Is Crude Oil Walking Into a Bull Market?

The Bloomberg Commodity Index (BCOM), which tracks 22 futures contracts on seven different commodities, hasn’t posted a calendar-year gain since 2010!

The commodities index posted a 17% gain that year. And, ever since, it’s been a downhill battle.

Take last year, for example. The resources benchmark lost almost 25% of its value!

But following last year’s battering, resources are making a comeback. The commodity index is up about 8.6%.

That result is a breath of fresh air. But is the rally the real deal?

I doubt it. Although, it’s difficult to know for sure.

But a broad commodities index doesn’t always reveal the true picture of an individual commodity.

For that reason, let’s focus on one particular commodity — crude oil. During August, crude oil made up 17.2% of the BCOM index. With that kind of exposure, it’s worth talking about.

I’ll explain…

Should we believe them?

Crude is one of the most heavily traded markets in the world. And you wouldn’t want to be short this year. Crude has spent most of the year rocketing higher.

Brent crude, the international benchmark, has surged to US$50 per barrel. It remains 79.66% higher than the low of US$27.83 per barrel on 20 January. Brent prices surged about 8.56% last week.

West Texas Intermediate (WTI), also known as US crude, is trading at US$48.02 per barrel. It’s up 84.34% from the low of US$26.05 per barrel on 2 February. Last week alone, the US oil price rallied 7.79%.

Last week’s jump was impressive — and certainly surprising…

Energy Voice reported on 30 September:

OPEC member countries have met in Algiers this week and in a surprise move agreed to a production cut.

The Organization of Petroleum Exporting Countries agreed to cut production to a range of 32.5million to 33million barrels a day — a drop of about 700,000 barrels — which would mean a first reduction in eight years.

The move is said to have been influenced by Saudi Arabia’s challenging finances.

It now has the highest budget deficit among the world’s 20 biggest economies.

The impact of the move has been described as “vast” but the industry has also been warned to continue its focus on the long-term, rather than short-term.

Iran will be exempt from capping production.

Further details from the meeting will still need to be worked out, and targets for each country are not expected to worked out until another meeting in November.

Crude oil skyrocketed when the shock news hit the wires.

The announcement caught everyone off-guard. The private investors I know who trade commodities were short going into the announcement, and got ‘stopped out’ when crude took off higher.

OPEC fooled everyone!

Or, did they really?

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Only a fool would believe this decision

The production cut — or should I say freeze — is at August levels.

Putting it into perspective, when you consider that OPEC normally pumps out more crude during August, the freeze is a bit of a joke. The Northern Hemisphere summer months (June to August) typically coincide with the highest demand for crude.

Seasonality matters a lot for commodities, particularly crude oil. Take a look at the chart below:

Source: Seeking Alpha
[Click to enlarge]

The red line shows crude’s average price from 1986–2015. The chart shows that crude tends to crash into year’s end. Oil refineries scale down production into the Northern Hemisphere winter. They spend most of the summer preparing for the winter months when it’s freezing cold. That’s why demand — and the crude oil price — surges during the summer.

The trend is your friend

Thanks to the supply freeze, global investment bank Goldman Sachs believes that crude should be US$10 per barrel higher. If that happens, you could say that crude is in a bull market.

I wouldn’t get too excited…

We can see that OPEC is freezing crude supply at peak levels. That’s a big risk for the crude oil price in the months ahead. When crude demand starts falling during the seasonally lower demand months, OPEC will be producing its oil at near record levels.

When you factor in the US shale game, the demand and supply story gets worse.

Despite the current uptrend, it doesn’t look great for crude oil in the months ahead. When crude plummets, the best crude stocks are likely to trade at bargain prices. That’s the time to buy.


Jason Stevenson,
For Markets and Money

Jason Stevenson

Jason Stevenson

Jason Stevenson shares his extensive knowledge of Australia’s mining sector as Markets and Money's dedicated resource analyst. Whether it’s iron ore, gold, copper or lithium, you can rely on Jason to give you in-depth analysis of the biggest and most important sector of our economy. Jason provides in-depth research to Resource Speculator, Australia’s premier resource investment advisory.

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