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As of yesterday morning, crude oil prices were holding tight near a two-year high. Despite the misgivings of short-sellers who use falling oil as a means to make money, the global market has finally stabilized.
As I write this, WTI (West Texas Intermediate) was at $57.33 a barrel, nicely above the upper limit of the end-of-year $55 to $57 range I forecast last month. The consensus indicates our next resistance level is around $60.
Meanwhile, London-set Brent is trading at $63.97, convincingly higher than my Dec. 31 range of $58 to $60 a barrel.
This adds up to one fact…
We're now in the perfect environment to make some nice money with the presence of two crucial ingredients: a degree of predictability and low volatility.
So, while I develop my new, upgraded crude oil forecast for the first quarter of 2018, let’s take a look at why this is happening and, more importantly, how we can make some money in the oil patch…
Sometimes Crude Oil Surpluses Can Be a Good Thing
I’ve written regularly about how critically important market balance between supply and demand is.
And that elusive, long-awaited market balance is here.
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This supply and demand balance doesn’t mean the oil market is moving into a "just-in-time" situation.
That’s neither possible nor advisable when it comes to a major raw material like oil. People don’t use crude oil – they use refined oil products. And without oil supply in storage to allow for at-will refining, even tiny swings in the availability of oil would result in huge swings in the price of crude oil (and refined oil products)…
That could wreak havoc on whole economies. So, this balance actually requires a surplus in the market.
So, how can we have a supply surplus without downward pressure on prices?
The key is to restrain the excess flow from available, extractable volume from driving down prices.
This is especially the case in the United States, where the presence of huge shale and tight oil reserves has prevented an appreciable rise in price and, until recently, had fueled a decline.
However, at current levels, much of American production is entering profitability.
Now, not all companies will benefit. The cycle of mergers and acquisitions will continue, as will bankruptcies.
But companies with developed operations, with producing wells in low-cost development basins, and with manageable debt, will be able to time production, thereby improving price per barrel at the wellhead (where the producer is paid) while stabilizing the broader market.
The days are gone when producers were forced to flood the market in a desperate attempt to stay in business. Prices at current levels allow surviving companies to plan production, and that sustains a higher pricing range.
All of this has the net effect of raising prices.
But that's not all…
Venezuela Is Teetering on the Edge of Collapse
Remember, the oil price is set globally these days, not in the developed economies of North America and Western Europe. And demand is increasing faster outside the United States and European Union than inside.
U.S. crude exports to higher-priced foreign end users are now at 2 million barrels a day. American refiners already lead the world in the export of processed oil products.
Events elsewhere in the world are contributing to lowered supply expectations. The OPEC-Russia agreement to cut/cap production is working and will now be extended into next year.
In addition, as I predicted some time ago, it now appears Venezuela and its state oil company, PDVSA, will not be meeting debt interest obligations.
This will further fuel the financial crisis in the country, constrict access to working capital, and exacerbate a PDVSA production decline.
This will lead to increasing flexibility among other OPEC members to increase production without impacting the overall price.
A few years ago, I never could have imagined that U.S. oil exports would surpass those of Venezuela – home to what are likely the world’s biggest reserves.
Yet, that’s exactly what is taking place.
Geopolitical tension elsewhere is also increasing uncertainty, in places like the Persian Gulf and, particularly, the South China Sea, currently threatened by China’s “sha shou jian” superweapon.
This translates into market concerns over whether oil transit routes will be affected. And that raises prices.
How to Make Some Money on Rising Oil
In the absence of actual events, traders peg prices on the expected costs of available barrels. In the current environment, they need to hedge at the higher level, effectively pegging contract prices to the anticipated costs of the most expensive next available barrel.
They then use an array of options and other derivatives to provide insurance.
Both of these main factors are causing a gradual rise in the floor of pricing ranges. Remember, it’s the floor, not the ceiling, of those ranges that genuinely tells us the attitude of market players.
The floor tells us the price will keep moving slightly up.
That's all we need to make money with targeted moves, like taking long positions in the United States Oil Fund ETF (NYSE Arca: USO).
There’s another way to play this trend, too, that could potentially hold “significantly” more upside. In fact, conditions haven’t been this perfect in 10 years for what I’ve got in mind; every piece of the puzzle is in place.
Now, this isn’t a stock or a bond, or anything long-term. It’s an opportunity for folks playing along to score up to nine times the money over the next 60 days or so. Click here to see how…
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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.