Start the conversation
The real price of crude oil is much higher than what you've been told…
Yes, oil prices fell to $26.50 today (Thursday) as investors shrugged off last week's temporary fall in U.S. inventories and remained focused on the larger global supply glut.
But according to Money Morning Global Energy Strategist Dr. Kent Moors – an international oil adviser who's worked with leading energy agencies for over four decades – today's price of crude oil is artificially deflated. In fact, there's one factor that's manipulating prices and pulling them lower than the actual market value of oil.
First, here's what's deflating crude oil prices today…
Why the Price of Crude Oil Is Much Lower Than the Market Value
At 11:45 a.m., West Texas Intermediate (WTI) crude oil prices were down 3.5% and trading at $26.50 a barrel. This is the fifth straight day of losses for WTI. The U.S. benchmark is now on track to close at its lowest level since May 7, 2003. Futures are down 16.2% in February and 30.6% in 2016.
Brent crude oil prices were less volatile today. The global benchmark – priced in London – tumbled 1.1% to $30.51 a barrel. Futures for April delivery are down 9.4% this month and 15.4% this year.
The reason why the price of crude oil is plunging today is overwhelmingly bearish sentiment about the market's oversupply. Although the U.S. Energy Information Administration (EIA) reported yesterday that weekly supply fell for the first time in five weeks, many investors think the drop is only temporary.
You see, this panic in the face of clearly bullish evidence has been causing an artificial decline in the oil price this week.
As a matter of fact, the real price of crude oil is significantly higher than the $26.50 oil quote we saw this morning…
This Is the Actual Price of Crude Oil Today
According to Moors, the real price of crude oil trades near $38.50. That's $12 higher than today's quote for WTI.
You see, the artificial "discount" we see is perpetuated by the short positions of hedge funds and various pundits. Bloomberg reported that hedge funds increased their number of short bets by 15% in the second week of the year alone.
The shorts from these highly visible investors scare others into thinking slowing growth in the U.S. and Chinese economies is dragging down the price of oil. The ensuing panic and sell-off lines the pockets of these hedge funds with profit.
"Suppose 'Chicken Little' from 'The Sky Is Falling Hedge Fund' comes on screen and talks about oil moving down to $18 a barrel (or even lower)," Moors explained last week. "The hedge fund is already running short positions on crude that will profit if anybody watching the interview buys the 'panic.'"
But Moors was able to see through all the panic and calculate the actual price of crude oil. He has been working in the oil sector for 40 years and has worked with U.S., Russian, and Iraqi governments. And he has developed his own algorithm for determining the true price of oil.
"I've set up an algorithm to track these artificial oil price machinations," Moors told Money Morning readers on Feb. 4. "That algorithm is now saying that the premium for these moves now averages $12 a barrel."
"In other words, oil quoted at $30 has an actual market value of about $42."
Although the WTI crude oil price is artificially deflated, it's about to see a long-term rebound this year. In fact, the 1.2% increase in annual demand this year will cause the price of crude oil to hit $70 by 2017. This will offer us some nice profit opportunities along the way.
But you have to be able to determine which oil stocks are dangerous and which ones are profitable during this low price climate.
Here are the oil stocks you should avoid – and the one type of oil stock you should invest in this year…
Alex McGuire is an associate editor for Money Morning who writes about energy. Follow him on Twitter for all of the biggest oil and gas updates.
Like us on Facebook: Money Morning