Don’t Be Surprised When Crude Oil Hits $40 Per Barrel

In today’s Money Morning…crude rallying on false signals…hype and promises…why US$40 oil prices may not be far off…and more…

Crude oil prices have been volatile.

OPEC has manipulated the market.

Despite their talking up the oil price, oversupply risks have grown.

Crude’s next collapse was imminent for weeks.

I can say that the decline has started. In my view, US$40 per barrel is the next target to watch.

I’ll explain…

Buy on the rumour

OPEC’s manipulation is fascinating to watch…

Brent crude, the international benchmark, has surged to about US$49.50 per barrel. That’s 77.8% higher than the low of US$27.83 per barrel on 20 January.

West Texas Intermediate (WTI) is trading at roughly US$48.50 per barrel. It’s up 86% from the low of US$26.05 per barrel on 2 February.

Before boosting production to record highs in September, OPEC agreed to reduce production to a range of 32.5 million to 33.0 million bpd. The crude price was around US$46 per barrel at the time.

The production ‘freeze’ was akin to a joke.

As I’ve discussed in detail over recent weeks, OPEC normally cuts its supply heading into the northern hemisphere winter months. That’s when demand pulls back on a seasonal basis. Also, the ‘cut’ would still see the organisation produce more crude than last year.

Despite these well-known facts, crude still rallied.

It shouldn’t be a surprise…

Markets move on expectation of results, even if it doesn’t make any logical sense. That’s why you should never ignore a trend — you can lose more than just your wallet.

When a result is announced to the market, confirming or rejecting the original investment thesis, markets typically turn. That’s what we’re seeing now…

Sell on the news

Over the weekend, Bloomberg reported on crude’s latest news:

OPEC’s internal disagreements over how to implement oil-supply cuts agreed to last month prevented a deal to secure the cooperation of other major suppliers.

‘More than 18 hours of talks over two days in Vienna yielded little more than a promise that the world’s largest oil producers would keep on talking. Discussions will continue in late November, just days before the Organization of Petroleum Exporting Countries is supposed to finalize the accord that lifted oil prices to one-year highs.

‘Non-OPEC nations ended talks with the group on Saturday without making any supply commitments, Brazil’s Oil and Gas Secretary Marcio Felix said after the meeting. Brazil won’t restrict its oil production, though it’s willing as early as next year to host future OPEC conferences with the world’s biggest producers, he said in a phone interview.

‘Azerbaijan’s Energy Minister Natiq Aliyev said the outcome of the process hinges on Iran and Iraq, two nations that are more interested in increasing production than reducing it. While Saturday’s meeting was a successful “first step,” oil-producing nations need to continue dialog and “come up with real numbers” before cuts can begin, Kazakhstan’s Deputy Energy Minister Magzum Mirzagaliyev said in an interview after the meeting.’

The latest manipulation scandal has amounted to hype and promise.

To be blunt: OPEC was never going to cut production. It wants to pump out as much oil as possible and at the highest price.

Remember, like many nations, OPEC members overspent during crude’s good times. They’re paying for it during the new era of lower for longer oil prices.

For example, Venezuela — one of the most pro-socialist countries worldwide — is facing a massive revolution due to lower oil prices. I’ve warned for months that it may be the first country to default on its government bonds and socialist promises.

Venezuela isn’t the only country caught between a rock and a hard place. Although if you’re watching this manipulation story closely, the country is always at the forefront of promising a deal. It’s pleading with Russia and the US (non-OPEC nations) to join in ‘cutting’ production. Venezuela is an eternal optimist about getting a deal done — it needs higher oil prices to avoid a revolution.

Unfortunately, this is just another political scam that has pushed up the oil price. With OPEC members announcing that they don’t want to cut or freeze production, the tide is starting to turn for crude oilers.

Unless we see more manipulation, US$40 per barrel probably won’t be too far away.


Jason Stevenson,
Resources Analyst, Money Morning

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Money Morning Australia