Why Crude Oil’s Dead-Cat Bounce Won’t Last

What a difference a week can make!

As I’ve been warning for some time, and initially near the high of US$52 per barrel, the good days are over for crude oil. The price nosedived into last week.

Of course, just when you thought the proverbial fat lady was really going to sing, it’s like nothing has ever happened. As I predicted last week, crude started to bounce back with a vengeance.

Brent crude, the international benchmark, is trading higher at US$44.98 per barrel. It’s up 61.6% from the low of US$27.83 per barrel on 20 January. West Texas Intermediate (WTI), also known as US crude, is trading higher at US$42.69 per barrel. It’s up 63.9% from the low of US$26.05 per barrel on 2 February.

Traders, again, have shifted their focus away from the global supply glut. They’re looking towards fresh signs that major producers will work together to freeze output.

I’ll get to this nonsense in a tick.

At the moment, there’s a bit of room left in the tank for higher prices. But, the bounce is unlikely to last. So, if you own any oilers, it may be a good idea to start cashing in your gains.

I’ll explain…

Is history repeating?

In last Tuesday’s Money Morning, I wrote a report titled ‘Will Crude Oil Bounce or Get Knocked Out?’ Here’s a snippet:

 ‘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. 

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.’

Well, it didn’t take long for the bounce. Although, I’ll admit that crude didn’t bounce for the reasons that I suggested. Talking about déjà vu, OPEC announced that it will hold an ‘informal’ meeting next month to discuss ways to restore stability and order to the crude market. MarketWatch reported on the story,

Analysts said the oil market found reason to rally after OPEC President Mohammed bin Saleh al-Sada, who is also Qatar’s energy minister, said in a written statement on Monday the cartel will hold an informal meeting in Algeria on September 26-28 on the sidelines of the 15th International Energy Forum.

“OPEC continues to monitor developments closely, and is in constant deliberations with all member states on ways and means to help restore stability and order to the oil market,” he said.

OPEC members, including Venezuela, Ecuador and Kuwait, are now pushing for fresh talks on setting new limits for oil production in a bid to push prices higher by constricting the amount of oil they release to the market.

It’s no surprise that these insolvent nations are calling for higher crude prices. Their economies are built and leveraged on crude. Without higher prices, they risk massive social unrest and default.

I reported that Venezuela ran out of toilet paper last year. It’s really that broke. I warned earlier this year that the country faces total default. Remember, Venezuela already swapped all its gold for cash.

Venezuela probably won’t be able to afford to buy its gold back. Its gold will probably be sold onto the market in the months ahead. That should mark the beginning of the end for the bankrupt country. It’s also likely to spell ‘tough times’ for the gold price.

To make matters worse, Venezuela’s economic collapse hit a fresh low last week. Its people have started to slaughter and eat zoo animals to survive.

With next to no money left, and the people poor and hungry, the county appears to be on the road to revolution. That’s definitely not good news. Although I’d argue a bit of blood in the streets is inevitable when those in power go too far, never listening to the people. It should be their heads, and not ours, on the chopping block.

So, yes, it’s no surprise that Venezuela — and other nations dependent on crude — are talking up the crude price. But, do you remember how this went last time?

Fool me once, shame on you; fool me twice…

Earlier in the year, when crude hit a 13-year low, global Energy Ministers and petroleum chiefs started talking up the oil price. For months, leaders suggested they would cut crude production to January levels. It never happened. Today, nearly every country in the world is producing more crude than January!

It sounds crazy, but it doesn’t really matter. Global leaders did a great job of fooling the market; the crude price rose sharply. While crude pulled back on target, the price remains at a substantial premium to January levels. And OPEC ministers want keep it that way. That’s why they are kick-starting the rumour mill all over again.

Will the market be fooled twice?

Vic Sperandeo, president and chief executive of EAM Partners, has the answer. He told Market Watch, ‘While OPEC’s comments might lead to a bounce in the short term, we’ll need to see stronger economic growth before a more significant rebound occurs.

That looks unlikely in a deflationary world economy. With supply continuing to rise, and demand falling, crude should hit a new low in the months ahead. That is, unless a black swan event happens.

Crude will see a sustained rally, but not yet

Black swan events are typically random and unexpected. However, if you connect the dots, the unexpected can become obvious. In the past, I’ve warned that the world is on the path to war. It’s an ugly outcome, and I’m as unhappy to see it as anyone. But tensions are starting to heat up in the East Chinese Seas. Here’s the latest update, reported by the Financial Times:

China has deployed additional coast guard patrols to a disputed region of the East China Sea in the face of Japanese complaints over a record number of vessels already there, threatening a further escalation in tensions between the two nations.

The renewed jostling over the East China Sea comes after Japanese prime minister Shinzo Abe won the two-thirds majority he needs to revise the country’s pacifist constitution in parliamentary elections last month.

Both China and Japan have seen a hardening of domestic attitudes under the moreassertive national leadership of Mr Abe and Chinese President Xi Jinping. That makes it harder to back down if a minor incident on the high seas escalates into a diplomatic showdown.

Tensions are escalating, and politicians appear to be preparing for war. That is clear. With the world nearing a major sovereign debt crisis, it’s highly likely that governments will start a war to distract the people. Otherwise, they risk revolution and their heads.

If anything happens in the East or South Chinese seas, crude should skyrocket. Legendary investor Jim Rogers says, ‘war isn’t great for much else but commodities’. For this reason, if you want to hedge your portfolio against war, buy resource stocks. If you pick the best stocks, you’ll make the biggest profits.

The question is: do you have the time to pick the best stocks?

That’s why I wrote the free report, ‘Three ‘Bounce-Back Mining Belters’ to Buy NOW’. Implementing my top-down approach, I’ve found three resource stocks that could make you massive profits in the months ahead.

Read your FREE report, here.

Regards,

Jason Stevenson,
Resources Analyst

From the Port Phillip Publishing Library

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