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Crumbling Crude

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We saw a significant shift in the energy sector today. The move came on the heels of a coup in Venezuela. President Hugo Chavez was ousted by the country's military.

When Chavez took office, he linked the country's energy policy with OPEC, and strongly adhered to quotas. With his removal, energy traders are betting that Venezuela -- OPEC's third largest producer -- will revert more of an expansion policy, which would be conducive to the U.S. economy. Obviously it's early in the making, but preliminary market response seems to reveal a shift in the global energy market.

At least the Oil Service Sector (OSX.X) reflects as much. The OSX.X had out performed the broader market since December. But that trend changed this morning with the first relative strength sell signal in four months.

OSX.X versus The Market

In absolute price action, the OSX.X broke down below its two month consolidation between the 96 and 104 levels. It is now pointing to its bullish support line at 92. That line hasn't been tested since February.

OSX.X Breakdown

The relative strength in the OSX.X in the last four months stemmed from two factors: An economic recovery and tensions in the Middle East. An increase in economic activity will result in increased demand for energy. And tensions in the Middle East have the potential to disrupt supply. The resulting imbalance led to a sharp rise in crude this year, with the black stuff recently peaking above the $28 per barrel mark.

But the developments in Venezuela could potentially ease supply constraints, especially if the country adopts a more capitalism friendly policy. That would be a bullish development for the U.S. economy, including businesses and consumers. Indeed, basic material and transport shares were under pressure in recent weeks as the cost of energy increased. Moreover, pump prices have put a pinch on consumers.

The market's reaction today is a welcome development for the economic recovery. The price of oil is trading near the $24 per barrel mark, lower by about 4 percent today!

Eric Utley
Option Investor

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