Why Crude Oil Will Crash to US$34 per Barrel

Crude oil tumbled below US$40 per barrel last week, the first time since August.

It’s not a great time to be an oil investor.

Most large-cap oil company share prices are lower than the start of this year. The mid- to small-cap oilers are faring even worse.

That’s not to say there aren’t opportunities out there. There are plenty, if you look in the right places.

But faced with a deepening global demand glut, punters are worried about the build-up of crude supplies.

We’ll explain why…

Oil price wars rage on

For the past year, oil stockpiles have climbed to record highs.

According to the Energy Information Administration, crude stockpiles rose for the tenth week in a row, bucking Wall Street expectations for a decline. The latest figure shows that commercial supplies are roughly 2 million barrels below a fresh record high. You can see this on the chart below.

Source: Atlas

[click to open in new window]

Talking about rising crude supplies, OPEC’s meeting wasn’t playing Christmas carols last week. While many members are in favour of cutting supplies, Saudi Arabia doesn’t seem on board. The final decision was made on Friday night. OPEC confirmed that it’s keeping production on hold. But don’t be shocked if OPEC doesn’t cut its crude production.

At the end of the day Saudi Arabia, being the largest oil producer in the world, has the final say.

And Saudi Arabia wants to protect its market share.

Think of it this way: why would it want to sacrifice dollars when other operators are still producing crude at record levels? No doubt, it will pump as much as it can…

Expect the oil price war to rage on in the months ahead, sending crude to lower prices. This won’t help geopolitical tensions, which are already showing no signs of abating.

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The first great war of the 21st century

Looking at the major hotspots, tensions in the Middle East are getting out of hand. Although, US President Barrack Obama has long said he won’t put troops on the ground in Syria and Iraq.

These comments were reiterated at the G20 summit on 16 November. According to Yahoo news, Obama ‘refused to send more troops into Syria, saying that boots on the ground “would be a mistake.”’ Just to clarify, Syria and Iraq are inseparable in this conflict. Obama’s pledged not to put ‘boots on the ground’ in either country.

Instead, the US President has a ‘better’ plan.

It started with airstrikes against ISIS. Over the last 18 months, the US and its allies have launched over 8,000 airstrikes against ISIS targets in Iraq and Syria. Yet, strangely, Russia’s airstrikes against ISIS made more of an impact in only six weeks.

Critics in the West claim that Russia’s quick success is largely a mirage. That Moscow’s local allies are simply giving them arbitrary targets to bomb, so that the Russians can claim an impact that they aren’t really making. And there are implications of heavy civilian casualties. Moscow counters that they are simply enjoying more success than the US because of their close cooperation with the Syrian regime’s ground forces.

With all of the military might the US packs, you’ve got to wonder why they can’t make more of an impact.

The answer is rather sinister. Obama’s only goal — and that of other Western leaders by association — is to get rid of Syrian President Bashar Hafez al-Assad. They want to cut off Russia’s energy influence on Europe. It supplies 30% of the European Union’s gas needs.

See, Russia just cut off the gas to Ukraine. If it wanted to, it could easily turn off the European gas tap. With tensions escalating and NATO’s aggression persisting against Russia, this is a risk.

A disaster waiting to happen

The Obama Administration wants to remain the world’s dominant power. For this reason, threatened by Russian influence, it’s doing everything it can to destabilise Syria and rid Assad from power.

If this happens, Saudi Arabia — a US ally — can build a gas pipeline from Qatar to Europe. Assad is strongly against this plan. Instead, he wants to build a European gas pipeline through his country from Iran. It’s no surprise that Russia — a partner for both Syria and Iran — backs this plan.

In the meantime, Obama isn’t making the chess match easy. Another plan of his involves the ‘training and advice’ program for Syrian rebels. Here’s The Guardian with the latest:

Brett McGurk, special presidential envoy to the global coalition to counter Isis, acknowledged that advisers sometimes provide much more than advice in both Iraq and Syria.

‘“For the most part, our military advisers are providing advisory support, training, and assistance,” he said. “However, there are times, of course, when we believe it’s in our national security interests and the president authorises for more direct action missions.”’

Authorising more direct action’ is the precise move Obama has made. According to Reuters, in a statement last Tuesday, Defense Secretary Ash Carter said:

The United States [will deploy] new “specialized expeditionary targeting force” [to] aid Iraqi government security forces and Kurdish peshmerga forces.

“These special operators will over time be able to conduct raids, free hostages, gather intelligence and capture ISIL leaders,”

“This force will also be in a position to conduct unilateral operations into Syria.”

Iraqi Prime Minister Haider al-Abadi strongly rejects this plan. He told Reuters ‘We do not need foreign ground combat forces on Iraqi land’.

Jafaar Hussaini, a spokesman for one of the Shi’ite armed groups, mimicked Abadi’s words. According to Reuters he said, ‘We will chase and fight any American force deployed in Iraq. Any such American force will become a primary target for our group. We fought them before and we are ready to resume fighting.’

Follow the trend

There’s no doubt that the geopolitical events are escalating. But, at the moment, this is still a chess match. Also, it’s clear the oil punters aren’t taking the events too seriously…yet. If they were, oil prices would be heading higher, not lower. This is what I expect when this crisis takes a turn for the worst next year.

On this matter, savvy investors know that it will take time before we see a full on confrontation. This means the resources bear market is set to continue. Facing major supply pressures, commodities are due to crash in the months ahead. As this happens, economic conditions should deteriorate further. This won’t be good for demand. Crude will hit US$34 per barrel or below before it turns around.

With this in mind, there’s a plethora of quality opportunities in the resources space. In the months ahead, you should be buying the best stocks at their lows. Because when the tensions turn into a conflict, the resources bull market will enter its next phase. If you want to buy the best stocks and outperform the pack next year, check out Resource Speculator here.

Jason Stevenson,

Resources Analyst, Resource Speculator

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Jason Stevenson

Jason Stevenson

Jason Stevenson shares his extensive knowledge of Australia’s mining sector as Markets and Money's dedicated resource analyst. Whether it’s iron ore, gold, copper or lithium, you can rely on Jason to give you in-depth analysis of the biggest and most important sector of our economy. Jason provides in-depth research to Resource Speculator, Australia’s premier resource investment advisory.

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