With crude oil surging another 3 percent, while the U.S. dollar and gold struggle, today King World News is featuring a piece that illustrates what it takes to get a true bottom in any commodity, whether it's gold, silver, oil, etc. This piece also discusses the importance of a "cleaning price."
By Jeffrey Saut, Chief Investment Strategist at Raymond James
February 3 (King World News) – "Like the vast majority of my constituents, I continue to be concerned about record profits reported by petroleum companies at a time when consumers are paying record high prices for gasoline." . . . Mike Rogers, a politician from an era gone by
Ever since I entered this business I have heard the old stock market saw, "The best cure for high prices is high prices." The quid pro quo is, "The best cure for low prices is low prices." Obviously this axiom references commodities. Verily, commodities have a "clearing price" and a "cleaning price." A clearing price is when a commodity gets so high it brings about more production of that commodity.
A cleaning price is when the price gets so low production is reduced and/or shuttered. A few weeks ago I wrote about Anaconda Copper, who in the 1970s near the price low for copper, shuttered its last mine. That is the kind of news you tend to see when prices are making a low. Fast forward, recently the media has been trumpeting the fact energy companies have been idling drilling rigs, suspending capital equipment projects, and laying off workers.
The negative nabobs have been spinning such news into an Armageddon scenario for the energy complex and the economy. So I have to ask, "Where were these new-found bears when crude oil was trading above $100 per barrel?!" Indeed, after falling from roughly $108/bbl last June to $55 – $60/bbl in December, the bears came out of the woodwork predicting $20 was where oil prices were going. In fact, the only folks that have had a negative "call" on crude oil for a while have been the energy analysts here at Raymond James. Now, they think prices are bottoming and have a price target of $62 per barrel.
I shared that view with CNBC's keen-sighted Joe Kernen a week ago yesterday on Squawk Box, noting my energy team was looking for a bottom in prices. I also believe it was none other than the iconic Boone Pickens who was predicting a bottom in oil prices between $40 and $45. Moreover, while investors were focused on the short-term negative energy news, smart investors like Richard Kinder bought a $3 billion dollar Bakken oil shale resource named Hiland Partners two weeks ago. The following week Energy Transfer Partners (ETP/$62.71/Market Perform) announced the acquisition of Regency Energy Partners (RGP/$25.81/ Market Perform).
Hereto, this is the kind of M&A activity often associated with "bottoms." So again yesterday I appeared on CNBC stating, "I think oil bottomed last Thursday." The chart set-up was perfect for as stated in yesterday's strategy report, "On last Thursday the March future's crude oil contract made an 'undercut low' (a lower print low than the previous reaction low). Then on Friday that same contract traded higher by over 8%. Ladies and gentlemen, this is how the October 4, 2011 'undercut low' bottom was made by the S&P 500 (we were buyers), and it just may be the way the now 8-month mini-crash in crude prices ends." The message, "buy energy!" The XLE ($77.86) looks about as good as anything (see chart below).
Comment from Andrew Adams, CMT: XLE looks to be set up nicely on the long-term charts. Bouncing off of both its Bollinger Band and horizontal support on the monthly chart. ***ALSO JUST RELEASED: Richard Russell – What To Do When The Financial Hurricane Strikes CLICK HERE.
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