Three New Signs of Trouble for Oil
Three new signs of trouble for oil… Just days away from a broad market sell signal… The best trading opportunities since 2008?… P.J. O'Rourke: Why the government wastes so much money…
The recent rally in crude oil has been incredible...
Since bottoming in mid-February near $26 per barrel, oil prices have soared more than 50%... one of the sharpest rallies in the history of the energy markets. But below the surface, there are growing reasons for concern...
First, as Porter noted in Friday's Digest, oil supply here in the U.S. remains at record highs. Remember, it was the massive glut in oil supply – as a result of the boom in U.S. shale oil production – that triggered the crash in prices to begin with.
So long as this record supply remains, a sustainable recovery in oil prices is unlikely. And we're unlikely to see supply fall until we see a significant decline in production. As regular Digest readers know, that hasn't happened yet.
Despite the plunge in U.S. "rig count" – the number of oil rigs actively drilling for oil – production has been more resilient than most folks expected.
Ongoing improvements in technology have allowed existing rigs to produce more and more oil at lower costs, helping to offset the declines in the number of active rigs.
According to the U.S. Energy Information Administration (EIA), U.S. producers are still pumping more than 9 million barrels of oil per day, as of the latest data. This compares with a little more than 9.6 million barrels of oil per day at the peak last June. Over the same time period, the U.S. rig count has fallen from 868 to just 480.
So despite a nearly 50% drop in active oil rigs, U.S. production has fallen less than 6% from its all-time highs. And there's no reason to believe this trend will end anytime soon.
In the meantime, we're beginning to see signs that the plunge in rig count could be ending...
Last Friday, right around the time oil prices were hitting a new 2016 high, oil-services firm Baker Hughes (BHI) released its latest rig-count report.
After 12 straight weeks of declines, the report showed the number of active U.S. oil rigs actually moved higher last week. The increase was small – rig count rose by just one – but it could be the first sign that U.S. shale producers are returning to the market.
According to news service Reuters, several shale companies have been quietly activating drilled but uncompleted wells (known as "DUCs"). These are wells that have been drilled but still require relatively more expensive hydraulic fracturing ("fracking") to bring them online.
It appears the combination of continued technological improvements and the 50%-plus rally in oil prices has made it economical to produce oil once again. But that isn't all... Reuters notes that the recent rally above $40 has allowed several companies to "hedge" large amounts of their production at prices above $50 for the next year or two.
In short, the long-awaited plunge in U.S. production could now be delayed even longer, if it happens at all... which means one of the biggest "reasons" to expect higher prices could be delayed along with it.
Meanwhile, last week's U.S. Commodity Futures Trading Commission "Commitment of Traders" report showed short positions held by speculators – who are often referred to as the "dumb money," because they tend to get bullish at market tops and bearish at market bottoms – plunged 20%. This is the lowest level since last June, when oil prices last peaked above $60 per barrel.
Finally, the big rally has brought the price of oil back up to its 200-day moving average ("DMA").
Many traders consider the 200-DMA an important longer-term indicator separating bull markets from bear markets. Clearly, the market agrees. As you can see in the chart below, this line has been stiff "resistance" since oil prices started falling in late 2014...

In other words, this rally has all the hallmarks of a classic bear market rally.
The dumb money is turning bullish on oil again... just as prices run into serious resistance, and the numbers suggest that oil production could be set to increase again once again.
Oil bulls be warned.
Like Porter, JPMorgan's Global Head of Derivative and Quantitative Strategies Marko Kolanovic – one of Wall Street's most respected forecasters – believes the rally in stocks is also an example of classic bear market action.
In an interview with financial-news network CNBC late last week, Kolanovic said the rally since mid-February has been driven mostly by "short covering," where investors race to unwind bearish bets they made while stocks were falling.
Our colleague and Stansberry Short Report editor Jeff Clark agrees. As he told his subscribers on Friday...
Institutional money managers who were leaning bearish one month ago have been forced to buy, or else risk underperforming their benchmarks.
Folks who got overly aggressive on the short side and held on to those positions thinking the market would bail them out rushed to cover their trades.
The average Joe on the street who listens to the talking heads in the financial media finally threw in the towel and bought into the stock market...
Despite last week's big rally, Jeff warned readers of some significant "caution signs." As he explained...
The Volatility Index ("VIX") call options for April are much more expensive than the VIX put options. This tells us that option-market-makers are pricing in a sharply higher VIX over the next month. And a higher VIX usually correlates to a lower stock market.
The Bullish Percent Index for the S&P 500 (BPSPX) is back up to the level at which it topped out last November. The McClellan Oscillator for the New York Stock Exchange is back into "extreme overbought" territory. The Summation Indexes for both the NYSE and the Nasdaq are starting to roll over from extreme overbought levels. The last time this happened was May 2015 – just as the stock market peaked.
I could go on. But you get my point... There is a lot of risk in this market.
Jeff believes we're likely just days away from a broad stock market sell signal. And if so, his Stansberry Short Report subscribers will be ready...
As Porter explained in this year's "Report Card," Jeff has been "red hot" recently, earning his Stansberry Short Report service an "A+" since the stock market peaked last summer.
That doesn't surprise us...
Jeff is veteran trader with a remarkable track record in all markets. But bear-market trading is where Jeff really shines. In fact, 2008 – when even most professional investors lost money – was the best year of Jeff's entire career. His subscribers had the opportunity to double their money nine different times that year.
Incredibly, Jeff says a similar opportunity is setting up today. He believes 2016 could join 2008 as one of the best years in his 30-year career.
In short, if you've ever considered joining Jeff's Stansberry Short Report service, there simply hasn't been a better time in years. You can learn more about a subscription – and even hear Jeff explain his trading strategies live on camera – right here.
New 52-week highs (as of 3/18/16): Kaminak Gold (KAM.V), Newmont Mining (NEM), PNC Financial Services – Series P (PNC-PP), Sysco (SYY), and Wells Fargo – Series W (WFC-PW).
Quiet day in the mailbag. Are you a Stansberry Short Report subscriber? Has Jeff helped you make money in today's volatile market? Let us know at feedback@stansberryresearch.com.
Regards,
Justin Brill
Baltimore, Maryland
March 21, 2016
P.S. There are now just SEVEN days left to try Porter's brand-new, $299 OneBlade luxury razor for FREE. Click here to get yours.

Editor's note: While we're waiting for the 2016 presidential nominations to sort themselves out (or blow up in our faces)... contributing editor P.J. O'Rourke is turning his attention back to recounting some of the lessons he learned from 46 years of reporting on politics.
To read his earlier series of lessons, click here, here, and here.

Why Government Spends So Much Money... On All the Wrong Things
By P.J. O'Rourke
There's a simple reason why government is expensive. Thirty-six years ago, in his 10-part PBS television series "Free to Choose," Nobel Prize-winning economist Milton Friedman used a plain chalkboard-box diagram to show how money can only be spent in one of four ways...

Logically, there are two kinds of money. And logic proves you only have four methods for spending that money.
| I. | Spend "your money" on "you." |
| II. | Spend "your money" on "other people." |
| III. | Spend "other people's money" on "you." |
| IV. | Spend "other people's money" on "other people." |
Let's take cars as an example of something to spend money on and me as an example of someone doing the spending.
I. In 1990, I bought a Porsche 911 that I still have. I got a great deal. I purchased it almost new from a dentist who scared himself with the Porsche and decided to get a Lexus coupe instead.
When you spend your money on yourself you get – as nearly as you can – what you want. And you bargain as hard as you can for it.
II. When you spend your money on other people, you still bargain hard. But you're not as concerned about getting exactly what's wanted... although I'm sure my wife loves the Geo Tracker I got for her and the kids.
III. If I'm spending other people's money on myself, then I'm on the fence between an Aston Martin Volante that goes for $300,000 and a Maserati GranTurismo convertible, a steal at $145,000.
IV. If I'm spending other people's money on other people, I'm not involved at all. It's not my dime, and nothing's in it for me. So it might as well be billions for this little number.
And No. IV is the way government does ALL its spending. It's how the Cash for Clunkers Program burns through $3 billion buying up everyone's broken-down Corollas.
Government lacks any incentive to limit spending. It also lacks any ability to make intelligent decisions about how that spending is done.
This has to do with the brain of a politician. "What brain?" you ask. Alas, it's worse than a joke. Taken one by one, politicians are of dull-normal intelligence. But when you put politicians together in government you get... committees. In Congress, they even come right out and call the committees "committees."
We've all been on committees. We know what happens to intelligence and common sense when a person becomes a committee member – "Committee Brain."
You live in a neighborhood with a playground. The kids in the neighborhood would like to play tetherball, but the playground has no tetherball pole. A committee is formed to raise funds for tetherball – the Committee to Raise Funds for Tetherball (CRFT).
CRFT is started by a group of pleasant, enthusiastic, public-spirited neighbors. The minute any of these neighbors becomes a member of CRFT, he or she will begin to express his or her pleasant, enthusiastic public spirit by turning into one of the following types:
The Stickler, who insists, "We have to draw up a charter and form a nonprofit corporation with a chairman, president, vice president, secretary, treasurer, development officer, and human resources executive. And the tetherball pole has to be exactly four meters high in accordance with North American Amateur Tetherball Association rules."
The Dog in the Manger, who says, "We need to get permission from the County Zoning Board, the City Council, the Parks Department, and adjacent landowners who may complain about tetherball noise. That part of the playground is too damp for tetherball. It might be federally protected wetlands. We can't do any fundraising without advertising. We can't advertise without raising funds. The kids would rather have a tennis court."
The Person Who Is Stupid Even by Committee-Brain Standards asks, "So the rope has, like, a ball on it?"
The Worrier frets about "Padded pole, break-away tether, a light-weight foam ball, and a ban on playing after dark or when visibility is poor – and also when the sun is shining, to avoid UV skin cancer damage. The kids should wear helmets and kneepads and safety belts..."
The Person With Ideas babbles, "Let's set up a challenge grant to erect a second tetherball pole in the inner city. Midnight Tetherball could be an alternative to crime for deprived youth. We can also promote tetherball as a way to combat child obesity, which would make us eligible for funding from the Gates Foundation. We'll have a tetherball league – no, three – Adults, Juniors, and 'Tether Tots.' This could be a great Title IX thing. If our daughters are varsity-level tetherball players, they'll get into Yale."
The Person With Ideas, None of Which Have Anything to Do With Tetherball carps, "Is the tether biodegradable? Is the pole made from recycled materials? Many playground balls are manufactured in Third World countries using exploitative child labor. Let's be sure to utilize organic fertilizer and indigenous plant species when seeding the tetherball play area."
The Bossy Person, who says the same thing as everyone else on the committee, but louder.
The Person Who Won't Shut Up, who says the same thing as everyone else on the committee, but more often.
The Person Who Won't Show Up... unless his or her vote is crucial, in which case he or she shows up and votes the wrong way. Or...
You, who actually does all the work and calls 40 people to ask them each to donate $20... half of whom do. And you raise the $400 needed only to find out you need $400,000 because the U.S. House of Representatives' Economic and Educational Opportunities Committee's Select Committee on Opportunities in Physical Education's Subcommittee on Americans with Disabilities Act Compliance requires all tetherballs to be wheelchair-accessible, no matter how high the tetherballs fly in the air.
Given the complete dominance of politics by Committee Brain, the wonder is that anything gets done, and the horror is that it does.
What government ends up spending money on is just what you'd expect from a committee.
"A camel is a horse designed by a committee" is a saying that couldn't be more wrong. A camel is a seeing-eye dog designed by a committee and available free with government grants to people who can see perfectly well but who can't walk.
Regards,
P.J. O'Rourke
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