Strap In: This Oil Price Rally Isn't Over Yet

Strap In: This Oil Price Rally Isn’t Over Yet

by | published June 28th, 2018

Four years.

That’s how long it has been since we’ve seen oil prices like this.

This morning, WTI briefly spiked above $74 a barrel for the first time since late 2014, while Brent neared $78.

For months now, I’ve been saying that, despite the record surge we’ve seen this year, we’ve still only seen the tip of the iceberg for oil’s big comeback.

Just look at the oil’s scorecard so far this year…

For the week: WTI is up 7%, and Brent is up 3%.

For the month: WTI has climbed 10% while Brent has surged only 0.5%.

Year-to-date: WTI has surged 22% with Brent posting a gain of 16.4%.

But the most telling indicator is this one…

A Trip Down Memory Lane

To understand why I’m so bullish on oil’s future, we have to take a quick look in the rearview mirror.

Since Thanksgiving 2014, when OPEC decided to defend market share rather than price – bringing global crude oil prices to their knees – Brent is now up 156%.

For West Texas Intermediate, that number is 182%.

Four days ago, I told you to expect an oil surge this week. And, right on target, oil hit a 3.5 year high.

And (as I’ll explain below) impacts of Iranian sanctions have thrown estimates of supply-demand balance completely out of whack.

Hence, increased upward momentum for global oil prices – opening up some historic opportunities for energy investors.

Meanwhile, America’s been exporting record numbers of oil.

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But there’s also another interesting figure we have to look at – the spread between these two benchmarks.

Both are better grades of oil (containing less sulfur) than over 70% of the oil traded worldwide.

But given its more central position in that global trade, Brent’s price has consistently been at a premium to WTI for the past eight years.

The spread, calculated as a percentage of WTI (the more accurate way of determining the differential) spiked to almost 15% two weeks ago and has averaged well into the double digits for the past month.

This morning, it is 5.3%

The spread tells us that Brent had accelerated first, rising quicker than WTI. That is not unusual, given that Brent’s preferred position in setting trade prices makes it more susceptible to market swings. WTI is more attuned to prices in the U.S. market, with that market reflecting a largess of shale and tight oil reserves.

But what does all of this mean? And how do I know that oil prices still have room to climb from here?

Well, I’ve got three overarching reasons that will explain everything you need to know.

Let’s take a look…

Oil’s Equilibrium

First, the global market has been moving toward a balance between supply and demand for a while now.

Now, this balance must also include an ongoing surplus in storage.

“Just in time” management may improve efficiency if you are manufacturing widgets.

But, applied to oil, it would be a recipe for unsustainable whipsaw volatility.

This means that any appearance of a supply constriction or an expansion in demand will lead to an immediate surge in prices.

For its part, international demand has remained strong.

It is the supply side of the equation that has experienced production pressure.

The combination of an OPEC-Russia agreement to cap production, the implosion in oil volume coming from Venezuela, declines in Libya and Nigeria, and continued stagnation in Mexico has been augmented by a multi-month disruption from Canada.

Simply put, the recent Russia-OPEC production hike will not make up the difference.

And that means it just doesn’t have the legs to drag down prices for any prolonged period of time.

[Alert] In my 40 years observing the energy markets, never have I seen this much money flooding into one tiny sector…

Opening the Spigots

Second, normally a rising price would translate into an opening of the spigots among U.S. producers.

Which has been what we’ve typically seen, as the aggregate American production levels approach 12 million barrels a day, with 3 million going to exports (the highest amount in decades).

But there is now a more nuanced approach underway.

For one thing, the current market price allows for practically everyone in the American oil patch to run at a profit.

It prevents a need to produce as much as possible in desperate operations one-step ahead of the sheriff.

These days, producers can leave more in the ground to serve as a hedge.

As I have noted several times recently here in Oil & Energy Investor, the advantage of American production being exported to higher-priced foreign markets is also pushing against its own ceiling.

There is little excess capacity remaining at U.S. ports.

That capacity will be expanded as trade moves down the coast from Houston and the channel to Corpus Christi.

But that will take some time…

No Shelter From the Geopolitical Storm

Third, the most decisive factor arises from geopolitics.

Trumps’ tariff moves introduced uncertainty that tends to restrain the price, given the concern that such moves would have a debilitating effect on economies in many parts of the world…

Including the very U.S. sectors they sought to support.

However, it was what happened next that changed the entire trading dynamic…

Trump pulled the U.S. out of the Joint Comprehensive Plan of Action (JCPOA, the Iranian nuclear accord) and has now called for a zero barrel import policy for Iranian exports.

That prohibition is to take effect on November 4.

The impact will be negligible on the U.S. market since there are virtually no Iranian barrels actually imported by American oil users.

However, there will be secondary sanctions applied to foreign importers.

These would include denial of access to the U.S. market, while having asses inside the U.S. subject to penalty.

Such secondary sanctions are having a chilling impact…

The prospect of having a significant portion of Iranian exports subject to removal from global trade, throws estimates of the supply-demand balance completely out of whack.

The result has been another major pressure for increasing global oil prices.

What used to seem like a walk up a staircase now feels like riding an escalator.

And somebody has hit the speed button.



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  1. ajay
    June 28th, 2018 at 20:16 | #1

    Great article!

  2. Darwin Armstrong
    June 29th, 2018 at 07:16 | #2


  3. Rick Hutchins
    June 29th, 2018 at 11:58 | #3

    Good, balanced commentary which as usual makes sense. Do have a question about a statement:

    “These would include denial of access to the U.S. market, while having ASSES inside the U.S. subject to penalty.” Hmmmm…

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