A Major Opportunity Looms with Crude Oil

Here’s the latest from CNBC:

‘Oil prices are almost a quarter below their recent peaks in early October, weighed down by surging supply, especially from the United States.

‘U.S. crude oil production has soared by almost 25 percent this year, to a record 11.7 million barrels per day (bpd).

‘This comes amid widespread market expectations of an economic slowdown, which saw Asian stock markets tumble on Tuesday, adding to sharp losses on Wall Street during the previous day.

‘As a result, financial traders have become wary of oil markets, seeing further price downside risks from the soaring U.S. shale production as well as the deteriorating economic outlook.’

The news has been terrible for crude oil for almost two months.

US shale production keeps hitting new highs. That’s because more wells have been drilled thanks to higher oil prices.

Traders are worried about an oversupply that could push crude prices sharply lower. That happened in 2014, mind you. Fund managers don’t want to be caught off guard, which is why they have sold around 553 million barrels of crude over the past seven weeks.

That might not mean much to you…

But it’s a big deal…

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The crude oil bears are in town

Long positions haven’t dropped this much since 2013! (A long position bets that prices will go higher. Net long means that traders are buying more crude; net short means that traders are selling more crude).

On that note, portfolio managers are holding a net long position of just 547 million barrels. That means they are slightly bullish. But the position is less than half the recent peak of 1.1 billion at the end of September. The current number is also down from a record 1.484 billion barrels in January.

Put simply, mutual funds have sold a lot of crude oil this year.

That doesn’t bode well for oil prices.

The Organization of the Petroleum Exporting Countries (OPEC) is worried. As a result, Saudi Arabia said it would cut production last week. But the news was squashed quickly. US President Donald Trump urged Saudi Arabia to keep oil prices lower. Saudi Arabia seemed to backtrack on its plan. That’s possibly in response to the killing of journalist Jamal Khashoggi last month.

(You scratch my back and I scratch yours).

Still, I wouldn’t rule out another round of cuts from OPEC this year. It’s pushing for a supply cut of 1 million to 1.4 million barrels per day, as CNBC noted:

‘”We expect OPEC to agree to a supply cut at its next official meeting on 6 December,” French bank BNP Paribas said.

‘The bank therefore said it expected Brent to recover to $80 per barrel before the end of the year.

‘”In 2019, we expect WTI to average $69 per barrel and Brent $76 per barrel,” BNP said.’

I agree with BNP Paribas.

Crude prices seem oversold and could rise sharply higher into next year. Remember, despite the negative supply talk, crude oil is really a demand story. The International Energy Agency forecasted in September that world oil consumption should hit 100 million barrels per day (bpd) later this year.

That should push crude prices higher.

Indeed, fundamentally speaking, nothing has changed with our overall bullish view. In that case, I suspect we should see a short-covering rally for crude soon. But you probably wouldn’t know it looking at the charts though. 

The big opportunity

Here’s the latest monthly chart for Brent crude oil ― the international oil price:


Graph of Crude Oil pricing

Source: tradingview.com

[Click to open in a new window]

I haven’t changed the chart for a few weeks now ― it paints the overall picture for crude. To make things simple, focus on the three coloured channels ― pink, red and blue. Brent oil surged towards the upper resistance of the pink channel early last month. It looked like pulling back to the bottom of the pink channel, prior to crude skyrocketing to fresh highs.

It didn’t happen.

Instead, crude ended up testing the bottom of the red channel. But it couldn’t penetrate it on a monthly closing basis. That was a positive sign. But, unfortunately, it wasn’t meant to be for the black gold.

Crude cracked the red channel this month. It looks like resting the low US$60 per barrel range into year’s end ― the lower blue trend line.

But who knows.

Crude is unlikely to fall forever.

I believe it’s overdue for a decent bounce.

Remember, crude has nose-dived by more than 20% from its October high. Looking at the story, only a monthly closing below US$70 barrel would suggest a major change in trend. That said, technically speaking, US$60 per barrel is the line in the sand. A year-end closing below that price should signal weaker crude prices into 2020.

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The bottom line: Crude looks weak today; however, despite the vicious correction, it remains in a technical uptrend. That’s a positive. In that case, with sentiment at extreme negatives, I believe we could see a bounce soon. If my view is correct, buying the best crude oil stocks might not be a bad idea.

Regards,

Jason Stevenson,
Resources Analyst, Markets & Money


Jason Stevenson is Markets & Money’s resource analyst. He shares over a decade’s worth of investing and trading experience across resource stocks and commodity futures and options. He originally studied accounting and finance at Curtin University, where he was awarded a first-class honours degree. His professional background stems across high-net-worth, top tier accounting (corporate finance, tax and auditing), and sell-side equities research. Before joining the team at Markets and Money, Jason worked at boutique firms which advised fund managers and high-net-worth clients on where to invest. Whether it’s gold, crude oil, copper or an obscure metal like vanadium, you can rely on an in-depth analysis in Markets and Money. Jason also brings you extensive macro, political and geopolitical analysis from around the world. He leaves no stone unturned when it comes to telling the truth. Jason is also the lead analyst of Gold Stock Trader, a premium service for investors serious about precious metal stocks. Websites and financial e-letters Jason writes for:


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