We have been bullish on crude oil for weeks.
We have also been wrong.
Crude has done everything but go up. In fact, the oil price has dropped 20% from its high. Is it time to throw in the towel?
Don’t be so quick.
Remember, we have been bullish on crude since August. That’s when crude was trading around $72 per barrel. So, given our starting point, nothing has really changed. After all, crude is trading at just under $70 per barrel today.
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Time to buy crude oil
Here’s the latest from Reuters:
‘U.S. crude prices fell for the 11th consecutive session, the most on record since the contract began trading, retreating from a rally early in the session as U.S. President Donald Trump said he hoped there would be no oil output reductions.
‘Trump’s comment followed remarks from Saudi Arabia’s energy minister saying OPEC was considering cutting supply next year, citing softening demand. Saudi Arabia has expressed concerns that U.S. sanctions have removed less oil from the market than expected.
‘Oil prices had strengthened early in the session, after Saudi Arabia said the Organization of the Petroleum Exporting Countries and its partners believed demand was softening enough to warrant an output cut of 1 million barrels per day next year.’
Indeed, while crude keeps marching lower, we know the story well. When Saudi Arabia announced that it would cut its output by 500,000 barrels per day, due to lower seasonal demand, we went long last night. Our thesis was that crude was oversold and due for a decent bounce.
Unfortunately, we woke up in the red…
What went wrong?
Our friend, of course, Donald Trump!
Crude prices turned south following Trump’s tweet. Remember, while its shale industry is producing more crude, the US is a net importer of oil. In 2017, the country’s net imports (imports minus exports) of petroleum was about 3.77 million barrels per day.
That’s an issue.
Donald Trump wants to turnaround the US trade deficit. That’s why he’s a fan of lower crude prices. Of course, the US President’s agenda doesn’t align with other countries. OPEC economies heavily rely on crude exports to generate revenue. It’s in their favour to boost oil prices.
Crude prices are caught in the middle of a dog fight
John Kilduff, a partner at Again Capital Management in New York, summed it up nicely. He told Reuters, ‘We’re kind of back to square one: It must feel like November 2016 to them, a lot…The Saudis and Russians, especially, rushed production to market to offset losses that aren’t materializing.’
Remember, US officials want to stop all of Iran’s oil exports via sanctions. But there’s a problem. Most countries don’t agree with the US. The EU believes the US shouldn’t be the world policeman and China said it will keep buying from Iran. In other words, the US had no choice but to grant waivers to certain major importers of Iranian crude.
Here’s a chart we showed last week:
If push comes to shove, we believe China will probably buy all of Iran’s oil exports considering their growing energy demands. That doesn’t sound good for crude prices. But we’re not done yet. Output from Russia, the United States and Saudi Arabia ― the world’s top oil producer’s ― has jumped by 1.05 million barrels per day over the last three months.
Wondering why we’re bullish on crude?
Crude is really a demand story.
Remember, 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.
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.
Here’s the latest monthly chart for Brent crude oil ― the international oil price:
Technically speaking, while it’s too early to know, crude looks like it could make a low this week. I believe we are seeing a false intra-month breakdown. There’s a good chance crude oil traders have targeted support shown by the horizontal black line.
Will we see a sharp reversal into month’s end?
But we think there’s a good chance.
Remember, crude has nose-dived 20% from its October high.
Looking at the story, only a monthly closing below US$70 barrel would change my view on oil.
On the flip side, as we have said for weeks, the bulls want to see a monthly closing above US$80 per barrel. If that happens, we could see crude move higher into mid-next year. I’m not ruling out US$100 per barrel oil in 2019, either.
Yes, we are seeing a pullback and it’s been more than expected, but 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. I’m buying.
Resources Analyst, Gold & Commodities Stock Trader