Talk about crazy times.
West Texas Intermediate (WTI) crude, also known as Texas light sweet, crashed to 13-year lows on Thursday. On Friday, it surged back 12.3% with record volume. Although it still couldn’t close the week higher.
Brent crude oil, which the Aussie oilers quote, has been relatively boring. Although it jumped from US$27.83 to US$36.77 per barrel last month, it’s starting to consolidate sideways. It traded mostly around the lower US$30 range last week.
Crude’s trying to tell us something. It appears ready for a massive breakout, or a crash to new lows.
But there’s more to this story than meets the eye. Saudi Arabia and Turkey are trying to start a Third World War. And if that happens, it could kick off the crude bull market.
Buy on the rumour, sell on the news
To start, it’s important keep an open mind. Yes, oil prices are depressed. But it won’t stay that way forever.
No sane person wants to see a war But, we’re facing a major war in the Middle East, whether we like it or not. When it breaks out, crude should rocket higher. I’ll provide more details below.
But first, let’s not get too distracted with the big picture story. It’s important to maintain a level head. In the short run, crude’s not looking good.
Crude producers are desperate for higher price. In fact, some leaders are doing whatever it takes to save the oil price. This includes floating rumour after rumour. As CNBC reported,
‘Last week, UAE’s energy minister said OPEC was willing to cooperate on an output cut, as reported by the Wall Street Journal, and added that cheap oil was forcing supply reductions that would help re-balance the market. In recent weeks, several reports have speculated a possible supply cut from OPEC members, particularly Saudi Arabia, even as U.S. inventories continued to build up.’
As I pointed out in Monday’s Money Morning (here), this is hopeful thinking.
Remember, Saudi Arabia’s 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 mainly means the US shale operators. Let’s not forget, the US is now the world’s largest oil producer. It has contributed significantly to the global oversupply problem.
More importantly, Iran has a major influence on OPEC decisions. It remains key to any deal…
But, at the moment, most OPEC members are producing at maximum capacity — except for Iran.
Reviewing the story, Iran’s actions are speaking louder than words. On Sunday, the country unloaded its first European oil cargo since sanctions were lifted. According to Bloomberg, Iran plans to ramp up its production by 500,000 barrels per day shortly. The number should increase to one million barrels per day by year’s end.
Iran’s not thinking about cutting production.
At the moment, the country’s producing roughly 2.8 million barrels per day. In comparison, Saudi Arabia’s producing over 10 million barrels per day. Iran’s extra production should quadruple revenue by year’s end. You can see this on the chart below.
|Source: BloombergClick to enlarge|
Iran would be foolish to forego this extra coin. To be honest, anyone would.
On the topic of cutting production, Dennis Gartman, publisher of The Gartman Letter, told CNBC’s Squawk Box:
‘A meeting to discuss cuts would probably happen and maybe yield a productive outcome, but there was absolutely no chance OPEC members would abide by quotas.
‘If there’s one thing we’ve learned from history, whatever OPEC says about curtailing production never comes to fruition. Everybody cheats.’
I don’t normally agree with Gartman. But you’ve got to give him credit. His comments make complete sense. If Saudi Arabia — or anyone else — cuts production, someone else will produce more and gain the rewards. It’s a dog eat dog world. In this case, expect crude’s oversupplied market to get flooded with Iranian crude. This should see crude make a new low.
But, don’t worry. Crude prices won’t stay low forever.
Awakening the crude bull
It’s not what I want. But the world is heading towards a global armed conflict. And if that doesn’t double the oil price, nothing will.
I updated the story’s development in Friday’s Money Morning. In short, Saudi Arabia and Turkey were planning to invade Syria. More specifically, they planned to enter Aleppo — Syria’s former business hub. It’s the last significant urban centre controlled by the rebels.
As is stands, Russia and Syria are pushing Syrian rebels out of Aleppo. Saudi Arabia and Turkey don’t like this one bit. It’s a major strategic hot spot. Its countryside, on the northern border with Turkey, is their lifeline.
If Russia and Syria recapture Aleppo, they can move towards southern and northwest Syria. It would be a major blow for Washington, Turkey and Saudi Arabia. Remember, they want to build a gas pipeline through Syria. And for this to happen, Syrian President Bashar Hafez al-Assad needs to go.
According to the Washington Post, Russian Prime Minister Dmitri Medvedev said ‘the world had already descended into a new Cold War.’
Unfortunately, this may be an understatement. We’re looking at a new hot war. Over the weekend, Turkey joined the fight over Aleppo. According to Sputnik International, ‘Turkish artillery shelled two towns in the north of Syria’s Aleppo province on Sunday.’ Apparently, Turkey claims ‘that Syrian Kurds have links to the Kurdistan Workers’ Party (PKK), a militant group fighting for Kurdish independence from Turkey.’
This story isn’t looking good. At this rate, it won’t be long until Saudi Arabia starts bombing the city. And imagine what will happen if another Russian is killed?
The tensions aren’t currently strong enough to drive a turnaround in commodity prices. Things have to get a lot worse to drive commodity prices higher. For example, a major oil field being bombed or a declaration of war.
Geopolitical events 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, commodities are due to crash in the months ahead. Commodities — and stocks — will cling to the deteriorating Chinese story in the short term.
When we see a full on confrontation, commodities will boom. That time hasn’t come yet. But if you want to be prepared — if you want to know when the best time to buy commodities comes, and know about the best miners digging them up, check out Resource Speculator. You can find out more here.