Oil prices are surging. The bulls are back in the driver’s seat, impatiently honking the horn and barreling down Wall Street.
Fundamental drivers include OPEC and Russia making deeper cuts to output, strong global demand and the threat of Middle East disruption.
Speaking of OPEC: They have a secret weapon that will probably shock you.
More on that in a minute. First, let me give you the rundown on what’s turning up the heat in the oil markets.
Adding gasoline to the flames, Turkey’s Islamic ignoramus and brutal boss man, Recep Tayyip Erdogan, has threatened to turn off the taps on the pipeline that carries oil from northern Iraq to the outside world if the Kurdish independence referendum goes the wrong way.
Well, the vote went the wrong way for Erdogan. About 90% of Kurds said “yes” to independence.
So, for many reasons, including cyclical reasons, the physical crude market is tightening. Front months are now more expensive than months in the future. This is pushing oil prices and oil stocks higher. Look at a recent chart of the Energy Select Sector SPDR Fund (XLE), the benchmark oil stock ETF.
You can see the XLE was recently up 17 out of the past 18 trading days since Aug. 30. It’s in a new uptrend.
I’ve put an indicator on the bottom called “The Force Index.” It combines price action and trading volume. And it shows buying interest is strong and getting stronger.
My price objective on the XLE is $79. When we get there, we’ll see.
We got more fuel for the fire at OPEC’s meeting in Vienna last week. Harold Hamm, CEO of Continental Resources (CLR), the biggest leaseholder and producer in the Bakken oil basin, gave a presentation at the meeting.
He told OPEC members that the U.S. Energy Information Administration (EIA) is wildly overestimating U.S. oil production growth this year …
Bloomberg reports that:
“While official Department of Energy forecasts as recently as last month showed U.S. crude production reaching 9.82 million barrels a day by December 2017, the Domestic Energy Producers Alliance – a group representing domestic onshore oil and natural gas exploration and production, chaired by Hamm – sees it at 9.35 million.”
You see, U.S. production is highly responsive to market conditions. Therefore, U.S. producers are pulling in their horns in face of prices under $60. That’s more fuel for a price surge. So, when you get down to it, OPEC has a secret weapon all right. And that’s the fact that U.S. oil production is way too price-sensitive for the good of U.S. oil consumers.
The cartel’s secret weapon is the U.S. oil market itself.
Some people will say that OPEC can and will always pump more. After all, no one knows how to let greed get the better of them than OPEC.
But that view would be wrong. WRONG!
In fact, five OPEC members – Iraq, Iran, Libya, Nigeria, and Venezuela – may already be pumping at their maximum capacity. That’s according to a new report from Citigroup.
Citigroup believes this fact is sowing the seeds for oil prices to squeeze higher – potentially much higher – as soon as 2018.
Meanwhile, speculative demand for fuel and products hit a new record in the week of Sept. 19.
How about total global demand? That is projected to grow by from 1.7 million- to 1.8 million-barrels-a-day this year. That’s 400,000- to 500,000-barrels-per-day more than expected at the start of the year.
The bottom line: This rally isn’t just based on speculation. It’s based on fundamentals. When we get pullbacks, buy those pullbacks.
But smart speculators should be aware that this market is going to be volatile. I’ll explain why.
Enter the Four Horsemen
There are a few aspects to this that could send this market zig-zagging wilder … and wider … than most investors can imagine. Four horsemen, if you will, that could ride through the market and send expectations scattering.
- Energy producers don’t believe this rally. They are hedging (selling forward production) in a hurry. This is to lock in forward profits. Producers are often right. On the other hand, they’ve been trapped in an abusive relationship with oil prices for a long, long time. Their disbelief is understandable.
- Hamm told OPEC a new U.S. oil peak is coming. He said that without technological innovation to overcome dwindling reservoir pressure, production from the Permian Basin could peak as soon as 2021. And it’s true that total production-per-rig is falling in major American oil fields (see below). However, I can make a strong case for American innovation rising to the challenge. Also, more rigs at work is great news for oil-services companies.
- Black swans breed in oil fields. In other words, we never know what unexpected event is going to flip the table on oil producers.
- The rise of the electric car. In about five years, we are going to see electric vehicle (EV) use rise enough to start affecting global oil demand. In 10 years, there will be definite effects. And by 2030, the effects will be huge.
In the short term, however, pullbacks can be bought. This rally hasn’t gotten anywhere near the top.
How You Can Play It
You can just buy the XLE. I showed you a chart and gave you a price target.
However, that’s not what I’m recommending to my Supercycle Investor subscribers. Why? Because there are BETTER ways to play this rally.
I just gave them three hot picks. And I plan to give them more.
Whatever you do, do your own due diligence. Buy something you’re comfortable with.
But you better buckle up. Get comfortable. Because the bulls are in the driver’s seat. And they’re shifting into higher gear.
All the best,
Sean Brodrick
P.S. The good news is Martin and I just had a great talk about threats and opportunities in the global economy. The better news is we recorded it. I took the chance to name some of my favorite gold miners. Click here to watch it now.
Richard Davis September 30, 2017
How does this reconcile to Mike Burnick’s cycle charts for oil?
James September 28, 2017
How’s this all effecting the securities indices, the s and p 500, the Dow Jones, and the Nasdaq. Are inverse etfs and low risk securities issued by the us government in the form of t-bills, treasury bills, what to try and get into. We are probably in a jugular, Kuznets cycle at the moment. The jugular cycle is a 15 to 20 year cycle. The Kuznets cycle is a 7 to 11 year fixed short term investment cycle. If we are in a Kuznets cycle that means the war cycles are starting to ramp up to only need to look at the USA v north Korea to confirm that. I am an optimist though, I think we are for a boom in the economic cycle. A boom even bigger than the last boom. Whatever happens we are in for a rollercoaster economy over the next 5 years. We are currently in a boom, recession, depression, improvents cycle. We just don’t know how prosperous the prosperity part of the cycle is gonna be.
Gary Torgison September 27, 2017
What do you know about an agreement between governments to confiscate all of the our wealth from every place possible and replacing it with basically a paper account showing what you have? A society with no cash and the governments knowing what you buy. Also, how will the government keep track of GOLD?