory levels in Q3 and Q4. Even as economic weakness and slower growth emerge, everyone can see a more prepared OPEC for any significant weakness.
OPEC cut production in early April, spurring Goldman Sachs (GS) to suggest that oil would quickly move to $95.00 per barrel.
I took the opposite bet, recognizing that OPEC’s forecast centered more on weakening demand. Oil prices pulled back from the high $70s to the high $60s in just a few weeks.
They appeared to find their bottom when the MicroSectors U.S. Big Oil Index 3X Leveraged ETNs (NRGU) bottomed out on May 16, 2023.
Now, OPEC is back with a warning. Saudi Arabia’s energy minister has said that short sellers need to look out – and that they would face “ouching” should they continue to bet against oil.
This very fact suggests that OPEC might slash production once again during its June meeting. What does this mean moving forward?
Triple Leverage and Leveraged Funds
As I mentioned earlier this month, I like to follow the MicroSectors U.S. Big Oil Index 3X Leveraged ETNs. This is basically the Matrix for the oil markets.
Not an ETF, NRGU aims to provide investors with returns that match triple-leveraged exposure to the underlying performance of the Solactive MicroSectors U.S. Big Oil Index.
The Solactive MicroSectors U.S. Big Oil Index is a tool that measures the total performance of the largest 10 oil and gas companies. Here’s the chart of the NRGU over the last year.
As I noted, we’re watching this chart to determine when it has reached oversold conditions for the Money Flow Index (MFI) and Relative Strength Index (RSI).
That bottom came on May 4, the day that I predicted it. Now, oil is moving higher, and the upside on the NRGU is back to the 200-day moving average of $450.
That would likely correspond to WTI crude at a resistance of $80.
To your wealth,
Garrett Baldwin
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
Market Momentum is Green
Momentum remains positive in this environment. However, today’s selloff did catch my attention due to concerns about the debt ceiling and the S&P 500’s move back up to the 200-day moving average. Over at Tactical Wealth Investor, we’re looking for long-term names in the commodity space that can take advantage of rising prices.
