In case you missed, the 24% decline in crude oil from its 2016 highs in early June above $50, to this morning’s low at $39.19 came to a screeching halt following today’s supply data:
With the help of the supply – demand data nudge, the commodity seems to trade fairly technically taking its cue and pivoting at nice round numbers, having been rejected at $50, consolidating around $45 and dropping in no time to its 200 day moving average at $40 all in the last month or so. Let’s see if the next move is back to $45?
The recent sell off in crude got some market participants wondering just how low it could go in bear market territory, but I think it is important to note that many large integrated oil stocks have shown good relative strength to the commodity. For instance the Energy Select etf (XLE), with 40% of the weight made up of Exxon (XOM) Chevron (CVX) and Schlumberger (SLB) was only down about 8% at its recent lows this morning, vs the commodity down 3x that. This has to do with the fact that these stocks sport fat dividend yields (3.45%, 4.25% & 2.53% respectively) and may have hit earnings troughs. The relative strength of the XLE vs crude over the last month after being highly correlated for most of the year is nothing short of impressive:
Today’s reversal in the commodity had some traders closing outright bearish bets or monetized some hedges in the Energy Select etf (XLE). Put volume exploded today in the XLE, at 9x average daily volume, with total options volume 2x average daily. The most active strike was the Sept 63 puts, with nearly 34,000 trading on the day, trading in three blocks of nearly 11,000 for about $1.03. These were marked closing and look to match up with the 34,000 of open interest in the strike heading into the day.
The XLE was rejected in June and July at technical resistance at $70, and found near term support just where its should have near $65:
But on a re-test of $70, if this reversal has legs, another rejection at $70 could mean a retracement back towards the downtrend that had been in place since the 2014 highs, until late March which corresponded with a 50% peak to trough decline. If the XLE were to establish a new range above $70, there is little overhead resistance until $80: