Direction of Crude Oil? Watch the Trannies…

This is a great piece and chart by Rigzone sent to us by Dougie, one of the smartest energy hedge fund energy traders out there.  You should know by now that canaries are our favorite bird, with the Hang Seng index our ultimate “canary in the coal mine” for global risk appetite.

Rigzone looks at the Dow Jones Transportation Index as a leading indicator for the downside direction of crude.  Makes total sense.  The transportation sector consumes over 70 percent of U.S.  petroleum production and imports (see this chart).   And there is a “tipping point” price which really starts to weigh on the economy and push it over the edge.  Nobody knows or sees that price — or the equilibrium crude price, for that matter —  and it is no better illustrated by the debate currently taking place among OPEC members.

We suggest you link to Rigzone and read the whole piece.  Here are the money quotes,

In past cycles a drop in the transports has signaled the end of a rally for crude. After rallying approximately 25% in 2010, the Dow Jones Transportation Average has entered territory not seen since 2008. Should this Monday’s 52-week high of 5219.8 turn out to be an inflection point for the index, then any meaningful reversal of course could again signal lower prices in crude…

Over the last two cycles, a retreat in transport prices has been followed by a significant decline in spot WTI prices. In July 2006, the transports signaled the end of the rally nearly one month ahead of a correction in crude prices. Subsequent to faltering transports, crude oil prices fell 20%+ over the following three months. A similar occurrence took place during the summer of 2008 with transportation stocks peaking in early June and crude finding its peak in early July. Then WTI crude prices fell 30% over the following three months and proceeded to bottom out 79% below the peak, before the calendar year had even ended…

We suggest keeping a close eye on the transports as the proverbial “canary in the coal mine” in preparation of rotating out of the energy sector ahead of what historically has signaled grief for the industry.