Here Comes US$100 Crude Oil…

Here’s the latest from CNBC:

‘An oil production cut is expected when the Organization of the Petroleum Exporting Countries (OPEC) meets in Vienna next week amid worries over a U.S.-China trade war, a supply glut and demand slowdown, according to Johannes Benigni, chairman and founder of consultancy JBC Energy Group.

‘”OPEC will probably manage to stabilize the oil market by choosing the right language,” Benigni told CNBC’s Sri Jegarajah. “They will indicate a cut of between 1 million and 1.5 million, and that will do, the market probably will stabilize.”

‘Saudi Arabia raised oil production to an all-time high in November, Reuters reported on Monday, pumping 11.1 million to 11.3 million barrels per day (bpd) during the month.’

Crude has crashed roughly 33% from the October high. That’s partly because of the massive amount of supply that’s entered the market. US shale production keeps hitting new highs. More wells have been drilled thanks to higher oil prices. Saudi Arabia keeps pumping more crude, as well.

Traders are worried about an oversupply that could push crude prices sharply lower. That happened in 2014, mind you.

How far will the oil price drop this time?

Will it even turn around?

Look, no one knows for sure. But, one thing seems certain, crude oil won’t drop forever. I believe it’s overdue for a sharp bounce and it could start next week. The oil price looks like it’s falling into the OPEC meeting on Thursday. If I’m correct, it might not be a bad idea buying some crude oil stocks early next week.

I’ll explain…

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The latest story on crude oil

OPEC leaders are set to meet in Vienna, Austria, on 6 December. They will discuss how to manage the oil output, supply glut and demand slowdown.

It won’t be easy.

US President Donald Trump keeps pushing for lower oil prices. Here’s an example from a recent tweet:


MoneyMorning 07-11-18

Source: Twitter

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Donald Trump wants lower crude prices to reduce the country’s trade deficit. The US remains a net importer of crude oil. That is, despite producing near record amounts of shale oil. If OPEC and Russia (the world’s second-largest crude oil producer) decide to cut oil production, it could trigger a major political fight with the US.

But, politics aside, we could see a massive shock out of the meeting. According to the IMF, Saudi Arabia needs an oil price of more than $85 per barrel to balance its budget this year. There’s no reason to suggest that OPEC will allow crude prices to crash. It’s a double edged sword.

Of course, OPEC might want to annihilate the US shale producers one more time. But they tried this approach during 2014.

It failed.

Everyone was a loser.

Saudi Arabia ― the undisputed leader of OPEC ― needs higher oil prices to survive. That’s clear. And it’s why I don’t think we’re going to enter another era of lower oil prices yet. But, I could be wrong. We’ll find out next week.

At the end of the day, 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, world oil consumption should hit 100 million barrels per day (bpd) this year.

That should push crude prices higher next month.

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. That could turn into a major slingshot towards US$100 per barrel oil. But you probably wouldn’t know it looking at the charts though.

What can we expect to see next?

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


MoneyMorning 07-11-18

Source: tradingview.com

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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 has surprised the bulls ― myself included ― and crashed through all channels. Fortunately, we can take some comfort.

Brent re-tested the US$58 per barrel zone ― the January 2017 high.

It’s trading slightly higher today.

I believe there’s a good chance we could see a decent bounce now.

Remember, crude has nose-dived by more than 30% from its October high. That’s a lot of expended energy for a short amount of time. But the worst might not be over. During 2014, crude oil showed us that it could meltdown in a short period of time. If history repeats, we could see a drop into the low US$40 zone.

I wouldn’t go out and dump crude stocks yet, however.

To re-iterate last week’s comment, US$60 per barrel is the line in the sand. Crude oil is trading around this level today. A year-end closing below that price should signal weaker crude prices into 2020. A monthly close below that level should suggest a drop into the US$40 per barrel zone into early next year.

I don’t know what will happen next.

No one does.

But, I don’t think OPEC will let crude oil crunch their economies ― they need higher crude prices to survive.

I believe crude is overdue for a big bounce.

The bottom line: Crude remains in free-fall today. But, despite the ongoing poor sentiment, keep focused on the numbers. US$60 is the key today. In that case, with sentiment at extreme negatives, I believe we could see sharply higher prices soon. If we see a monthly closing above US$60 per barrel this month, buying the best crude oil stocks might not be a bad idea.

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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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