We all know from the sector rotation theory that the energy sector is the last sector to grow in every economic expansion and the energy/staples ratio turns around to decline when economy starts contracting.

So far we can’t say yet that the XLE chart is topping, though it’s possible that it is. What we can say is that the attitude of big oil companies toward oil price changed dramatically. All the last few years any price increase in oil was automatically translated into profits.

Not anymore. When oil is at record $95 and gasoline in US is far from last year maximum the profit margin is squeezed. The reason is that the consumers are not willing to pay more, they reduce the driving instead. Look at the chart:

gas to oil

Don’t you agree that the gasoline/oil ration is in the bear market?

The conclusion is that the big oil corporations are not happy anymore about the high oil prices. And I think that they have enough of financial and political power to start driving those prices down. It can’t be fast, it will take months, but we’ll see much lower oil prices next year.

And once the XLE starts declining the bull market is over