Oil gets energized
09/25/18

●Crude oil prices again poised to challenge multi-year highs

●Tighter supplies amid Iran sanctions, Venezuela turmoil, OPEC status quo?

●Oil stocks along for the ride


 

And just like that, crude oil is back on the market mainstage.

It may have lacked the drama of the Dow’s push to a new record last week, but yesterday’s roughly 2% oil rally took prices to their highest point ($72.74) since July and, for a day, pushed the November WTI crude futures contract (CLX8) above the top of its four-month consolidation:

November WTI crude oil futures (CLX8), 8/18/17–9/24/18. Crude oil futures price chart. Upside breakout.

Source: OptionsHouse


And guess what? Talk about $100 crude is again making the rounds.

The first thing to remember about calls for $100 crude is that they’re just that—calls, forecasts…guesses. The second thing is that most of the analysts and traders discussing this possibility are doing so on a multi-week/month horizon. Yes, some people think crude could hit $100/barrel, but they also expect this to occur later in the year, not tomorrow.

And lest we forget, the last time “$100 crude” was cocktail-party chatter was mid-April, when oil was in the upper $60s and Saudi Arabia was claiming it was “comfortable” with crude trading above $80. After that, the market got two more legs out of its uptrend, rallying above $72 in May, selling off to below $65 (as OPEC and Russia agreed to increase oil production), pushing above $75 in early July and, ultimately, forming the consolidation that bulls are hoping was decisively broken to the upside by yesterday’s up move.

In other words, there may be a chicken-or-egg component here: Are forecasts of $100 oil likely to lead to additional gains in the crude market, or does a rallying crude market lead to forecasts of $100 oil?

This time, though, the $100 oil meme is cropping up in a different market environment, one that some analysts see as a little tighter than the one that was in place five months ago. First, there’s the argument that OPEC and Russia don’t have the ability to further ramp up production to a level that would significantly change the near-term supply-demand picture.1

And for you cynical types who may think OPEC could increase oil supply if it wanted to: Right now that appears to be a moot point, since over the weekend the Saudi oil minister dismissed out of hand the idea of a supply problem, and brushed off White House critiques regarding the cartel’s stance on higher prices.2 (History shows, however, that OPEC can change its tune on a dime.)

Then there are the looming US sanctions against Iranian crude oil, which could continue to constrict supply for the foreseeable future, despite Iran’s attempts at circumventing them.3 Finally, there’s Venezuela’s ongoing political and economic implosion, which has severely disrupted the country’s oil business. (Although Venezuelan oil exports to the US have rebounded since February, they remain close to their multi-year lows.4)

Conoco Phillips (COP), 5/23/18–9/24/18. Conoco Phillips (COP) price chart. Leading the crude market?

Source: OptionsHouse


As you’d expect, oil stocks got in on yesterday’s fun, including Conoco-Phillips (COP), which actually led the crude market with an upside breakout of its own about a week ago, and pushed to several new record highs, including yesterday’s (chart, above). But it’s worth noting that COP, like most oil stocks, pulled back from its intraday high despite posting a healthy gain for the day. Crude oil is always an up-and-down affair, as its traders will tell you.

All this doesn’t necessarily translate into a parabolic rally to $100 in the next week or two, but if the tight-supply scenario plays out, it may translate into an oil market more like the one from late last year and February–March of this year, when, more often than not, oil and energy stock bulls were rewarded not for chasing new highs, but for buying pullbacks.

Today’s reports: Case-Shiller Home Price Index (HPI), FHFA House Price Index, Consumer Confidence, FOMC meeting begins.

 

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1 Bloomberg.com. Major Traders Are Talking About $100 Oil Again. 9/24/18.

2 Forbes. Saudi Arabia And Russia Fire Back At Trump On Oil Prices. 9/23/18

3 Financial Times. Iran sends out ghost tankers as US oil sanctions loom. 9/21/18.

4 U.S. Energy Information Administration (eia.gov). U.S. Imports from Venezuela of Crude Oil and Petroleum Products. 9/24/18.