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The collapse in oil prices has now reached historic levels.
Tuesday's 7% plunge in West Texas Intermediate (WTI) - the largest slump in more than 30 years of futures contracts - marked the 12th consecutive daily loss for the New York benchmark. Before rebounding slightly, crude was down more than 22% in less than a month.
Now, we've spoken many times before about the numerous reasons why crude prices can plunge: artificial manipulation from short sellers and institutional monkeyshines, geopolitical tensions, distortions in supply and demand, even outright oversupply - we've seen it all before.
In this present case, some of this current decline is warranted, given the market's overestimation of Iranian sanction impacts and, to a far lesser extent, some weakening in underlying fundamentals.
But to be sure, the leading cause of the plunge has been a combination of what I have called the "lemming fixation" (a penchant for jumping off the cliff en masse) and some outright market manipulation.
I'll have more to say on this shortly, in a more extensive analysis my team and I are preparing right now.
But it's the completely counterintuitive - yet entirely predictable - effect of the recently re-imposed sanctions on the Islamic Republic that I want to explore today...
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Trump Has Undermined His Ultimate Goal in Iran
One of the administration's stated aims in slapping sanctions on the Teheran regime is to choke off their avenues for selling crude oil on the global markets.
Economics 101 tells us, all other things being equal, a reduction in supply would lead to a rise in prices.
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But much of the expected effect from Iranian sanctions has been delayed, even blunted, by a last-minute decision on the part of the Trump administration to exempt the eight largest importers of Iranian crude.
This makes the short-term impact of the sanctions effectively nil, and advances a direction question: Why was the decision to remove the U.S. from the Joint Comprehensive Plan of Action - the "nuclear deal" treaty signed by the United States, France, the United Kingdom, Germany, China, Russia, the European Union, and Iran in 2015 - and reintroduce sanctions even made?
At the moment, it seems merely another political move, utterly devoid of substance, by an increasingly beleaguered White House.
We're witnessing the result, at least in the short term: WTI has been cut by almost $20 a barrel since Oct. 1. The more widely used London benchmark, Brent, is down $20.63 a barrel since Oct. 3.
Now, whatever the geopolitics may be, here's what I think investors should take away from this result...
Here's What to Do with Oil Right Now
The market is now more oversold and undervalued than at any time I have witnessed in the last three decades.
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That's no idle claim: As you may recall, several years ago I developed an analytical technique to determine the effective market value for oil. The intent was to determine what effect artificial moves (especially those short contracts) had on the market value so we could see, in essence, the truth.
By the close of trade Tuesday, my calculations put the effective market value of WTI at $65.80 a barrel; Brent was at $74.75.
Respectively, those prices would be $10.11 and $8.91 higher than Tuesday's closing prices.
Meanwhile, the spread between Brent and WTI, calculated as a percentage of WTI (the more accurate way of determining the difference between the two benchmarks) has expanded to 15.4%.
That is a wider spread than at any point since the turbulent depths of the global crude bear market in late March of 2015.
Anyone who's long crude right now should be out; we need the dust to settle and for a "floor" to emerge here before moving back in. There's not even a pretense of market equilibrium right now.
But rest assured that, when that floor becomes apparent, there will be some very big money to be made. Manipulation has a way of snapping back like an elastic band, and there's massive profit potential in the "snapping."
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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.