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For the past week, I've been discussing some of the broader – and more technical – factors in the oil trade.
But my overall conclusion in each of those issues was this…
A rise in crude oil prices was coming, at least in the near term – a conclusion that has certainly come true.
As I'm writing this (Thursday, March 22), the West Texas Intermediate (WTI) price has surged almost 3% for the day and more than 5% since the close on Monday, and is up 6.5% in a week – its highest level since the beginning of February.
Meanwhile, Brent has registered equivalent gains of 2.9%, 4.6%, and 6.5%, respectively.
Now, there are two essential reasons why the price improvement is taking place, and both bode quite well for investment returns in the sector.
Oil's "Usual Suspects"
The first reason goes to the "usual" suspects:
- U.S. production levels
- Currency exchange rates
These are familiar, traditional, and market-based considerations.
American extraction came in much lower than expected for the week. Estimates from the Energy Information Administration (EIA) showed a decline of 2.6 million barrels. However, analysts had expected a 2.5 million increase.
Now, a variance like this is hardly news.
In fact, the EIA and analyst expectations tend to move in different directions over 60% of the time.
Somewhat unusually this time around, however, was the convergence between the EIA and analysts on the two other major weekly figures – gasoline and distillates (diesel and low-sulfur heating oil).
Only crude oil showed a marked disparity.
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Now, geopolitics can once again be used to explain all manner of events in the energy sector.
This time, we can point to concerns over:
- Rising instability in the Persian Gulf as the Saudi Crown Prince visits D.C. as Trump considers ending the Iranian Nuclear Accord
- Washington considering sanctions against an imploding Venezuela
- The intensifying Libyan conflict
- Chinese saber-rattling in the South China Sea
- Ongoing Nigerian domestic problems
I often note that geopolitics are no longer an outlier when considering the energy markets.
Rather, the uncertainty resulting from cross-border and global unrest is an ongoing staple element.
Nonetheless, pundits often use it as a catchall for anything they have difficulty explaining.
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.