Crude Oil Rockets 12% — Buy, Hold or Sell?

What a roller coaster ride of a year…

The US S&P 500 is leading the way. It’s trading at two-year lows, down about 9%. Meanwhile, the Dow Jones is holding up a bit better. It’s down around 1,450 points this year. But, it’s still above last year’s low of 15,370 points.

Meanwhile, the ASX 200 is hovering around 2013 lows. It’s down roughly 10% this year and 20% since March 3, 2015.

With the bad news getting worse, investors finally got something to cheer about on Friday. The Dow Jones bounced 300 points in its final trading hour. So, expect the Aussie market to bounce today.

The talk on the town was crude’s incredible surge. Western Texas Intermediate (WTI) spiked 12.3% to US$29.44 per barrel. It was the biggest one-day percentage surge since February 2009.

After crashing to a 13-year low on Thursday, this could be big news.

Has crude finally bottomed?

Markets love a good rumour

To kick off the discussion, let’s turn to CNBC:

Oil prices rallied more than 12 percent Friday on renewed prospects for an output cut among the world’s oil producers, but analysts and market watchers told CNBC that traders shouldn’t hold out hope.

Crude prices spiked Thursday afternoon after UAE Energy Minister Suhail bin Mohammed al-Mazrouei said consensus was forming within OPEC that it was time to discuss cuts with nonmembers. He also said current low prices had forced some members to cap production.

Michael Cohen, Barclays head of energy commodities research, said he was not moved by the latest news, which follows a string of similar comments from oil ministers and petroleum executives in recent weeks.

“We think it’s a lot of false hope. Basically what’s been happening over the last month is, as the market’s gotten increasingly short, anytime that we see these kinds of headlines, they result in this kind of rapid change in the price,” he told CNBC’s “Squawk on the Street” on Friday.

I don’t often agree with the mainstream. But, I think this time they’re onto something.

There’s nothing new about this OPEC headline. Some OPEC nations are really feeling the pinch from lower crude prices. For example, Venezuela — a major oil producing nation — is on the brink of insolvency. It’s selling its gold reserves to stay alive, and will do anything to boost oil prices. This includes floating rumours. As CNBC reported last week,

The proposal of a production “freeze” at current levels was floated by Venezuelan Oil Minister Eulogio Del Pino during his tour of producing countries this month which included Russia, Iran, Qatar and Saudi Arabia, they said.

“The Venezuelan oil minister wants to organise a meeting before OPEC’s June meeting if there is consensus on either a production cut or at least a production ‘freeze’,” one source familiar with the matter said.

“There is an ongoing discussion to meet soon for a freeze deal. That’s what’s happening now,” the source said, adding that at least Russia and Qatar had given their initial agreement if there were a consensus among other producers.

Unfortunately, a production ‘freeze’ at current oil prices is a fairy tale.

Lies, lies and more lies…

Remember, Saudi Arabia is calling the shots for OPEC — it’s the largest producing member. Saudi won’t be content until some of its competitors are wiped out. This means mainly the US shale operators. Let’s not forget, the US is now the world’s largest oil producer. It’s contributed significantly to the global oversupply problem.

On another note, Iran — a major influence on OPEC decisions — remains key to any deal…

This is a problem…

As I reported in Friday’s Money Morning, Saudi Arabia is preparing to invade Syria. Iran’s strongly against military intervention. In fact, reviewing recent events, Saudi Arabian and Iranian relations are at or near an all-time low.

More importantly, Saudi Arabia produces significantly more crude than Iran. As CNBC reported,

While the idea [of an OPEC production cut] was met with openness by Saudi Arabia, talks are still at an early stage and [it] will not commit unless [Iran] agrees to restrict supplies, the source said.

That appears to be a major stumbling block in the path of any agreement. A source familiar with Iranian thinking, asked whether a production freeze would gain much support in OPEC, replied that it would not.

Iran is reluctant to restrain supply as it wants to recover the market share it lost during sanctions that were imposed in 2012 because of its nuclear programme. The sanctions were lifted in January.

“If the Iranians are willing to stick to, let’s say, the rise of 300,000 bpd they said they have already committed to Europe and if U.S. shale production has slowed, then yes, a production freeze would be a positive sign to the market.”

‘[But] “Everybody is already producing to their maximum capacity now, except for Iran,” the source said.

Indeed, while Saudi is pumping out millions of barrels of crude per day, do you really think Iran, a much smaller producer, will cut production?

This appears to be another OPEC rumour.

If OPEC cuts crude production, non-OPEC operators — like the US shale operators — are set to gain. So, you’d really need a major agreement between OPEC and non-OPEC members.

Good luck with that.

As I’ve been saying for months, the trend is still down. In February 2015, when crude was trading above US$58 per barrel, I warned Resource Speculator reader’s we’d see US$30 per barrel. Unfortunately, we’re still not near the bottom. So, I suggest remaining cautious.

I’ll keep on top of this story. Remember, crude won’t stay low forever.

I hope I’m wrong, but all signs point to a pending major war in the Middle East. When it breaks out, crude should boom. While that time hasn’t come yet, now’s the time to start preparing. If you want to know the best time to buy commodities and the best miners digging them up, check out Resource Speculator.

Regards,

Jason Stevenson,

Resources Analyst


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.

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