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"in late September 2004, Hurricane Ivan caused significant disruptions to Gulf of Mexico operations, resulting in a loss of over 29 million barrels of oil through November 9, with a continuing disruption of more than 200,000 bbl/d (down from over 1 million bbl/d on September 14 and around 450,000 bbl/d in October) due to damage at platforms and other oil infrastructure in the Gulf....150 platforms and 10,000 miles of pipelines were in the direct path of Hurricane Ivan... Pipelines in mud slide areas off the mouth of the Mississippi River experienced failures and will take a significant effort to locate and repair..." --- U.S. Department of Energy. Rather than importing more crude oil to make up for the loss, the imports actually declined sharply in September last year (see Chart 1). This September, Hurricane Katrina & Rita caused even more significant disruptions to the Gulf's oil operations. Once again, the crude oil imports declined drastically. It's interesting to see such declines when the demand for oil remains strong, and the oil market remains tight.
The median for the crude oil imports over the past 2 years is approx. 10.2 million barrels per day. That sets right in the 10 to 10.5 million barrels per day range (thick black horizontal lines on Chart 1). Prior to Hurricane Katrina, the imports were trending well above this range (blue arrow). Unless we've fundamentally altered our energy consumption behavior in the past 2 months, these track records indicate undiminished demand. GM's September sales report on the gas-guzzling Hummer SUV is yet another good indicator. According to GM, "H3 is driving record HUMMER sales performance and appealing to new GM customers. About 70 percent of H3 buyers previously were not GM owners. HUMMER’s September deliveries were up 128 percent compared to last year, and H2 sales hit a milestone in September with delivery of the 100,000th vehicle." Since not much has changed fundamentally, some analysts believe the declines in imports and gas price is due to the government's release of the SPR (Strategic Petroleum Reserves). I believe it's due primarily to the logjam at the refining capacity. It also has a lot to do with the damaged pipelines and transportation problems. Without refining, crude oil is useless to consumers. And, without transportation, the finished oil products can't get to the consumers. It doesn't do any good to keep importing crude oil unless the hurricane damages are located and repaired. After the oil operations in the Gulf Coast region returned to normal capacity last year, the crude imports surged right back up. This year, the same should happen. Actually, crude oil imports have already started rising from 9/30/2005 low of 8.12 million barrels to 9.2 million barrels last week (10/14/2005) - three consecutive weeks of increase. The greater extent of damages this time is going to push the imports higher than last year. That may subsequently push the price of crude oil over $70 again come November or December. By all means, the return of crude oil price above $62 would be quite bearish for the stock market. Technically, that would reverse the crude oil's current bearish Head & Shoulders pattern, as per my September 25, 2005 Sunday Chartmentary. However, the price may, but not necessarily, go down to $52-$54 before the reversal takes place. And, as I've also written in that Chartmentary, unless the decline in crude oil imports becomes permanent, the crude oil price breaks down, the equity funds net cash inflow surges upward, and my Market Strength Index moves above Zero, I'd maintain my bearish bias. We know the decline in imports is not permanent, and the price of crude oil hasn't broken down either. So, let's check on the equity funds cash flows data. Although last week domestic funds had finally reported net cash INFLOWS totaling $161 million for the first time since August (Chart 2), the $1.034 billion net cash OUTFLOWS from the domestic funds excluding ETFs (Chart 3) was the largest cash outflows since January 26. And, that's not a positive sign.
Next, let's check on my market strength indicator. This MACD Histogram (Chart 4) is one of my market strength indicators. MACD is, as well known, the difference between the 2 moving averages. In this case, I use 9 & 21-day moving averages with a faster 5-day moving average (black curve) as the trigger line. The important thing here is to follow this fast line. On Chart 4, the first buy signal was given on 8/29/2005 when the histogram turned positive and moved above the trigger line. I've marked this day with blue arrow on the Nasdaq chart below (Chart 5). Except for Sep. 2, the histogram didn't fall below the trigger line - no visible gap between the histogram and the fast line - till 9/13 (red arrow on Chart 5). Sell signal was given on that day. The Histogram then turned negative. No buy signal would ever be given while both the histogram and the trigger line are in the negative territory. The next time they both moved into the positive territory was on Oct. 5. However, the histogram dropped down below the trigger line again on the very next day (gap between them). This was more of a whipsaw than a buy signal. Subsequently, they both moved below zero again. While this MACD Histogram along with my 5 other market strength indexes have all shown upticks on Friday, none of them have moved into the positive territory yet. By the way, even though it's a mild price upday, Friday was actually one of the better market breadth days in about 2 weeks. Still, as long as the market strength continues to stay in the negative territory, no buy signal would be issued. Thus, after the Sell signal on Sep. 13, there has been no new Buy signal.
And so, I've found myself extending my stay in the bear camp for the time being.
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