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Welcome to Oil’s “New Normal”

by | published May 16th, 2018

Dramatic swings in the oil market may soon become the norm.

After two months of an almost uninterrupted rise in prices, the crude oil market has plunged headfirst into volatility on a string of geopolitical events that have pushed both West Texas Intermediate (WTI) and Brent prices to the brink.

Now, to be clear, an uptick in volatility means there will be the occasional dips in price, but overall, prices are going to continue to grind higher.

Just look at yesterday as an example.

Despite the overall markets taking a dive, crude oil stayed firm and even ended the day in positive territory.

And while some pundits were warning about an overheated crude space (several probably hoping to run a quick short on any indication of weakening), a downturn has yet to happen.

Better yet, there are three factors at play that prove to me that not only is a prolonged downturn unlikely, but as you’ll see in a moment, we are actually on the fast track to $100 oil.

Let’s take a closer look…

Crude’s Fast Track to Record Highs

The situation I see developing in the market paints an increasingly strong picture for crude prices going forward, despite any volatile trading bands we hit along the way.

And there are three overriding reasons why…

First, the floor of the pricing range continues to rise.

As I have noted here in Oil & Energy Investor on many occasions, it is the support level (the floor) not the resistance level (the ceiling) that is telling.

To demonstrate the strength of the current movement, consider Brent.

It is one of two primary standards (WTI being the other) against which the bulk of global oil exchange occurs.

Both are denominated in dollars, as are the overwhelming bulk of international oil trades.

Each is a better grade of oil (“sweeter,” that is, having a lower sulfur content) than over 70% of the oil actually traded worldwide.

However, Brent is now used more internationally than WTI and is priced at a premium (despite WTI being a slightly better oil).

As a result, the fluctuation in Brent pricing is more closely tied to what is happening in international trade, meaning it is more sensitive to geopolitical tension and cross-border dynamics.

At the close of trade yesterday, Brent was up 1.3% for the week, but 9.6% for the month at a level unseen since late 2014.

That was before the Saudi-led OPEC decision to defend market share rather than price, a move that crippled global prices for more than two years.

Putting the matter in perspective, Brent is now up 81% since January 20, 2016,  its lowest point in the slide.

While WTI is also up, its rises of 0.24% for the week and 7.2% for the month are less pronounced.

The ability of U.S. producers to increase market volume easily, combined with being further distant from geopolitical instability tempers WTI’s gains.

Yet events occurring elsewhere, especially in developing regions worldwide, remain the oil price “trendsetter” – another reason why Brent has a greater sensitivity to worldwide events.

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Reading the Oil Market

The second overriding consideration is what the trading market is actually telling us.

The OPEC Secretariat in Vienna confirmed something yesterday that I have been telling Oil & Energy Investor readers for weeks…

The global oil sector is reaching a supply balance in the face of rising demand.

Keep in mind that such a balance requires an amount of excess (or surplus) available volume.

This is hardly a “just in time” series of transactions.

If oil were provided to meet orders as they rolled in, the volatility would be much higher.

In fact, I did a series of calculations earlier this year when crude first started to move up.

My conclusion then was that a time constriction to that extent would add nearly $15-$20 a barrel to the price.

The reason involves how oil is actually traded.

Remember, futures contracts – or “paper barrels” – are set in the expectation of where prices will be at some future date.

On the other hand, so-called “wet barrels” are the consignments of physical oil changing hands in the market.

Now, paper barrels drive wet barrel pricing.

Traders peg contract price to the expected cost of the most expensive next available barrel to hedge against risk in rising pricing scenarios.

In a high-oil-price environment like the one we are currently experiencing, that will only overexpress the genuine trading price for wet barrels, requiring that an arbitrage take place at the expiration of a paper contract to converge with what the exchange dynamics for the underlying oil are.

This isn’t unusual.

Arbitration like this takes place all the time, whether the price of oil is moving up or down in price.

To offset an appreciable hit in pricing, there needs to be sufficient restraint on adding new physical volume to the market.

Which brings us to our third factor…

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The Consequence of a Surplus of American Shale

Additional (and easily accessible) supply from the surplus of American shale and tight oil reserves could drive prices down.

However, that is unlikely given the substantial forces helping move prices in the other direction.

The OPEC-Russian agreement to cap production remains in force with major participants like Saudi Arabia and Kuwait cutting beyond agreed levels.

In addition…

  • A production implosion in Venezuela;
  • Protracted declining extractions because of civil war in Libya and unrest in Nigeria;
  • Persistent technical problems in Mexico and Kazakhstan; And
  • A restraint in additional production in the U.S.

Are all working in tandem to bolster prices.

However, longtime Oil & Energy Investors know that the real, long-term catalyst is this…

The Secret $100 Oil Ploy

Looking at the energy market landscape over the next few months, I’m nearly 100% confident in my $100 oil prediction.

And not because of geopolitical tensions…

Or supply and demand…

There are far more powerful sources at play here.

Saudi Arabia’s enormous power grip on the oil markets will be the chief mover of oil into triple-digit territory

We’ve been talking at great length about this windfall game-changer, ignited by the Saudi Kingdom, recently.

And for a good reason.

As I’ve mentioned in previous issues, the Saudi Aramco IPO (expected to be the largest ever) is on the horizon.

And once the company goes public, Aramco share prices will be directly determined by the price of oil.

So of course the Saudis are going to drive prices as high as possible… so they can siphon as much money as possible from this historic IPO.

According to current estimates, they could see a million dollars for every single dollar the price of oil rises – all from this Saudi Aramco IPO.

And right now, they’re setting up the perfect scenario to make sure that happens… (Click here for more details)

In the meantime, pay attention to geopolitics. It’s the one wild card that could supercharge oil prices even faster than I’m anticipating.

The following concerns could send oil soaring, independently of the Saudi situation:

  • The pending Iranian sanctions following U.S. withdrawal from the Iranian nuclear accord;
  • A possible third intifada following the movement of the U.S. embassy to Jerusalem;
  • The return of Muqtada al-Sadr in this weekend’s Iraqi parliamentary elections;
  • Or the intensifying paralysis in Caracas…

Which is all we need to know to sleuth out profitable trades in the energy sector.

In fact, with these four plays alone, I’m predicting a combined 1,329% payday for my readers who get in early.

So make sure you take a few minutes to check it out for yourself.

Sincerely,


Kent

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  1. C T Spines
    May 21st, 2018 at 20:59 | #1

    DEPLETION on an ever increasing number of barrels. In elasticity quality of demand means “one needs a drink of oil & water each day to survive”. World demand is approaching 100mm barrels a day and with a decline rate ~ 5% we need to find 5mm barrels per day each year. 50% of the the maximum daily output of The North Sea each year? Law of large numbers eventually comes into play “unstainable”.

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