The Verge of a Massive Crude Oil Bounce?

Is it lights out for crude oil?

The price of the world’s most traded commodity has nose-dived since early October…

Commentators certainly aren’t talking about US$100 oil anymore. We’re back to reading about cheaper crude. Brent oil ― the global crude price ― is trading near US$72 per barrel. Oil Price wrote yesterday:

‘Goldman [Sachs’] logic is that if U.S. shale can grow as quickly as it did this year, with WTI in the $60s per barrel, then that means it can continue to grow briskly, which means that oil prices in the years ahead will be lower than previously thought.’

‘The investment bank sees Brent falling back to about $65 per barrel by the end of 2019 as midstream bottlenecks in the Permian clear up. That may allow OPEC to dial back on production and rebuild spare capacity. Goldman calls this a “re-anchoring of long-term oil prices.”’

Wasn’t Goldman Sachs predicting that oil would fall below US$20 per barrel in early 2016? A quick internet search shows it did. These days, given its poor forecasting track record, the investment bank likes to play it safe. It predicts outcomes which are barely different to current prices.

Let’s make things clear: if you listen to Goldman Sachs, you’ll probably go broke. It couldn’t even forecast the Global financial Crisis of 2008. The investment bank was bailed out by Warren Buffett and the US government.

We recommend doing the opposite to the investment bank.

Crude could bounce sharply any day now.

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Oil’s big bounce

Here’s the latest from Oil Price:

‘The decision by the U.S. to grant waivers to eight countries, allowing them to continue to import oil from Iran, has helped ease the tension in the oil market.

‘Iran’s oil exports stood at 1.7 million barrels per day in October and won’t fall to zero anytime soon. But that may not be the end of the story. As more Iranian supply goes offline, the market will continue to tighten. Iran could lose nearly 600,000 bpd of exports by the end of the year, relative to October levels, [Goldman Sachs] predicts.

‘“As a result, we still expect that the global oil market will be in deficit in 4Q18, leading to a strengthening in Brent timespreads,” Goldman said,’

Indeed, while we gave Goldman Sachs a hard-time earlier, the investment bank is probably correct ― oil markets could move into deficit this quarter. That’s why we’re shocked they can forecast higher crude prices in the short-term and lower prices next year.

It doesn’t make sense…

We’re expecting higher oil prices, considering the lower supply and rising demand in the short-term. 

Remember, US officials want to stop all of Iran’s oil exports via sanctions. US Secretary of State Mike Pompeo claims more than 20 countries have already cut oil imports from Iran, reducing purchases by more than one million barrels per day. That said, we don’t think international sanctions will totally cut-off Iran.

Countries imports of Iran's oil in 2017

Source: BBC

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China is the country’s largest export market and has said, many times, that won’t change.  China said it would continue to purchase oil from Iran. In fact, if push comes to shove, I believe China will probably purchase all of Iran’s oil exports, considering their growing energy demands. In that case, while we could see some short-term repercussions for Iran, we believe the entire situation is overblown.

Crude is really a demand story.

We have heard that demand’s been weak for years. Yet, as the International Energy Agency forecasted in September, world oil consumption should hit 100 million barrels per day (bpd) later this year. That should push crude prices higher, with sanctions on Iran starting to hit now.

Indeed, fundamentally speaking, nothing has changed with our overall bullish view. I believe crude oil fell into 5 November ― the date set for Iran sections by the US. In that case, I believe the ‘big bounce’ should start any day now.

Brent crude’s bullish set up

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

Brent crude oil

Source: tradingview.com

[Click to open in a new window]

For weeks, we have warned that crude’s making an extremely bullish set up. But our message wasn’t without warning. Here’s a snippet from your latest update on the topic:

‘Despite the sharp pullback this month, crude has reacted mostly as expected. In your last update, we thought crude would bounce off the lower pink trend line.

‘It didn’t.

It went a tad lower…

‘Brent moved towards the lower red trend line, before bouncing to the lower pink trend line. That’s where it’s sitting today.

‘We’re still bullish…

‘Nothing has changed outside a small correction.’

Technically speaking, while it’s too early to know, we might be seeing a false intra-month breakdown. I believe crude oil is targeting support at the US$70 barrel level, shown by the horizontal black line.

I wouldn’t be surprised if we see a bounce of that level this week.

Let’s see what happens next.

The bulls need to see a monthly closing above US$80 per barrel in November. If that happens, we could see crude move higher into year’s end. A monthly closing below October’s low of US$74.57 per barrel could signal a change in trend. Although looking at the broader picture, only a monthly closing below US$70 barrel would change my opinion on oil.

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The bottom line: Trade the trade. Crude looks bullish on the charts and remains one of the best performers in the commodities sector this year. So, while we are seeing a pullback as warned may times, the party could start any day now. Crude could take off to much higher prices in the months ahead. I believe this is the time to buy crude oil stocks, while we’re seeing the price dip.

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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