IEA Says Crude Oil Prices Nearing A Bullish Turn
Crude Oil Prices: Bottom Near?
Without question, crude oil prices have been the talk of the commodity industry for the past six months. That’s because West Texas Intermediate (WTI) crude oil is currently undergoing one of the steepest price downturns in decades.
The commodity has collapsed 52.6% since July 2014.
The lion’s share of those losses has come since November 26th. As you may remember, that’s the day before the Organization of Petroleum Exporting Countries (OPEC) announced their historic decision to keep 2015 oil production steady.
With OPEC members like Saudi Arabia, United Arab Emirates, and Kuwait pumping a collective 30 million barrels of oil per day, global crude markets are oversupplied by approximately 1.5 million barrels a day.
Why do such a thing?
Most analysts will tell you OPEC is trying to bring the US shale industry to its knees. While they’re having some success, I have serious doubts this is the Middle Eastern Oil Cartel’s main motivation.
After all, oil will have to stay in the $40 range indefinitely to keep US shale producers out of the picture.
Long time readers already know my thoughts on the downturn.
Regardless of the reason for OPEC’s historic production decision, the International Energy Agency (IEA) believes the global oil market is already seeing the fundamental signs needed for price recovery.
IEA: Oil Price Recovery Fundamentals Building?
According to the Paris, France based global energy market analysis firm, non-OPEC supply growth is already starting to dwindle. In fact, the IEA just lowered its 2015 non-OPEC supply growth estimate by 350,000 barrels a day.
Why is this happening?
It’s simple. In response to low prices, oil companies are cutting their exploration budgets and postponing/cancelling new projects.
From the IEA’s viewpoint, this news is a step in the right direction towards an eventual rebound in oil prices.
But let’s be clear…
While I agree with the IEA, you must realize there’s a big difference between weakening supply and weakening supply growth. The former implies overall supply is dropping. The latter means the rate of supply growth is slowing.
What’s my point?
As long as global demand remains subdued (like it is now), we could see years of dwindling supply growth without a bullish effect on oil prices.
So, Are Crude Oil Prices Really Close To A Bottom?
While we may see a few short-term rallies in crude in coming weeks, I’m doubtful they’ll hold up. In fact, I’m beginning to lean heavily on the idea oil will ultimately bottom in the mid-$30 range, like I mentioned here.
Barring an unforeseen Middle East blowup, which causes supply disruptions, you’ll be best served by shorting any upcoming rallies in WTI.
How do you do that?
You could do it through WTI futures.
But an easier way is to simply short the US Oil Fund (USO). If you’re not comfortable with shorting, you could purchase an inverse crude ETF like the US Short Oil ETF (DNO). As you may know, when the price of oil falls, DNO rises.
If you’re really looking for outsized gains as the price of oil falls, the ProShares UltraShort DJ-UBS Crude Oil ETF (SCO) may be for you.
Just keep in mind, SCO provides twice the inverse performance on a daily basis as WTI. As a result, if you time the crude market incorrectly, you risk outsized losses.
Until Next Time,
Justin Bennett
Commodity Trading Research
BIO: Justin Bennett is the head commodity research analyst at Commoditytradingresearch.com. With over a decade of real world trading experience, he finds ways for you to consistently profit from movements in commodities and the companies producing them. Sign up for our free reports and commodity newsletter at https://commoditytradingresearch.com/free-sign-up.
