Why Crude Oil’s Run Simply Won’t Last

Gold, copper, nickel and crude have all had a great year.

It’s easy to think the commodities bull market is back. But let’s not get carried away. The Bloomberg Commodity Index (BCOM) hasn’t posted a calendar-year gain since 2010! The commodities index posted a 17% gain that year.

Take a look at the five-year chart:

Commodities Index five-year chart 3-10-17

Source: Bloomberg
[Click to enlarge]

The resources benchmark lost almost 25% of its value in 2015. That was one of the worst years on record for resources. But it’s easy to forget the tough times. The index — which includes 22 commodity futures contracts — is up about 8.6% since late 2015. Most commodities traded sideways, mind you.

Is the rally the real deal?

I doubt it.

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. Crude oil makes up 15% of the BCOM index. With that kind of exposure, it’s worth talking about.

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. Investing.com reported over the weekend:

Prices have gained more than 20% from their June lows, meeting the definition of a bull market, as data showed strong compliance from major producers with their supply cut agreement and a plethora of energy agencies suggested global demand is increasing.

Crude oil’s definitely had a good run. But, unfortunately, one rally — an impressive one at that — doesn’t make a bull market. My definition of a bull market is a several-year rally, just like we’re seeing with the US stock market. And the commodities bull market from 2000–2007 and 2009–2012.

Crude oil still isn’t in a bull market. This is a two-year rally, just like many other commodities. I believe, unless a war breaks out in the Middle East, we should still see new lows in the months ahead.

Remember, OPEC is freezing crude supply at peak 2015 levels. That’s when crude prices were in freefall. When crude demand soon starts falling during the seasonally-lower demand months, OPEC will still be producing its oil at near record levels.

Seasonality matters for crude oil. Take a look at the chart below:

WTI Crude Oil Seasonality 3-10-17

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.

That happened on target. Crude prices have rallied as a result. And thanks to OPEC rumours regarding sustained production cuts into late 2018, in addition to the Kurdish referendum, we’ve seen new two-year highs.

But sadly, nothing has changed. The world is still oversupplied with crude oil. In fact, the situation is worse than this time last year.

OPEC knows it. That’s why it keeps manipulating prices higher. Why else would it freeze oil stocks for another year? 

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

In fact, US shale producers are loving these higher prices:

Rig Count Overview 3-10-17

Source: Baker Hughes
[Click to enlarge]

The total US oil rig count stands at 940 rigs — up 418 from last year. It’s basically doubled. OilPrice.com reported on 29 September:

…the recent rise in oil prices will no doubt encourage US shale drillers to turn on the taps at the more profitable pricing.

It’s possible that the response to the prices may be quicker than normal, as the number of drilled-but-uncompleted wells (DUCs) have grown over the past couple of months, and stood at 7,048 as of the last count in August 2017.

To compare, in December 2016, the number of DUCs stood at 5,379. A year ago August, the figure was 5,031.

There are 30% more drilled-but-uncompleted wells than last year. Let that sink in for a second. Common sense says that, as crude prices keep rising, many of these wells will start flowing.

But don’t let that stop you from being bullish. According to one commodities analyst, crude oil has never been better.

Ignore it all and go with the flow

CNBC reported on 27 September:

“The fundamentals are changing and the market is rebalancing,” Jodie Gunzberg, head of commodity and real asset indices at S&P Dow Jones Indices, told CNBC Wednesday.

This support is coming from several sources, including OPEC whose members are complying with production cuts and China where there is demand growth, according to Gunzberg.

“I think Hurricane Harvey really gave (oil) a boost, it was a catalyst for some of the disruptions in the refineries,” she added. “We are seeing real rebalancing in the oil market.”

“When we look at the index data, we can see the price could move even as high as $80 to $85 (a barrel). Not immediately, but with their structural backwardation and shortages in the market, you just can’t replenish it overnight,” she said.

Is Jodie Gunzberg selling investment newsletters? That forecast is absurd.

Look, despite my overwhelming pessimism, I hope her target pays off. I’ve tipped three oil stocks inside Resource Speculator. And while that might shock you, know that my tips don’t need crude prices to surge higher.

Higher prices would help. But we don’t need them.

Being a resources analyst, I spend most of my time scouring the market for ‘under the radar’ opportunities. When it comes to the oil sector, I love stocks that offer potential massive returns if it appears that they can turn their business around. I’ve found what I believe to be three such stocks today. And I’m looking for more as we speak.

I don’t know how long these three stocks will stay cheap. So don’t miss out on buying them today. Details here.


Jason Stevenson,
Editor, Resource Speculator

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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