What the Year-End Close Means for Crude Oil…

Here’s the latest from CNBC:

‘Oil prices fell 3 percent on Monday, echoing the weakness in global stock markets as the focus returned to demand growth concerns. Crude prices erased the gains they made on Friday following an OPEC-led decision to cut output.

‘Prices rose on Friday after OPEC and some non-OPEC producers including heavyweight Russia said they would cut oil supply by 1.2 million barrels per day.

‘”Friday’s agreement was a seemingly good one, or maybe we should say the best one under the current circumstances,” Tamas Varga, a strategist with PVM Oil Associates, said.

‘”As good as it looks, our view is that it will not be able to provide long-term price supports because it could not help global oil inventories deplete.”’

The story for crude doesn’t sound good.

Brent crude oil has crashed around 33% from the October high. There has been no end in sight to the price drop, either. That’s partly because of the massive amount of supply that’s entered the market. The world’s top three largest producers — the United States, Saudi Arabia and Russia — have ramped up production over the past few months.

Meanwhile, the world’s two largest economies — the United States and China — are locked in a trade war. That’s causing significant concern. Markets are worried the war could hit economic growth and impact investor sentiment. That could push crude prices lower, thanks to a reduced demand.

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?

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Look, no one knows for sure.

I’ll explain…

The main story for crude ― politics

OPEC leaders met in Vienna, Austria, on 6 December. They discussed how to manage the oil output, supply glut and demand slowdown. Unfortunately, as CNBC reported above, oil bulls didn’t get the result they wanted.

But it’s no shock.

US President Donald Trump keeps pushing for lower oil prices. Here’s an example from a recent tweet, which I showed you a fortnight ago:


MoneyMorning 07-11-18

Source: Twitter

[Click to open in a new window]

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 records amount of shale oil.

I believe that OPEC obliged with Trump’s request due to politics. Saudi Arabia ― the undisputed leader of OPEC ― has been under immense pressure since October. Remember, it was accused of the killing of Jamal Khashoggi at the Saudi Embassy in Turkey. The Guardian reported on Monday:

The Turkish president, Recep Tayyip Erdoğan, says the operation to kill Khashoggi was ordered at the highest levels of the Saudi establishment, and has strongly suggested that the crown prince, Mohammed bin Salman, was involved, steadily leaking information from the investigation to pressure his rival in Riyadh.

Riyadh has maintained the killing was a rogue operation carried out without the powerful crown prince’s knowledge.

Regardless of the accusations and findings, Donald Trump has turned a blind eye to the crisis. CNN reported earlier in the week:

‘President Donald Trump signaled Tuesday that he will not take strong action against Saudi Arabia or its Crown Prince Mohammed bin Salman for the murder and dismemberment of Washington Post journalist Jamal Khashoggi.

‘The White House has been struggling to square a widespread sense that the crown prince directed the killing with a desire for Saudi support for its foreign policy priorities and the need to manage close relationships between bin Salman, the Trump administration and members of Trump’s family.

‘In an exclamation-mark laden statement subtitled “America First!” Trump said on Tuesday that “our intelligence agencies continue to assess all information, but it could very well be that the Crown Prince had knowledge of this tragic event — maybe he did and maybe he didn’t!”’

I believe that OPEC scratched Trump’s back because he scratched Saudi Arabia’s. Remember, Saudi Arabia ― the ring-leader of OPEC ― needs higher oil prices to survive. 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, other than politics in my view.

Of course, given a few months, things could go back to normal. 

Despite the negative supply talk, crude oil is really a demand story. The International Energy Agency forecasted in September that world oil consumption should hit 100 million barrels per day (bpd) this year.

Growing demand should support crude prices in the near term. CNBC added on Monday:

‘Despite the expectations of a slowdown, demand on the ground remains healthy.

‘China, the world’s biggest oil importer, over the weekend reported November crude imports rose 8.5 percent from a year ago, to 10.43 million bpd, marking the first time China imported more than 10 million bpd. That leaves the world’s second-biggest economy on track to set yet another annual import record.

‘Demand is driven by Chinese purchases for strategic reserves, but also by new refineries, triggering excess supply of fuels, filling up storage tanks and eroding refinery profits across Asia.’

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

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Latest chart for Brent Crude

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


MoneyMorning 07-11-18

Source: tradingview.com

[Click to open in a new window]

The monthly chart 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. It’s trading just under major support of $60 per barrel, shown by the horizontal black line.

Brent crude is merely holding up today…

It bounced off the black line to re-test the lower blue uptrend level. That’s a bearish move. Make no mistake: Brent crude’s year-end closing is absolutely crucial going forward. It should dictate the trend next year.

US$60 per barrel is the line in the sand.

A year-end closing below that price should signal weaker crude prices into 2020.

I don’t know what will happen next.

No one does.

But crude oil is known for having big moves that shock the majority. For example, defying the odds, it melted down quickly during 2014. If history repeats, we could see a drop into the low US$40 zone next year.

That would shock the majority.

OK, pushing the risk of a big drop aside, let’s not get ahead of ourselves. US$60 is the key for the year end closing for Brent crude oil. Focus on that number and ignore everything else. In that case, 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.

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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