Way back in October, my colleague Larry Edelson accurately called the fate of OPEC’s efforts to depress oil production as well as lift oil prices.
Now, the most recent November deal to trim oil production has failed to tighten up burdensome global supplies. And that has been followed by a quicker and larger turnaround in U.S. shale oil production.
The perfect storm of crude clobbered oil prices, just as Larry predicted.
In fact, oil prices have returned to the levels before the November agreement. And now, OPEC and non-OPEC members are heading back to the drawing board.
As I see it, oil markets have forced OPEC’s hand. They must extend previously agreed production cuts at their May 25 gathering for fear of even lower oil prices.
And that lays the foundation for higher oil prices in the shorter term. Consider the following …
Force #1: OPEC member jawboning. This includes a stream of headlines out of Saudi Arabia, as well as Russia, talking up consensus for extending their production-cut agreement into 2018. All under the guise of bringing global supply-and-demand into balance.
Force #2: Technically oversold. The 18% decline in oil prices from March levels produced an oversold technical condition that’s ripe for a corrective rebalancing effort.
Force #3: E-Wave cycle forecast. The Edelson Wave cycle forecast calls for higher oil prices into early June. See for yourself …
As you can see, the E-Wave cycle chart above forecasts higher oil prices into early June, driven by the forces I just told you about.
But the rally isn’t going to last. In fact, after the bump higher, oil turns lower with a vengeance.
And it’s not just my cycle forecast that says oil is going lower. There are other factors at work …
First: OPEC is losing control of the oil market. As it stands, OPEC-member production represents 33% of global production. And their scheme to prop up oil prices is costing them market share, with the U.S. shale oil industry becoming the world’s new swing producer.
Second: Too much supply. Case in point is the surge in U.S. production that increased for 12 consecutive weeks to a rate of 9.31 million barrels per day. And the latest monthly report from the U.S. Energy Information Administration (EIA) pegged U.S. oil inventories at 100 million barrels above the five-year average for this time of year.
The supply dynamic is made worse by a doubling in the number of U.S. oil rigs in the last year, which points to even more supply in the months ahead.
And to OPEC’s chagrin, Iran and Libya were exempt from the November production-cut agreement and the two countries have aggressively ramped-up oil production.
Third: Waning demand on multiple fronts. One is the slow ramp-up in gasoline demand going into the U.S. summer driving season, which is running 1.6% below the same time last year.
Another demand headwind is China, with some of the world’s largest oil-trading concerns noting slower refinery buying interest.
Underscoring this point, the International Energy Agency (IEA) downwardly revised their global-oil-demand outlook from earlier this year. That’s partly because of slower economic growth in Russia and India.
So, how do you play the oil market in the months ahead?
My team and I are monitoring oil-market action going into the May 25 OPEC meeting in Vienna. Based on OPEC’s decision, we’re looking to sell a post-meeting rally to take advantage of the looming price decline. Should all my signals line up, we have our eyes on the ProShares UltraShort Bloomberg Crude Oil ETF (SCO).
But just like in all investing, timing is everything! It’s not enough to know what to buy or sell. You have to know when to do it as well.