Most punters — myself included — have believed for some time that crude is going nowhere.
West Crude Intermediate, also known as US crude, fell to a low of US$26.05 per barrel on 2 February. It’s now trading higher at US$33.75 per barrel.
Brent crude, the international benchmark, fell to a low of US$27.83 per barrel on 20 January. It’s now trading higher at US$35.97 per barrel.
Both crudes have been choppy all year. They’ve mainly traded sideways. But now punters seem more hopeful. Major oil producers are working together to try and cap — not cut — output. You wouldn’t think crude would react so positively to such minor news. After all, production isn’t being decreased. All that’s happening is that the increase in production is slowing or stopping. And as I’ve written in recent Money Morning articles, getting the major oil producers to agree on anything is no easy task.
But WTI and Brent are both trading against their upper resistance technical levels.
You have to wonder, is a breakout to higher levels on the cards?
Traders are gearing up for a major crude rally
When it comes to financial markets, fundamental analysis can fail you. When major moves happen — to the upside or downside — it’s hard to know why at the time. But later, everything becomes clear.
Remember the financial meltdown of 2008/09. At the time, stocks crashed by 50% into February 2009. Many were stunned when stocks started skyrocketing. Punters were worried that the crash wasn’t over. When I was an analyst for high net wealth investors in 2012–13, fund managers were still bearish!
With the benefit of hindsight, it’s clear that money printing pumped stocks like no tomorrow. Punters became addicted to ‘free money’. Many searched for yield in a low interest rate environment.
I make this point for one reason: crude looks ready to break out higher. Yet, the supply and demand story clearly stinks.
Fundamentally, crude oil supply is relentless — storage is at an 86 year high! Meanwhile, the world economy is contracting at a rapid pace. Politicians are to blame. Rather than restructuring the economy, they’re increasing taxes and regulation to benefit the bond holders. With business and consumers spending less, crude demand is crashing.
The hunt for a crude oil bottom continues. But for now, at least, the bulls appear to have some wind at their backs. Oil trader Bob Iaccino, a 22-year year commodity veteran, told CNBC:
‘OPEC essentially doesn’t exist anymore. The U.S. is the marginal producer now, it’s not OPEC. It’s not going to be OPEC that says we’re boosting a hundred million barrels a day or cutting a million — it’s the U.S.’
Despite his pessimism over OPEC’s latest move, Iaccino had some positive remarks. CNBC writes,
‘Still, due to factors related to the seasonality of gasoline production, Iaccino does see crude oil finding a “medium-term bottom,” and rising to $40 per barrel. That is more than $7 above Friday’s settlement price. He doesn’t see it getting much above $40, however.
‘That would still require a significant break of oil’s recent trading range. Save a few high and low ticks, over the last several weeks WTI has appeared to have become comfortably ensconced between $29 on the downside and $36 on the upside.
‘Meanwhile, a look to the options market shows what a long-shot Iaccino’s target is considered to be [low]. The way the April crude oil option with a striking price of $40 is trading, the chance of oil finding itself above $40 when the April futures contract expires in late March is considered to be lower than 10 percent.’
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The trend is your friend
I’ll admit, it’s not guaranteed that crude will rally. But the trend is your friend.
Looking at the daily charts, should Brent close above US$37 and WTI close above US$34 per barrel, it may be game on for crude.
I agree with Bob Iaccino. The rally probably won’t be huge. If it happens, crude should jump to US$40–42 per barrel — a major technical resistance level.
Don’t be fooled by this small move. It could be a blessing in disguise for crude oil stocks. Some of the larger operators may jump by 25–40%, depending on who they are. You’re mid-tier oilers could jump by 50–75% on this move.
Of course, timing will be crucial for buying and selling. According to Nasdaq.com,
‘Venezuela oil Minister Eulogio Del Pino said late Thursday that four oil-producing countries, including Saudi Arabia, Russia and Qatar, will meet in mid-March to discuss efforts to stabilize the market.
If we see a breakout on the daily chart, expect crude — and crude stocks — to rally into mid-March. It may turn into a ‘buy on the rumour and sell on the news’ type trade. But if the meeting produces exceptional news, we may get an extended breakout into April.
While this sounds good, don’t get too excited. At the end of the day, fundamentals will prevail. Remember, the supply and demand story stinks. According to Nasdaq.com,
‘Global crude production is outpacing demand following a boom in U.S. shale oil and after a decision by OPEC last year not to cut production in order to defend market share.
‘Analysts warned that market conditions remained weak due to an ongoing glut. U.S. crude stockpiles increased by 3.5 million barrels last week to an all-time high of 507.6 million barrels, according to the U.S. Energy Information Administration, underlining concerns over a domestic supply glut.’
For a real rally to blossom, significant change is needed on the demand or supply side. If I was a betting man (which I am), I would bet that change is inevitable on the demand side.
Another major war is looming in the Middle East. No sane person wants it, but, the trend is in motion. And every time war has broken out in the Middle East, crude oil has rocketed.
Federica Mogherini, the European Union’s foreign policy chief, warned against the risk of ‘hot war’ between Russia and Turkey in the Middle East last week. According to Wall Street Journal, Mogherini said:
‘We are always referring to Syria as a proxy war among regional actors. This risks to become something bigger than this. I’m not thinking of a cold war. No, we risk a hot war among different actors than the one we always think of. Not necessarily Russia and the United States, but Russia and Turkey, could be. And, as Europeans, we have a clear interest in trying to contain and scale down the tensions.’
Unfortunately, if the US gets more involved, this could easily turn into another World War.
Talking about this story, the tensions aren’t strong enough to drive a turnaround in commodity prices yet. Things have to get a lot worse, to drive crude prices higher. For example, a major oil field being bombed or a declaration of war.
Tensions are escalating. But at the moment politics is dragging this out. So, crude should hit a new low in the months ahead. This should be a major buying opportunity.
In this environment, a number of crude operators may go bankrupt this year. So, be careful when choosing oil stocks. On the other hand, if you pick the best stocks, you’ll make the biggest profits.
When it comes to oil stocks, there’s two live recommendations — possibly the best on the ASX — on the Resource Speculator buy list. Readers just profited by 242% from the last oiler I recommended. When the time is right, I’ll recommend buying that stock back.
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