Who Spat the Dummy over Spilt Crude Oil?

I’m amazed.

The investment banking community is clueless about commodities.

On 18 January, Brent crude hit US$28.94 per barrel — a fresh 12 year low. At the time, Goldman Sachs, Citigroup and Morgan Stanley said watch out for US$20 per barrel. Standard Chartered said US$10 per barrel was possible!

On the other hand, I told you:

If you ask me, these major banks will likely be wrong again.

I’m expecting a 15–20% bounce in the near-term. In this case, crude should retest the US$35–36 per barrel level.

If you want to have a punt on the oilers, there’s a good quick trade on offer.’

Less than a fortnight later, crude rocketed to a high of US$37.55 per barrel. It’s now trading in the low US$30s. And, everyone’s jumping on the ‘bullish’ bandwagon.

Talking about Goldman Sachs’ outlook, CNBC told readers: ‘A key theme for the year will be “real fundamental adjustments that can rebalance markets to create the birth of a new bull market, which we still see happening in late 2016.” The bank expects U.S. crude prices to rebound to $40 per barrel sometime before July.’

I hope Goldman’s right. The hedge funds are listening…

According to Reuters, they’ve ‘raised their bullish bets on U.S. crude oil, amid expectations that oil prices finally may have bottomed, after a global supply glut has sent prices plunging to 12-year lows.

I wouldn’t get too excited. After all, I did suggest locking in your profits at higher prices last week.

Crude’s roller coaster ride is just getting started. If you ask me, we’ll probably see new lows in the weeks ahead.

I’ll explain…

Just because you’re an ‘expert’, doesn’t make you right

Punters say, ‘follow the money’. While this can be true, it’s not always right.

According to CNBC, legendary oiler, T-Boone Pickens said, ‘U.S. crude hit bottom at just above $26 per barrel, and based on history, prices should double within 12 months.

When Pickens speaks, people listen. His net worth stands at roughly US$1.4 billion.

With over a half century in the oil and gas business, Pickens spent most of his career building Mesa Petroleum into a powerhouse. After selling Mesa in 1996, he founded BP Capital Management — an investment firm focusing on the energy industry.

Early last week, Pickens predicted on CNBC’s ‘Squawk Box’ — a morning news and talk show program —that, ‘oil prices will rise to at least $52 per barrel by the end of the year.’ He added, ‘whether its $50 or $70 by the end of 2016 will largely be determined by the global economy.’

Despite his billions, I wouldn’t back Pickens call. Unfortunately, the global economy’s going down the drain.

And Pickens was dead wrong last year. If you didn’t know, the billionaire said crude would hit US$70 per barrel by the end of 2015. Oil closed the year at US$37 per barrel: his prediction was off by 50%.

Nonetheless, his call resonated with the investment banking community. Back in May, most brokers said crude would recover to US$60–70 per barrel by the end of 2015. Citi forecasted Brent to hit US$63 per barrel. I saw a different picture entirely. And I told Resource Speculator readers we’d hit US$34 per barrel.

Winston Churchill famously said, ‘History will be kind to me for I intend to write it.’ Unfortunately, unlike Churchill, the investment community can’t re-write history.

So, let’s look forward. T-Boone Pickens’s certainly is…

Follow the money…

Last Thursday, four days after saying crude would double, Pickens threw in the towel. Bloomberg said,

Pickens has sold all his oil holdings and is waiting for the best moment to get back in. With prices low, mid-size U.S. oil companies such as Pioneer Natural Resources Co., Anadarko Petroleum Corp. and Apache Corp. are acquisition targets for larger firms like Exxon Mobil Corp., he said.

Something doesn’t add up…

Bargains are up for grabs. Yet, the billionaire sold all his holdings?

What about that US$52 per barrel forecast by year’s end?

Bloomberg elaborated on his decision. Pickens said, ‘The low is in. Just don’t get in a rush here. You’re going to have plenty of opportunity. The market is going to be volatile. It’s not going to go straight up, so there will be good entry points.’

Okay, let’s stop and think about this for a second…

Crude’s now trading in the low US$30s. Yet, the recent low was at $27.83 per barrel on 20 January — two days after I told you we’d see a bounce.

So, if crude’s bottomed — like Pickens says — why didn’t he put his money where his mouth is?

Like they say, actions speak louder than words.

If you ask me, there’s no way crude’s bottomed. You’ve got to follow the money…

Remember, the supply and demand story hasn’t changed. It’s still atrocious. So I expect the carnage to persist in the short term. Nonetheless, I’d be surprised if crude trades below US$25 per barrel. So, I’m recommending Resource Speculator readers start buying some of the best oilers  now.

There’s plenty of liquidity and volume in markets. If you want to build a decent position, this is necessary. Now’s time to start accumulating the best oilers. Of course, with the oil environment still weak, don’t buy your full positions yet. Just, dip your toes in the water.

Remember, crude oil won’t stay low forever. Geopolitical tensions are escalating. But, at the moment, this is still a chess match. It will take time before we see a full on confrontation. As such, crude should crash in the months ahead.

When we see a full on confrontation, commodities will boom. That time hasn’t come yet.

If you want to read thorough macro, fundamental and technical analysis on how this will impact resource stocks each week, you can find out more here.

Regards,

Jason Stevenson,

Resources Analyst

Join Money Morning on Google+


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


Money Morning Australia