Dancing with Crude Oil

A special note from Edelson Institute Executive Director Mike Burnick: JR Crooks knows how to play commodities like a fiddle. So far this year, he’s led his Natural Resource Options Alerts subscribers to possible gains of 103.7% in Southern Copper, 151.2% in the ProShares Ultra Bloomberg Crude Oil ETF, and 226.5% in Gold Fields. With a track record like that, I think you’ll want to pay close attention to where he sees crude going next.

ABC called to invite me to join the next season of “Dancing with the Stars.”

Well, no. They didn’t, actually.

But I did take a few dance lessons before my wedding, to prep for the first dance with my wife. That was 10 years ago to the day.

These days, most of our dancing is with the day-to-day privileges of raising children.

Apart from that, I also dance with crude oil quite a bit.

And lately, there’s been no shortage of quicksteps and foxtrotting there.

Since crude oil’s major price decline bottomed out in February 2016, when it got stuck in a $20 trading range, it’s been a little tougher to follow crude oil’s lead.

I’ve been fortunate, though. Most of my bets on crude oil since then resulted in gains for my subscribers. But my latest bet looks a little dicey …

I just went long.

That is, I bet that the price of crude oil will rise in the near term.

On Wednesday morning, I told my colleagues that I thought the balance of surprise in crude oil was to the upside. But then moments later, the Department of Energy dropped a surprise inventory build on the market.

The news sent the price of crude oil tumbling more than 4% on the day. Oops.

It’s OK. I’ve been wrong one other time before! Wink, wink.

What gives?

Why would I bet against the prevailing sentiment that crude oil is loaded with long-term bearish fundamentals? After all, the U.S. rig count keeps rising … which suggests U.S. production is not going to collapse anytime soon … which suggests inventories are not going to collapse anytime soon.

10,000,000 barrels per day, here we come!

Perhaps there’s no shaking this bear.

Production in Libya and Nigeria is coming back online. And even though Saudi Arabia is not exporting as much oil into the U.S. as it had been, Iraq is shipping a lot more.

Despite OPEC’s agreement to cut production, they’re not going to cut back their efforts to generate revenue. That means they’re still shipping as much as they can — exports are critical in keeping Petro states afloat.

Nevertheless, I’ll agree that the foreseeable future remains bearish.

But I’m tempted to argue that investor sentiment will change before the fundamentals do. That’s because some items suggest fundamentals will change … eventually.

Long story less-short: Production is (still) outpacing the discovery of new reserves.

A lot can and will happen before the industry is hit with what this chart portends. But anecdotes of how companies are spending less on new exploration and production may mean something.

And that something is how the declines in proved reserves will impact market sentiment.

So, in the meantime, we watch for clues to how investors and traders respond.

How goes?

When crude oil collapsed more than 4% on Wednesday, the price broke through a critical support level. And it’s headed for the next one.

By my measurement, the thrust lower looks like an extension of the downside move that was in play. I don’t like it, but that’s what it looks like.

Hopefully, it’s just a natural shakeout. New bulls, rocking the same idea I am, are susceptible to getting shaken out at key technical levels.

For example, a crude oil futures trader might put a stop-loss order at or below technical resistance. If a whole bunch of traders do the same thing, might as well be a bullseye. And an ironic pun. In such a scenario, price is likely to cascade lower as bulls exit and new bears enter.

Is that what we’re seeing unfold in crude oil?

At this point, I can’t say either way if that’s an appropriate explanation for this price action. But if it is, it bodes well for those bulls who can sit through it.

I can argue for a move to $53 per barrel … and then to $58 per barrel. Those are sizeable moves that could unfold in a matter of just two months.

Maybe we just hold our breath for a more favorable surprise next week.

Put your dancing shoes on!

Do right,

JR Crooks