Oil’s Bear Dance Coming to an End

Earlier this month, I wrote about the bearish headwinds facing the oil market and laid out my forecast.

And since then, oil prices dropped a staggering 11%. And in just a few weeks’ time!

While I don’t like to crow, no doubt about it that forecast was right on.

And there’s more where that came from. In fact, I expect oil prices to continue to drop over the short-term, before turning higher into the fourth quarter.

And when that turn happens, watch out! Oil may be in for a monumental upside surge. In fact, my signals tell me that $60 oil isn’t out of the question for this next run higher.

But before that bullish turn can happen – and a definite bottom comes into play – three bearish factors need to be addressed …

#1: U.S. supplies need to come down. As it stands, U.S. oil inventories are roughly 100 million barrels above their five-year average for this time of the year. This comes from a surge in drilling activity that’s increased for 23 consecutive weeks and from domestic oil production reaching the highest level in nearly two years.

#2: OPEC and non-OPEC members must address the surge in Libyan and Nigerian production. Both nations were exempt from the output-cut agreement and have since turned up the spigots. With the current drop in oil prices toward $40, it’s increasingly likely that the cartel will pursue a larger cut in production.

#3: Companies need to draw down oil stored at sea. Estimates from Kpler SAS put the amount of oil stored on tankers at a new high for the year at 111.9 million barrels.

Once these headwinds are behind us, we should have clear sailing for higher oil prices.

And just like I expected, my E-Wave cycle forecast calls for just the same action:

A bottom in late July followed by a nice tradable rally into the fourth-quarter. See for yourself …

The above chart shows oil declining into late July, and then a significant rally into early October. Once oil makes that turn, I expect additional upside support from a handful of fundamental factors …

Improvement in U.S. gasoline demand. There was substantial improvement in this metric last week, with average daily gasoline demand at 9.816 million barrels per day. This is within striking distance to the record set in May 2017.

I expect U.S. gasoline demand to remain near these levels – and possibly increase – in the coming weeks as consumers hit the road for vacation and take advantage of cheaper prices.

More Middle East Tension. This includes the latest powershift in Saudi Arabia, with the controversial new crown prince – Mohammed bin Salman Al Saud. He threatens to disrupt stability in the region with his well-known antagonism toward Iran and Qatar. This tension will likely intensify over the short-term and build more geopolitical fear-premium in oil prices.

OPEC and non-OPEC member jawboning and headline flow to support the market. This includes talk of larger production cuts as well as indications that global oil supply-and-demand is coming back into balance.

What to do?

I’m monitoring the oil market closely for signs of waning selling pressure and for evidence of new demand. But I think it’s still a few weeks away. When the time’s right, I’ll recommend my members buy the ProShares Ultra Bloomberg Crude Oil (UCO) to take advantage of the coming advance.

Good investing,

Mike Burnick

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Comments 27

  1. Joe Gehrig June 26, 2017

    Oil: Are you sure you will suggest to buy SCO? Isn’t that an ultra short not long ETF???

    Reply

  2. Tom Bradley June 26, 2017

    Don’t you mean buy UCO? I don’t think you want to short oil a that point.

    Reply

  3. Ayachi Ben June 26, 2017

    I think it will stay low until the beginning of October

    Reply

  4. jefe Gordo June 26, 2017

    Why not put some labels on your Graph. What is the Vertical scale? What does the Green line represent. Some of us are not clairvoyant

    Reply

  5. Tim Brown June 26, 2017

    You guys should do analysis of cryptocurrencies,

    Reply

  6. lew hodgerney June 26, 2017

    You don’t short oil when the price heads higher! Is this a mistake?

    Reply

  7. Yan Ocheri June 26, 2017

    ProShares Ultra Bloomberg Crude Oil has symbol UCO not SCO !

    Reply

  8. Harry Jones June 26, 2017

    Oil’s Bear Dance Coming to an End
    by Mike Burnick | June 26, 2017 – I believe Mike meant to say reco of UCO, not SCO as he stated !!??

    Thanks

    Reply

  9. Barry Barker June 26, 2017

    Mr. Burnick
    Your last comment on this report has me unclear, SCO is a short on oil correct? So are yoiu going to play that for a month or so until the bottom comes in and then possibly a leveraged play for the advance.

    Reply

  10. Ernie June 26, 2017

    You stated: “When the time’s right, I’ll recommend my members buy the ProShares Ultra Bloomberg Crude Oil (SCO) to take advantage of the coming advance.”
    Advance? Are you sure that’s what you wanted to say? SCO is leveraged -3x and sinks like a stone if the price of oil rises.

    Reply

  11. S June 26, 2017

    SCO, really?

    Reply

  12. David Helms June 26, 2017

    Why are you recommending an ultrashort etf to take advantage of an advance in prices?

    Reply

  13. Matt Gibby June 26, 2017

    I’m confused. SCO goes down when oil goes up so did you mean something else?

    Reply

  14. John H June 26, 2017

    I may be wrong, but isn’t SCO ultra-short crude oil? Why would you recommend it for an expected increase in the price of oil? Maybe you mean UCO, not SCO. Maybe we should buy SCO now for the next few weeks during your expected decline in oil, then buy UCO.

    Reply

  15. James Williams June 26, 2017

    Don’t you mean UCO not SCO?

    Reply

  16. Robert Schubring June 26, 2017

    The oil-stored-at-sea issue you mention, Mike, is functionally a bull oil play. What makes it possible is the lack of US domestic pipeline capacity to move North Dakota shale oil to Gulf Coast petrochemical plants. Initially, a regulatory overreach by EPA bureaucrats contributed to the problem thusly:
    To attract the industry, North Dakota legislators enacted a state law protecting intellectual property from forced publication. One such item of intellectual property, was for an adhesive that enabled sand to stick to rocks. The sand, called “proppant”, props open the pores in fractured rock after fracking is performed. Using glue to stick the sand to the rocks, offered a way use less force to break the rock, and developing a good glue formula required testing, hence the attraction of being able to keep a proprietary glue formula, secret.

    The regulatory confusion that arose, is that EPA has authority to regulate additives added to oil products that are sold to consumers for purposes of setting those products on fire. Leaded gasoline combustion residues in the form of lead bromide and lead oxide that formed smoke and fell in rain, remains a questionable health hazard, because most cities whose residents drink fluoridated water from lead water pipes are getting significant doses of lead that impact their health, and neither those cities, nor the vendors of the fluoride additives, want straightforward answers on lead poisoning. Hence, oil companies on their own volition stopped selling leaded gasoline, avoiding litigation, and EPA retains authority to regulate possible lead replacements, just in case a lead replacement for gasoline gets proposed, that ends up more harmful than lead.

    What EPA bureaucrats tried to do, was expand this authority over things added to gasoline, into a power to force the glue manufacturers to give away data about the tests they were running in North Dakota, on a glue that stays behind in the sand grains placed in the fracked oil formation (and is not refined nor run through gasoline). Obviously, once in possession of this confidential information, those bureaucrats could illegally obtain money by selling the information to foreign countries, hence none of the bureaucrats actually admitted the reasons for their fishing expedition.

    The matter never came to court.

    The 9-11 Attacks put NATO into the War On Terror, and if there’s one thing a navy needs to fight a war, it’s boiler fuel to propel ships. Britain’s Royal Navy wanted to buy that North Dakota crude oil, send it to British and European refineries, and trade it for jet fuel and bunker fuel for ships. The Bush Administration swiftly agreed with the concept and issued a waiver, citing National Defense, allowing North Dakota crude to be loaded aboard trains and hauled to ports in Maine, from where it was loaded aboard tankers and sent to Europe. EPA’s authority to regulate what’s in civilian gasoline was completely bypassed.

    What made the Bush-Blair move influential, is that pipelines built in the opening round of World War II to haul Texas oil over the Appalachians to refineries in Montreal, Canada, got pressed into service. Those same tank ships that docked in Maine to load North Dakota crude for Europe, arrived laden with British Brent crude from the North Sea. So, the same ships were hauling oil in both directions. This meant that other routes, such as the Nigeria-to-Houston route that had been a mainstay of the US oil business in the 1990’s, were less economical. The ships hauling in Nigerian crude had to carry sea water ballast on the return trip to Nigeria. Ship owners put every hull they had, on the bidirectional trade route between Britain and Maine.

    The Obama Administration scored political points with it’s backers, who view oil as a great evil, by leaving the Bush-Blair arrangements in place. West Texas crude continues to be available, because the fracking technology that got tested out in North Dakota, became freely available in Texas as well. Proppants and adhesives weren’t creating environmental problems in Europe’s oil supply, because as advertised, they stayed behind in the oil formation and stuck to the sand. Essentially, Team Obama found it profitable to oppose the completion of two pipelines from North Dakota to the Gulf Coast, because it made for better television, than to try to create an issue over the proppants and adhesives at that late date.

    The Trump Administration disrupted those arrangements massively. Threatening to dismantle the EPA entirely, signaled that any attempt to expand EPA’s authority over gasoline additives, into an authority over proppants and adhesives, would result in someone getting fired and the agency’ budget being diminished. Authorizing completion of both Dakota pipelines now opens the door to much-more-expansive use of those sources. But more importantly, Alberta’s tar-sands industry requires thinning agents to mix with the heavy tar, to make it pumpable. Blending the Dakota crude with the tar-sands oil, is an outstanding way to do precisely that.

    A trend worth observing, as the Bush-Blair arrangement unwinds, will be the price of diesel oil relative to gasoline. The Alberta tar-sands oil is better suited to synthetic gasoline, than to distilled diesel fuel. I expect to see the price of diesel fuel diverge upward, from that of gasoline. This may lead to a renewed push to fuel heavy construction and farm equipment on butane, a move that railroads would welcome because butane must be transported under pressure to keep it liquid, and the giant tank cars that railroads use to move the stuff are already used in winter to haul a butane-propane mixture called LP Gas, that rural users who have no access to natural gas pipelines, use as fuel.

    Another consequence of moving Alberta tar-sands oil to the Gulf Coast, is that the residue from distilling it, can be blended with a high-asphalt crude oil such as what Venezuela once exported, to make asphalt for construction work. Certainly China’s “One Belt, One Road” policy is going to create a global demand for construction materials such as asphalt, and Texas refiners will likely contribute to that demand. A valuable form of asphalt, known as Superpave, contains asphalt slurried with old tires and heated until molten, then mixed with glacial sand that has a specific grain shape that makes the mixture nearly as strong as concrete and actually tougher than concrete in some ways…the waste rubber makes it impact-resistant and waterproof, which protects it from damage by freezing and thawing. Western China has an abundance of sand that got ground up in the last Ice Age, making it ideal for Superpave…and America’s junkyards are chock full of worn-out automobile tires. Mixing asphalt and old tires gives a liquid that a tank ship could carry to China, and China’s engineers could certainly mine the local sand and turn it into pavement wherever needed.

    Can the grain ethanol industry survive that onslaught? It needs to reinvent itself, minus the need for subsidies, or it’s in serious trouble. Canada and Russia employed an ethanol-based technology in World War II, thermal cracking, in which very hot ethanol vapor got passed over hot scrap iron, yielding butadiene and hydrogen gas, along with steam. Butadiene reacts with a peroxide catalyst to make a kind of synthetic rubber (this was pretty essential in the War, because the Japanese Army occupied most of the world’s rubber plantations, particularly the very tough Gutta Percha rubber that was native to Southeast Asia. and the synthetics were desperately needed for strong tires and drive belts. Brazilian rubber had to be mixed with Gutta Percha to make those products, and when Gutta Percha was no longer available, synthetics made from butadiene-styrene-acrylonitrile blends were essential to the Allied war effort.), but butadiene also is a flammable gas that could be added to butane, compressed to a liquid, and fired in Diesel engines that are retrofitted with pressure tanks to handle a liquid fuel under pressure. As for the hydrogen…it’s hydrogen. It has loads of uses. If nothing else, it can be burned to heat the furnace that makes the butadiene from alcohol.

    Reply

  17. Neil June 26, 2017

    I believe SCO is incorrect for advances in the price of oil

    Reply

    • Neil June 26, 2017

      UCO ?

      Reply

  18. Art White June 26, 2017

    Your view points and data are very articulately presented so that the average investor can understand the data and short/long implications thereby investing accordingly.

    Reply

  19. Paul June 26, 2017

    Looks like JR Crooks article in the Edelson Wave on June 9th, Dancing with Crude Oil turned out not so hot…He announced he went long on oil that day… Bad Call….Hope he didn’t lose too many thou$ands…I stayed short, sold recently, and made a nice profit…Now am looking for a minor oil pop (hopefully) and then go short again…Mike, I think your analysis is spot (pardon the pun) on…

    Reply

  20. Nick ONeill June 26, 2017

    When the time’s right, I’ll recommend my members buy the ProShares Ultra Bloomberg Crude Oil (SCO) to take advantage of the coming advance.

    This makes NO sense if you expect the price to rally higher? SCO is a SHORT position???

    Reply

  21. steve nelllissen June 26, 2017

    Mike,

    SCO is what you should have recommended three weeks ago.

    Hope you meant USO or UWT. Those are long Oil ETF’s.

    Steve

    Reply

  22. Robert Olsen June 27, 2017

    Why do you want to short it when you say it’s going advance (SCO ultrashort)

    Reply

  23. Tom Skupa June 27, 2017

    I think that you mean that you expect to recommend UCO and not SCO!

    Reply

  24. azhar June 27, 2017

    good article

    Reply

  25. Matthew Marsiglia June 27, 2017

    Mike,

    Are you correct in the symbol for Bloomberg Ultra Crude Oil? I believe SCO is actually ProShares Ultra Short Crude Oil. The correct symbol for Bloomberg Ultra Crude Oil is UCO.

    I enjoy reading your comments and forecasts.

    Sincerely,

    Matt

    Reply

  26. bharat shah June 27, 2017

    Edelson wss talking about oil going to $10..you seems to b bullish on oil

    Reply