Crude Oil’s been a terrible long term investment.
West Texas Intermediate (WTI), also known as Texas light sweet, crashed to US$26.19 per barrel last Wednesday. That’s near the 13-year low of $26.55 per barrel, which was hit on January 20.
Brent crude, which Aussie producers receive for selling their product, is trading around US$30 per barrel. Earlier in the week, when I told you to lock in your gains, it was trading near US$35 per barrel.
Indeed, the WTI and Brent price difference is widening. Growing crude supplies in the US are to blame. According to Bloomberg, the US is now the largest oil producer in the world.
Yet, the mainstream overlooks the US shale producers. Instead, the focus is on OPEC — led by Saudi Arabia — which continues to pump more crude. OPEC is trying to defend its market share against non-OPEC supply. Let’s not forget, non-OPEC includes Russia, who labelled the ongoing oil price war as ‘irresponsible’.
Looking forward, it’s highly unlikely we’ll see a coordinated change in strategy between OPEC and non-OPEC nations. At least, not any time soon. So, prices will have to remain lower for longer.
It’s an almighty mess — a mess that should end in total disaster.
I hate to be the bearer of bad news
To start, I’ll discuss the crude supply story. It’s important to understand what’s really happening. You’ll see why things should get worse before they get better.
Reports last week weren’t great. The US Energy Information Administration (EIA) lowered oil-price expectations for this year. Furthermore, the International Energy Agency (IEA) showed a wider forecast for the global supply surplus.
This is a problem…
At the IP Week conference in London, BP Chief Executive Robert Dudley explained why. He said, ‘We are very bearish for the first half of the year. In the second half, every tank and swimming pool in the world is going to fill and fundamentals are going to kick in. The market will start balancing in the second half of this year.’
So, according to Dudley, it’s going to be a crude bloodbath. A critical turning point, when current onshore capacity will be overflowing with crude, is approaching.
You have to wonder, where’s all the excess crude going to hide?
Hellenic Shipping News has the answer. It reported,
‘In the case where onshore storage gets filled, the excess barrels will need to be stored in the form of floating storage, which is a more expensive option. Despite the high cost, this would not be without precedent: in 2009, trading companies stored circa 120 million barrels offshore in 64 tankers.’
It seems like a good idea. But, it costs money to store crude. So, once all the ‘swimming pools’ are full, perhaps the excess crude will be dumped onto the market.
If you’re banking on higher crude prices soon, think again! To quote the EIA,
‘We suggest that the surplus of supply over demand in the early part of 2016 is even greater than we said in last month’s oil market report. If these numbers prove to be accurate, and with the market already awash in oil, it is very hard to see how oil prices can rise significantly in the short term. In these conditions the short-term risk to the downside has increased.’
For crude to truly rally, major fundamental change is required. Something that will affect either the supply or demand side.
Unfortunately, we’re looking at change that should affect the demand side.
Saudi Arabia’s preparing for Third World War
It’s not what I want. It’s not what anyone wants. But the world’s facing another major war in the Middle East.
It’s a trend set in motion, which could end in a total disaster. If Russia, China and the US get involved, we could be looking at a Third World War. Remember, the world economy is bankrupt, people are broke, and they’re protesting. Historically, when the economy declines, politicians drag their people into war — they need a distraction.
The Financial Times discussed the latest developments,
‘Saudi Arabia is discussing plans to deploy ground troops with regional allies, including Turkey, for a safe zone in Syria, in a last-ditch effort to keep alive a rebellion at risk of collapse as a Russian-backed offensive by Syrian regime forces encroaches on the northern province of Aleppo.
‘Two people familiar with Saudi plans told the Financial Times that high-ranking Gulf officials are in Riyadh meeting Turkish officials to discuss options for deploying ground troops to head a coalition of fighters inside Syria.
‘Aleppo city, Syria’s former business hub, is the last significant urban centre controlled by the rebels. Its countryside, on the northern border with Turkey, is their lifeline.
‘President Bashar al-Assad’s forces, bolstered by Iranian-funded Shia militias, advanced last week into opposition-held territory in Aleppo’s northern countryside under the cover of Russian air strikes. The violence prompted thousands of civilians to flee, exacerbating the already vast humanitarian crisis.
‘Publicly, Saudi Arabia, the UAE and Bahrain are calling for troops to be deployed as part of the US-led international coalition already ranged against Isis. This comes after Washington singled out Arab countries for not doing more to fight the Islamist group. But regional observers say the moves are cover for an intervention to help the Syrian rebels.
Of course, the war on terror is blamed. Yet the US, Saudi Arabia and Turkey want to topple the President of Syria, Bashar Hafez al-Assad.
They want more influence over the region, where Iran is becoming more powerful. Plus, they want to build a gas pipeline from Qatar — through Syria — to Europe. This would challenge Russia, who supplies the European Union with 30% of their gas news.
We’re nearing the political end game — which of course, is just the beginning to a major war. Hararetz reported,
‘The encirclement of Aleppo, if completed, will be not only the Assad regime’s greatest accomplishment in the Syrian civil war. It will also mark the end of the U.S.
‘Under the cover of heavy Russian airstrikes and with the aid of Shi’ite militias from several countries, the regime’s death squads are advancing toward the siege, starvation and perhaps the eventual conquest of Syria’s second-biggest city.
Success there is liable to encourage the dictator in Damascus to gamble on similar measures in southern and northwest Syria. Washington looks on with a combination of worry and helplessness, while the American public is preoccupied with the presidential primaries and the Oscars.’
This is getting serious. What will the Saudi Arabia, Turkey and the US do next? A war in the Middle East isn’t what we want, but it’s is precisely what crude oil needs to stage a massive comeback.
The geopolitical events are escalating. But at the moment this is still a chess match. It will take time before we see a full on confrontation. As such, commodities are due to crash in the months ahead.
When we see a full on confrontation, commodities will boom. That time hasn’t come yet. But if you want to know the best time to buy commodities, and the best miners digging them up, check out Resource Speculator. If you want to know more on this story, click here.
Resources Analyst, Resource Speculator
Ed Note: This article first appeared in Money Morning.