Will Crude Oil Bounce or Get Knocked Out?

It’s a bloodbath…

Just as I’ve been warning you for some time, and initially near the high of US$52 per barrel, the good days are over for crude. It’s started to nosedive.

Brent crude, the international benchmark, has pulled back to US$42.21 per barrel. It remains 51.6% higher than the low of US$27.83 per barrel on 20 January. Brent prices ended July with a monthly loss of 12.7%. It’s down almost 18% since peaking above US$50 in early June.

West Texas Intermediate (WTI), also known as US crude, is trading down at US$40.09 per barrel. It’s up 53.8% from the low of US$26.05 per barrel on 2 February. The US oil price dropped 14% last month — its worst monthly performance since last July.

With crude trading lower, is it time for a big dump, or another short term pump?

I’ll explain…

 

Investment bank forecasts — the good and the bad

It’s clear that the sentiment has changed, and it happened quickly. When I warned you that crude would break out higher at around US$33 per barrel on 1 March, the majority of investment banks said it would crash to US$20 per barrel. A fortnight ago, when crude oil was trading higher — when I warned again that it would crash — CNBC reported:

Bank of America Merrill Lynch’s energy research team maintained its outlook for 2017 oil demand, saying it will grow by 1.2 million barrels per day to bring supply into a deficit. Brent will hit $55 a barrel by end-2016, it forecast.

To be fair, Bank of America Merrill Lynch wasn’t alone with its bullish forecast. With crude starting to trend lower, it probably won’t be long until more investment banks downgrade their crude oil forecast. As I’ve explained at length, the supply and demand dynamics are shocking.

Goldman Sachs, on the other hand, seems to understand what’s going on. Its forecast has been more consistent of late. This is what Goldman said during the week of 6 June — the week of the high, and when I initially warned you to sell your crude stocks. Bloomberg reported:

‘A decline in production driven by unexpected supply disruptions, as well as sustained demand, have resulted in a “sudden halt” to the output surplus, Goldman analysts Damien Courvalin and Jeffrey Currie wrote in a report. Other banks such as Morgan Stanley, Barclays Plc and Bank of America Corp. also noted that supply losses are leading markets to rebalance.

‘“The physical rebalancing of the oil market has finally started,” Goldman said. The bank raised its U.S. crude price forecast for the second half of 2016 to $50 a barrel from $45 estimated in March. It cut its forecast for the first quarter of 2017 to $45 from $55, but sees oil at $60 by the end of that year. The bank expects global demand to grow by 1.4 million barrels a day in 2016, versus 1.2 million predicted previously.’

While Goldman’s forecast is on the safe side of the fence, the crude oil price has crashed to the bottom end of its 2016 target. Regardless, hats off to the investment bank for sticking with its forecast…at least for now. According to CNBC on 28 July,

Crude oil prices will remain in the $45-$50-a-barrel range till mid-2017, with little to change the global supply and demand situation, Goldman Sachs said in a note Thursday.

The investment bank’s analysts ran through the many scenarios that would keep the oil market in stasis.

“The improvement in oil fundamentals remains fragile and continues to feature large offsetting forces: wildfires have helped offset surprisingly strong Iran production, slowing demand growth in India and China in 2H16 will help offset production issues in Nigeria and Venezuela and finally product builds have offset crude draws,” they said.

Look, I can’t argue with the Goldman’s forecast. The demand story remains anaemic in a deflationary-driven world economy, and the supply outlook doesn’t look great.

The trend is your friend, until it changes

High gasoline inventories at New York, Europe and Singapore have raised concerns. According to investing.com yesterday,

Oilfield services provider Baker Hughes said late Friday that the number of rigs drilling for oil in the U.S. last week increased by three to 374, the fifth straight weekly rise and the eighth increase in nine weeks.

According to the U.S. Energy Information Administration, gasoline inventories increased by 452,000 barrels last week. Despite being in the midst of the peak summer-driving season in the U.S., gasoline stocks are well above the upper limit of the average range, according to the EIA.

The report also showed that total crude oil inventories rose by a surprising 1.7 million barrels to 521.1 million barrels, which the EIA considered to be “historically high levels for this time of year”.

According to market experts, elevated stocks of fuel products amid slowing global demand growth is expected to keep prices under pressure in the near-term.’

Whatever way you want to look at it, crude stinks!

Resource Speculator readers who followed my buy and sell signals on the oilers have made a lot of money. But, unless a stock has near-term exploration upside that can offer potential short term share price rewards, I’m not recommending any crude stocks to my readers. I believe there will be plenty of bargains in the months ahead — especially if crude crashes to a new low, as I expect.

Of course, crude could easily bounce higher in the ultra-short term. Remember, no market moves straight up or down. Financial markets have a habit of surprising, and playing with your mind. That’s why it’s important to appreciate the trend, despite your fundamental analysis. Take a look at the weekly Brent crude oil chart below:


Source: Resource Speculator; Tradingview.com
Click to enlarge

Brent peaked on the major green resistance at roughly US$52 per barrel, which lines up with the blue resistance dating back to mid-2015 breakthrough range. The pink trend line, which acted as major support and dates back to the 2015 low, has broken down. Crucially, crude has now cracked the black support level.

On all measures, the crude oil trend has turned down, and that screams sell. However, it’s never that simple. While crude could hit a new in the months ahead, we could see a bounce first.

Keep in mind, crude tends to rally during August to September on a seasonal basis. The northern hemisphere summer, often results in a rise in gasoline demand. If gasoline drawdowns start to rise, and the rig count starts to fall, crude could rally to about US$47.60 per barrel this month — that’s the green resistance on the chart above.

Of course, a rally isn’t guaranteed. After all, the trend is your friend…

As it stands, the chart doesn’t look good for crude. After posting a five-month rally, crude peaked in June. It then nosedived, closing below support last month. Thanks to higher taxes and excessive global regulation, crude demand could easily remain depressed into September. If the Baker Hughes rig count and inventories keep rising, oil could return to the US$37 per barrel range before bouncing higher.

I recommend being cautious for now. Regardless of what happens next, crude should hit a fresh low in the months ahead.

In the meantime, while the future remains uncertain, I suggest checking out three stocks that you can find in my free report, ‘Three ‘Bounce-Back Mining Belters’ to Buy NOW’.  In my view, there are no better three stocks to own this year.

To get your FREE report today, click here.

Regards,

Jason Stevenson,
Resources Analyst, Money Morning


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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