My September Oil Price Forecast Will Burn the "Short Artists"

You're likely to catch plenty of oil doom and gloom on cable news right now, but West Texas Intermediate is up nearly $1 a barrel over the past 30 days.

I can't think of a better object lesson in why you shouldn't believe the players and short artists who make money whenever you believe crude prices are headed lower.

Instead, I'm going to show you exactly where I think oil prices will go in September - the truth - so you can get into position to make money.

Let's take a look...

The Oil "Distortionists" Are at Work Again

On several occasions recently, I have written about the manipulations ongoing in the oil markets.

Culprits have included big banks, as you'd expect, but also "zombie" funds, among others.

Since July 4, we've been experiencing another example of these manipulations.

The price gyrations in the oil market have brought out the latest bout of doomsayers and speculators.

oil priceThe doomsayers - what we call "symbol crashers" in the oil patch - are into another round of proclaiming an imminent collapse, wildly forecasting prices back in the $30s for WTI (West Texas Intermediate, the benchmark crude rate traded in New York).

Meanwhile, the speculators are tying their wagons to quick profits via shorting oil, causing a decline in prices beyond any level whatsoever justified by market conditions.

Keep in mind that these two forces tend to move in tandem, but only in one direction. They must drive the oil price down to make any money.

If the market prompts a jerk upward, these guys must quickly unwind their short positions. That always artificially stokes the upward trend to an overemphasis in the opposite direction.

The equilibrium between supply and demand remains the point most analysts focus upon. But the games being played by the folks I am now calling the "distortionists" make that more difficult.

Oil prices - specifically WTI - have been "volatile" over the past month, surging past $50 at one point in early August, only to fall below $47 last week. They shot up past $48 and sank to $48.35 yesterday.

On the surface, that's quite a lot of yo-yoing, but not as much as you might think...

[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

It's About the Price Floor, Not the Ceiling

Do not watch the ceiling of prices looking for resistance.

The market in oil actually forms around the pricing floor and the support level established there - despite what the distortionists try to tell you.

It's All About the Timing Here

I've seen oil price distortion many times in my 40-year career. It happens almost every year, in fact.

This potentially lucrative phenomenon, on the other hand, has occurred only four times that I've seen.

Each time, early investors have had the chance to take down rare, exceptional scores – gains like 3,160%, 3,983%, 8,233%, and even 16,557%.

I think this situation could possibly double investors' money in 30 days and bring up to 10X the money in the months that follow.

Click here to see what it's all about…

A current WTI trading range of between $42 and $49 a barrel has emerged. The unusual spread of over 14% is itself a testament to the rapid movements possible in either direction.

Additionally, while a foray below $42 is possible, there simply are no market forces to justify remaining there. When it comes to the pricing floor, and with apologies to Gertrude Stein, a tangible "there" is there.

As for the ceiling, let's lay out the factors restraining oil prices. There are only two of any consequence (despite what some talking heads on TV want you to believe).

First, concerns remain about that most traditional of all market indicators - supply and demand.

Oil demand has been increasing worldwide. But it consistently collides with a perception of supply. This results in an obfuscation always beneficial to short-sellers who keep the "oil price yo-yo" going.

This perception centers on the excess volume that could be brought to market if companies decided to do so. Preeminent here are the known extractable reserves in the United States, along with similar considerations elsewhere in the world.

In other words, there's a fear that some madness will strike and cause American oil companies to dump too much oil into an already saturated market, thus shooting themselves in the foot.

Well, aside from a few desperate guys who are one step ahead of the sheriff and must sell at any price, this is not happening.

Surplus crude is declining in the U.S. market. And while differences persist in well costs among producing basins, few producers will be looking at ramping up extractions until prices are consistently above $55 a barrel.

oil price forecastForget all the talk about breakeven prices.

Unless a driller is heavily in debt and needs to "pay the piper" by churning a declining revenue stream, companies will leave supply in the ground to await higher prices, then move out production proportionally to market requirements.

The ones who can't afford such a luxury will go belly-up, become acquired by a larger fish, or find their drilling rights relinquished.

As for U.S. rig usage increasing in 22 of the last 24 weeks, the translation into actual drilling is interesting...

New U.S. Drilling Won't Translate into a Production Spike

Most of the DUCs (drilled-but-uncompleted wells) are still designed to replace existing wells in areas where production has declined and secondary/enhanced recovery techniques are not cost-effective.

This does not translate into a huge spike in new volume.

Yes, it's true that the projections see American production rising to about 10 million barrels a day.

But that will happen in stages and will reflect an overall increase in worldwide demand. Remember, U.S. crude oil exports are now more than 1.1 million barrels a day, and that number will be increasing.

As for the global picture, both the International Energy Agency (IEA) and OPEC have extended their outlooks for when balance will be reached, but both still see it coming by the first quarter of next year. Oil prices will reflect that balance in advance of its actually gaining hold in the market.

The second overarching factor is the OPEC-Russia commitment to curb production. Now, Moscow has recently given notice that it may not be prepared to intensify the cuts.

However, Minenergo (the Russian Energy Ministry) has provided ample indication that it remains on board and will consider an additional strengthening of price caps if production outside the present agreement is brought into the fold.

There remains nothing OPEC or Russia can do about U.S. production. Yet the market conditions I have just briefly summarized will largely do the job.

Libya and Nigeria, on the other hand, is another matter...

If Global Oil Production Falls, This One Country Will Be the Reason

Neither Libya nor Nigeria had been included in the agreement. Saudi Arabia is now pushing to have that changed.

Both countries are members of OPEC and have periodic rises in production that cannot be sustained - whether because of civil unrest, in the first instance, or expanding infrastructure problems in the second.

That makes their inclusion in the OPEC-Russia deal attainable.

The most likely tempering of overall global production (and, thereby, an allowance for new or overproduction elsewhere) is situated squarely in OPEC itself.

Despite having the largest reserves in the world (greater than even the Saudis), Venezuelan production is approaching free fall.

The Venezuelan national oil company PDVSA has been circumspect in its figures.

But even in what they did release, production looks to have declined over 30% from its levels from only a few years ago.

Partly as a result, both PDVSA and the central government in Caracas have acute financial difficulties.

But internal OPEC analysis projects a further decline in available exports from Venezuela, with some suggesting levels representing a 50% cut by 2020. That would represent a full 2 million barrels a day (or more) siphoned from the market.

The problems in Venezuela are not going to be reversed any time soon.

I'll be talking about these problems - and the opportunities they'll create for energy investors - in Oil & Energy Investor this week. Click here to get those updates - they're absolutely free of charge.

An economic contraction ("implosion" may be a better term) is under way, and it has already unleashed an expanding wave of riots and civil unrest.

Because of all these uncertainties, some have begun to speak about prices in excess of $100 a barrel.

That's wishful thinking.

Yet, as investment banks cut their projections, OPEC is internally increasing its own. The consensus in Vienna (the location of the OPREC Secretariat) is for a price approaching $60 a barrel within 18 months.

In the nearer term, I am revising my estimates, but only slightly...

Oil Is Moving Higher by September

WTI should be $52 to $54 a barrel by September, and Brent (the more widely used, global benchmark set daily in London) at around $55 to $57.

This is not an environment where a rising tide lifts all boats.

But there will be some nice plays here with selected stocks that can produce high-grade oil at lower costs.

This remains all about the selection. I'll be recommending those specific profit plays for my paid-up Energy Advantage and Energy Inner Circle readers, of course, but investors who simply want to ride WTI higher can play the United States Oil Fund LP ETF (NYSE Arca: USO), and those profits can be juiced with September call options on the same ETF.

Follow Kent on Facebook and Twitter.

About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.

Read full bio