Will Crude Oil Peak Now or Rally into June?

When the mainstream was far too bearish on crude, I warned it looked bullish in Money Morning on 1 March. I said,

Crude looks ready to break out higher. 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. The rally probably won’t be huge. If it happens, crude should jump to US$40–42 per barrel — a major technical resistance level.

As you’re likely aware, my target has well and truly been hit.

Brent crude, the international benchmark, is trading higher at US$44.88 per barrel. Brent has rocketed 61.6% from the low of US$27.83 per barrel on 20 January.

West Texas Intermediate (WTI), also known as US crude, is also trading higher at US$43.54 per barrel. WTI has surged 67.1% from the low of US$26.05 per barrel on 2 February.

In my view, there’s a bit of room left in the tank for higher prices. For crude to rally higher, it needs to close above those levels — and the March high — next month on a weekly basis. In my view, this will be a challenge.  So, if you own any oilers, I suggest locking in your gains for now.

I’ll explain…

Buy on the rumour, sell on the fact

Traders have shifted their focus away from the global supply glut. They’re looking towards signs of slowing US shale production, and continued hopes that major producers will work together to freeze output.

Since mid-February, there have been a countless number of rumours suggesting it will happen. Unfortunately, this hope has been met with disappointment. Over the weekend, we heard the words ‘no deal’. Saudi Arabia said it won’t cut production unless Iran does the same.

It’s hardly a surprise. I warned you in Money Morning on 15 March,

While Russia and Iran may strike a deal, seeing crude rallying higher, Saudi Arabia’s probably against Iran producing more oil. Aside from their recent disagreements in the Middle East, it’s threatened by Iran’s rising influence in the region. And unless Iran’s allowed to produce four million barrels per day, we probably won’t see a deal reached by April.

So, crude’s bear market rally should end soon. If I’m right, crude — and stocks — could remain choppy and elevated into April’s OPEC meeting. But when the deal shows signs of breaking down, crude may re-test the US$30 per barrel level sometime in May. If this happens, stocks should plunge with crude.

Crude rallied into last weekend’s producers meeting. And, strangely, it rallied following the meeting this week!

Of course, there’s a reason for everything.

Don’t get caught buying at the top

Kuwait called a three day oil strike, cutting production by nearly 50% during the ordeal. Workers feared reduced salaries, benefits and staff layoffs will be part of a planned overhaul of the public oil and gas sector.

Following the strike, there were rumours suggesting the supply cuts were back on the table. These were dismissed by Russia. In fact, Russia seems to be leaning strongly the other way.

Russia’s Energy Minister, Alexander Novak, said it could ‘in theory’ increase oil output, and, ‘was never ready to cut production.’ Talking about this supply story, Reuters elaborates,

 ‘Russia said on Wednesday it was prepared to push oil production to historic highs, just days after a global deal to freeze output levels collapsed and Saudi Arabia threatened to flood markets with more crude.

Energy Minister Alexander Novak said Russia was “in theory” able to raise production to 12 million or even 13 million barrels per day (bpd) from current record levels of close to 11 million bpd.

Meanwhile, Iran, determined to regain market share following the lifting of international sanctions last January, reiterated its intention to reach output of 4 million bpd as soon as possible.

With major producers in the Middle East and Russia seemingly racing to raise production, much will depend on U.S. shale drillers and demand to determine how long the global glut lasts which sees between 1 million and 2 million barrels of crude pumped every day in excess of demand.

“Any hope of market re-balancing from the current surplus in supply (lies) on the predicted decline in U.S. oil production,” French bank BNP Paribas said.

IEA chief Fatih Birol said on Thursday he expected the oil market to come back into balance from oversupply by next year, although he warned that this was provided there were no major economic shocks.

I doubt any of these optimistic forecasts will playout. When it comes to forecasting, investment banking firms have the worst track record. And of course the International Energy Agency (IEA) will be bullish on crude — higher prices are good for business.

By the sounds of it, producers are looking to flood oil markets with more supply. Meanwhile, they’ll try and ‘create’ rumours that production cuts are back on the table. No doubt, they’ll tempt punters to buy into the rumour that the cuts will happen during the June meeting.

Reviewing the previous bounce, we could see crude jump into June. That said, I do have my doubts. Next week I’ll get into the reasons why in more detail.

For now, the warning is clear: lock in your gains. It’s better to be safe than sorry. Remember, you can always buy your oilers back later, if crude closes above the March high next month.

In this environment, I’m being cautious and sitting mostly on the sidelines. I expect the most indebted crude operators to go bankrupt this year. As it stands, there are only three oil stocks in the Resource Speculator portfolio. Readers profited by 242% from an oiler earlier this year. Another oiler is up around 70% on the Resource Speculator buy list. And our last oiler hit crude this week…jumping 35%. But while we’ve managed these gains in a few good stocks, in most cases I wouldn’t recommend the sector.

When the time is right, I’ll recommend buying multiple crude oil stocks this year.

If you want to know more on this story, click here.


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.

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