John,
The W scenario for the drillers that I talked about more than a month ago was based on a continuing oil glut that capped oil above $15. However, falling dayrate in the offshore was not widespread yet (at least I wasn't aware of at that point). Today we have attacks from two fronts, actually three:
1. Continuing oil glut with no end in sight.
2. Falling dayrate in offshore market while land drillers got worse.
3. Traders no longer believing in positive speculation. Their attitude has changed to show-me-the-money, meaning I'll believe oil glut is over when you can show me the number.
To be sure, we are almost at similar low point as the January low for all practical purposes, which means the second bottom has been reached according to the original W scenario. I am more pessimistic now however primarily due to factor #2 and #3. The effect of #2 is a true change in fundamentals and the daily downward revision is the confirmation of that. I hate to use the DD analogy but that may be true as well for the drillers. The effect of #3 is a prolonged suppression that makes an immediate snapback like what we saw in March-April unlikely. Rather, we would have technical bounces and the trend will look more like Nov - Jan until the traders can convince themselves that a good bet is near.
If oil stabilizes above $15 again then that would help. If OPEC announces doubling of their intended cut then that would help. If major oils like Exxon, Shell, Chevron, etc come out and announce they will not cut exploration spending despite cheap oil then that would help.
If the market continues to head down from here then it won't help. If OPEC sticks to their limited cuts then it won't help. If there are announced cuts in exploration spending then that won't help,... on and on.
Net, I think OSX is heading lower than the Jan low and the recovery to the upper right side of the W will likely be longer than the first U - meaning at least 5 more months of basing to do.
As an investor I would stay as far away from this very high risk situation as possible. The best case is small profits from playing the bounces if one trades well. The fair case is dead money for a long time. The worst case is losing one's shirt and pants. There are better risk/reward opportunities elsewhere for the rest of 1998. Good luck.
ps: TA is totally useless as a guidance to the price movement of the drillers at this point. If you rely on TA to improve your odd of investment success, that advantage is totally lost. |
