Posts Tagged ‘MSCI Index’

After a move from $40 to $50, it looked like oil may have bottomed. We now stand at $38, even after production cuts from OPEC.

Oil extended yesterday’s 8.1 percent decline after OPEC agreed the group’s 11 members with quotas will trim current production by 2.46 million barrels a day to 24.845 million barrels a day. U.S. fuel consumption in November declined 7.4 percent from a year earlier to the lowest for the month since 1998, the American Petroleum Institute said yesterday.

The media describes this as “traders thinking the cuts won’t be enough to eliminate a supply glut.” I don’t necessarily agree with that since it isn’t plausible to say that cutting aggregate output from 87.5 million barrels a day to 81.5 wouldn’t affect the price…there lies the issue. It’s not that the action won’t be enough to boost prices, its that OPEC can’t afford to/doesn’t have the discipline to cut output that drastically since they are having a credit crisis of their own, and oil is the only thing the middle east exports (How else will they finance all of these underground malls?)

Anyway, if you believe oil will sustain these lower price levels for the immediate future, there is no explanation for oil related companies to sustain the rallys they had when oil seemed to have bottomed at $40. The drillers (Schlumberger, Transocean, Haliburton) are still depressed, but the conglomerate companies like Exxon and Chevron are quite high.


“USO” is an ETF which tracks the price of crude, “XOM” is Exxon, and “CVX” is Chevron (a company which does the same thing as Exxon). Notice that during the sell off in October, both of these companies dropped at faster rates than crude oil. We see the divergence since then,  however during the sell off in November, we saw the same behavior as the October sell off – the oil companies falling harder than oil itself. Given this increasingly large gap in the past month, I don’t think it’s unreasonable to conclude that Exxon and Chevron will be hit rather hard during the next sell off in the new year.

Therefore if you think this rally will end in January, consider buying “DUG” a 200% short ETF which targets oil companies like Chevron and Exxon, or “EEV” which shorts the MSCI emerging markets index. Emerging market economies rely heavily on oil prices, however the Obama infrastructure plan ignited a rally amongst the Iron-ore companies (iron-ore is the chief ingredient in making steel), which caused this ETF to go down substantially.

Or if you don’t like financials either, there is “SDS” which is the inverse of the S&P 500. Since the S&P is a weighted-average index, moves in Exxon and Chevron (in addition to financials) typically dictate how the S&P will close (since they have the most weight from their share price multiplied by outstanding shares – or market caps).


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