How You Should Trade the Crude Oil Bounce

Have you heard of Art Berman?

If you haven’t, don’t worry. You’re not alone.

Berman is a 37 year old oil veteran. His experience ranges across petroleum exploration and production.

Berman is a leading expert in the energy sector. He has published more than 100 articles on geology, technology, and the petroleum industry over the past five years.

Why am I telling you this?

I’ll explain…

It’s always supply and demand

Berman veteran just spoke to Macro Voices, a podcast with hedge fund manager, Erik Townsend. Berman said on the program,

‘[Crude] inventories have increased by about six and a half million barrels over the past six weeks, which should have been a total de-stocking. This is a very surprising development. It shows how totally artificial this latest price rally has been. [The rally] has been driven by hope.

Well, I don’t disagree with that comment. During the Northern hemisphere summer, which has come and gone, crude oil inventories tend to plummet. This summer, however, the crude drawn down was nonexistent!

That’s a disturbing sign of what lies ahead…

The story’s key is that supply far outweighs demand.

On the demand side, the world economy is at peak leverage. Borrowing more debt is not creating real economic growth.

When economies were booming, their economic engines were hungry for crude. Today, most of the major economies are declining. Higher taxes and ever-so-burdensome regulation have destroyed the world economy.

Businesses are cutting jobs and wages across the board, which directly hits the economy. With fewer dollars in their pocket, and more in the government’s, consumers are demanding fewer discretionary goods. This is a proverbial punch to the global economy, and spells ‘lower demand’ for crude oil.

On the supply side, a lot more crude keeps being brought to market. Bloomberg reported on 1 September,

‘OPEC’s crude production rose to a record in August as increased output from Gulf members made up for persisting losses in Nigeria and Libya, according to a Bloomberg survey.

‘Supplies from the Organization of Petroleum Exporting Countries climbed by 120,000 barrels a day to average 33.69 million a day in August amid increases by Iran, Iraq and Kuwait, the survey of analysts, oil companies and ship-tracking data showed.

‘U.S. average daily crude exports rose to 474,000 barrels a day in July compared with 383,000 barrels a day in June, according to Bloomberg calculations of U.S. Census Bureau data released.’

The supply story is horrendous. That’s why, despite the recent rally, crude keeps trying to push lower.

Source: Bloomberg
Click to enlarge

Looking at the story, it appears that the final low might not be locked in. And that makes global leaders nervous. For this reason, they are doing everything possible to keep the crude price artificially elevated.

History repeats

Earlier in the year, when crude hit a 13-year low, global Energy Ministers and petroleum chiefs started talking up the oil price.

Leaders suggested they would keep crude production at January levels. It never happened. Today, nearly every country in the world is producing more crude!

It sounds crazy, but it doesn’t really matter. Global leaders did a great job of fooling the market; the crude price rose sharply. And OPEC ministers want to keep it that way. For this reason, they re-started the rumour mill.

Bloomberg reported yesterday,

Saudi Arabia and Russia agreed to work together to ensure oil market stability even as leaders from the world’s two biggest crude producers stopped short of offering detailed proposals.

Oil-market stability is impossible without Saudi-Russian cooperation, the kingdom’s influential Deputy Crown Prince Mohammed bin Salman said after meeting on Sunday with President Vladimir Putin in Hangzhou, China. Prince Mohammed made his comments three days after Putin said he’d like OPEC and Russia to agree to freeze crude supply to steady the market.

‘“Our countries are the two biggest oil producers, that’s why there can’t be a stable policy in the sphere of oil without the participation of Russia and Saudi Arabia,” said Prince Mohammed, a son of the Saudi king. Putin said it is important for the two countries to “maintain a permanent dialogue.”

Conveniently, if you haven’t noticed, this ‘oil stability’ talk only happens when crude approaches the US$40 per barrel level. Take a look at the WTI chart below, which summaries the story.

Source: Trading View; Resource Speculator
Click to enlarge

The chart shows how much garbage politicians speak.

Despite what we think, the market believes every word they say…

Perhaps market algorithms that buy and sell based on news headlines are to blame.

Who knows?

One thing seems certain: politicians are determined to keep the crude price above US$40 per barrel.

Don’t bet the mortgage

Russian President Vladimir Putin is working hard. He told Bloomberg over the weekend,

From the viewpoint of economic sense and logic, then it would be correct to find some sort of compromise. I am confident that everyone understands that. We believe that this is the right decision for world energy.’

Putin isn’t alone in this view. ‘Other producers are coming to the view that freezing production is right’, Saudi Arabia’s Foreign Minister Adel Al-Jubeir told Bloomberg.

As it stands, don’t be surprised if crude surges into the OPEC meeting on 26 September.

If so, that could mean good news for certain oil stocks, but only in the short term. There are still plenty of risks for oil. If the price continues to rise, don’t be surprised if OPEC and Russia start trying to talk the price down again.

The oil market really as at the mercy of political manipulation, and there’s no telling when that will end.


Jason Stevenson,
Resources Analyst

From the Port Phillip Publishing Library

Special Report: Central banks are losing control. Their efforts to prop up asset markets are failing. We’re now entering the endgame. What will the endgame look like? What are the short and long term investment implications? And how can you navigate this period of hyper central banking intervention…and emerge from the other side with a healthy portfolio? Vern Gowdie is one of the few minds in Australia with clear answers to these questions…[more]

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