Why Everyone's Wrong About Venezuela

Hey there, it’s Garrett. 

You probably woke up to headlines screaming about Venezuelan oil markets and energy sector explosions. By the time you read this, talking heads will be explaining how geopolitical events "drove" today's oil rally.

I'm going to tell you that's BS.

I spent way too much of my mid-twenties as an oil flow analyst and midstream pipeline person. I understand where energy comes from and how long it takes to get out of the ground. 

So when everyone becomes an expert in Venezuelan crude oil overnight, I have to laugh.

Yes, there's a geopolitical premium being felt in energy today. You're seeing WTI move higher. CNBC will tell you it's because of Venezuela.

The real reason oil moved? 

OPEC got together yesterday. OPEC Plus - the producing nations that actually make decisions - agreed to hold the line on their production. They committed to not raising production capacity in the first quarter.

That's actually bullish. 

If they would've changed it, it would've been bearish. The fact that they commit to not raising production leads to the expectation that short covering can continue in this market.

That's good for upstream E&P. It's good for names like Occidental, Chevron, everything in the XLE. We saw this setup on Friday - the timing with Venezuela is just fortuitous.

I can't begin to describe how difficult it is to pull that crude out of the ground. 

It's a completely different type of crude - very high sulfur. You have to blend it at the location before you can even move it through a pipeline. That's the level of thickness, and that's the intelligence you need.

Everybody knows something about the viscosity of Venezuelan crude oil now. Yeah, write that word down, viscosity.

Some of these wells can fall into disrepair in three weeks. You have to completely re-drill everything if you haven't touched a well in six months. 

The terrain is more difficult than what goes on in the tar sands in Alberta.

This is going to take years. We might be two administrations away from the point where Venezuela produces meaningful barrels per day.

Chevron is up this morning for a specific reason. When Hugo Chavez nationalized the industry back in 2007, EOG left, COP left, Exxon left. They all sued, got billions of dollars. Venezuela never paid them.

Chevron stayed and got paid in oil.

Chevron knows the engineers, the terrain, the energy space. The expectation is they get first crack. But it's going to cost tens of billions of dollars and take years to implement.

Chevron produces about 200,000 to 250,000 barrels of crude a day down in Venezuela - about 25% of total output. But this place isn't politically stable and won't be for some time.

When everybody gets excited and this hits the headlines in Barron's, hedge funds sell right into that pressure. You don't think they didn't want to buy for a dollar and sell for two?

That's the whole point of a market.

The price movement has already happened - it happened Friday and in pre-market today. Don't be shocked if Barron's is writing about the winners and losers of this on Saturday and the winners lose and the losers win.

Watch names like Valero - they can get momentum, but the moment they move into overbought on RSI and MFI, that's where profit taking will be. That's where there's an opportunity to go to the short side.

Focus on ERX and OILU. When they get overbought - and we're setting up for that, probably in the first 45 minutes of trading or later this week - the XLE becomes shortable.

You don't need to be a master trader. If you can master what RSI and MFI tell you, you're ahead of 85% of retail traders. RSI measures price momentum. When it hits 70, it's overbought. At 30 or below, it's oversold.

MFI incorporates volume. A price rally without volume is thin and susceptible to sharp pullbacks.

Energy was coming out of oversold in late December. This Venezuela story is just convenient timing for people who were already positioned.

The purpose of a market is to sell. When you see spikes like this morning and wonder why they're pulling back in the first couple hours, it's because people are taking profits.

Focus on the technicals. Be contrarian. The real oil story happened yesterday in an OPEC meeting. Everything else is just noise with a convenient political backdrop.

I’ll have a lot more to say about this later in the TheoTrade Chatroom. 

Stay Positive,

Garrett Baldwin

P.S. Options flow is wild today - heavy call buying in XLU, CVX, HAL. One name's getting unusual activity that caught my attention. Brandon's covering it tonight at 7 ET if you want the breakdown