Has Crude Oil Finally Bottomed?

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On 18 January, Brent crude hit US$28.94 per barrel — a fresh 12 year low.

At the time, Goldman Sachs, Citigroup and Morgan Stanley were calling for US$20 per barrel. According to Bloomberg, Citi said ‘U.S. oil prices may fall to $20 if tanks used to store crude start to fill up before producers sufficiently curb output.

Morgan Stanley said it differently. It told investors in a research report, ‘In an oversupplied market, there is no intrinsic value for crude oil.

If you think that’s bearish, think again. According to Bloomberg, Standard Chartered said US$10 per barrel was possible!

The message is clear from the ‘experts’ — you’d be crazy to buy the oilers.

But, talking about crazy times, crude hit a high of US$37.55 per barrel last week.

Has crude finally bottomed? Surely, these ‘experts’ weren’t wrong again.

I’ll explain…

A small bounce bring healthy rewards

To start, I’d like to reiterate some of my comments from 18 January. I said,

If you ask me, these major banks will likely be wrong again.

I’m expecting a 15–20% bounce in the near-term. In this case, crude should retest the US$35–36 per barrel level.

If you want to have a punt on the oilers, there’s a good quick trade on offer.’

I hope you listened to my advice. You could have made some quick money.

The mid-tier oilers outperformed the pack. This is expected — they’re typically the most leveraged to the oil price. If the oil price drops, their share prices tend to get spanked. On the other hand, as it did this time, shareholders are rewarded if the crude surges.

On this note, Senex Energy’s [ASX:SXY] jumped 30% from 12 cents to 15.5 cents. Tap Oil [ASX:TAP] is now 26.3% higher, rising from 9.1 cents to 11.5 cents. And Sundance Energy shares rose by 32% from 9.1 cents to 12 cents per share.

If you’re thinking those gains aren’t exactly eye watering, think again. Remember, these gains were made in less than two weeks. Most fund managers are happy to make a 20% gain in a year.

Talking about profiting from a bear market, let’s not forget the big players. They also fared well.

Santos Ltd [ASX:STO] jumped the most, up nearly 18%. Origin Energy [ASX:ORG] rose around 9%. Woodside Petroleum [ASX:WPL] and Oil Search Ltd [ASX:OSH] surged from their lows.

So, contrary to the ‘expert’ view, oil stocks have gone alright. But will the fun continue?

Will the oil markets be rescued?

It depends…

I should say that I’m not bullish on crude oil yet. Remember, the supply and demand story hasn’t changed. It’s still atrocious.

Crude oil demand is still weakening. The world’s heading into a deeper deflationary phase, which will get worse before it gets better.

Clueless politicians are to blame. Other than raising taxes and increasing regulation, they’re out of ideas. So businesses have no incentive to spend and expand. Consumers will just hoard capital. So it’s no surprise crude oil demand’s getting worse.

At the same time, supply is overflowing. Remember, thanks to technological advancements, the US is now the world’s second largest oil producer.

Furthermore, according to the Telegraph, Saudi Arabia and Russia produce 20% of the world’s oil production combined. And Iran’s starting to flood the world with more oil. It’s already producing 500,000 barrels per day. By the end of this year, the total should rise to one million barrels per day.

It’s clear. Financial markets and the world economy doesn’t need any more crude oil.

Unless something major happens, crude oil should make new lows in the months ahead. On this note, CNN reported last week:

A Gulf source [said] regional players are willing to do anything to stabilize the market and all options are open.

That includes a potential emergency meeting in February between OPEC and non-OPEC producers like Russia.

It sounds good. But is it just a rumour?

CNN elaborates:

The comments suggest a possible shift from Saudi Arabia, the powerful Gulf oil producer in control of deeply-divided OPEC.

The Saudis have long resisted dialling back production out of fear of losing market share. But U.S. production is slowing slightly and oil prices have closer to $30 a barrel.

This come just after Russian Energy Minister Alexander Novak on Thursday said OPEC and non-OPEC producers are considering a 5% output cut, according to Russian state news agency TASS. Novak cautioned that it’s “too early” to call anything a concrete agreement.

A spokesperson for Russia’s energy minister told CNN there is no formal date for the meeting or an official invitation yet. However, the spokesperson confirmed there are discussions taking place.

Financial markets live for rumours

If you’re hoping for higher crude prices, it doesn’t sound very assuring — there’s no discussions taking place. So I wouldn’t get too excited. Reporting on the rumour, Bloomberg told readers:

OPEC delegates said they have no meeting planned with Russia after the country’s Energy Minister Alexander Novak indicated he was willing to meet with the group next month to coordinate oil-output policy.

Four OPEC representatives said they hadn’t heard of any plan for talks. One Gulf member said de facto leader Saudi Arabia had no proposal to trim production by 5 percent, after Interfax reported the country had suggested such a cut at previous OPEC meetings, citing Novak.

Reviewing the story, crude’s ‘pop’ should be over for now.

Remember, markets tend to move on anticipation, not facts. Punters love a good rumour. It’s why they say, ‘buy on the rumour and sell on the news’.

On this note, it’s clear the meeting rumour is a hoax. So crude shouldn’t jump much higher right now. There’s no story to build up. On the other hand, if a meeting does eventuate, punters will start to get excited. They’ll think better days are ahead for crude and start bidding up the price.

Absent of any rumours, crude’s in for a volatile month. It’s unlikely to break through the US$40 per barrel level. And US$27.83 per barrel — the recent low — should remain a major target.

Crude should make a new low, though probably not this month. So be careful if you’re looking at buying the oil companies. A few are likely to go bankrupt. Remember, the supply and demand story’s terrible. And market sentiment MUST change to confirm a MAJOR bottom.

When the low’s confirmed, I’ll let Resource Speculator readers know. Remember, crude prices won’t stay low forever. The world’s facing a major war in the years ahead. That isn’t something I want. But commodities — and particularly crude — tend to rally during times of war.

If you want to know the best time to buy commodities, and the best miners digging them up, check out Resource Speculator.

To find out more, click here.

Cheers,

Jason Stevenson

Ed Note: This article was first published in Money Morning.

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Jason Stevenson

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