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Oil Prices Look For Steady Rebound
Dr. Kent Moors, Global Energy Strategist for Money Morning, tackled those questions today (Friday) on Fox Business and gave his latest prediction on the future for oil prices.
Despite the high level of worldwide supply for oil, Moors expects oil to rise from the amount of global demand. He noted that the effects of the embargo have been overshadowed by Europe's debt crisis and once those sanctions are felt oil will start to rise.
You can see all of Moors' analysis on oil prices in the accompanying video.
Three Reasons Oil Prices are Gushing
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For the first time in three weeks, oil staged a noticeable rally. Brent crude oil topped $100 a barrel on Tuesday and crude for August delivery jumped $3.80 to $87.57 a barrel.
Tuesday's rise in oil came off Monday's 1.4% decline and follows a selloff that has pushed oil down some 22% from its 2012 peak of $128.40 on March 1. In the second quarter, oil prices experienced their biggest quarterly drop since the financial crisis of 2008.
Moving oil prices higher on Tuesday was a trio of factors: Iran tensions, dwindling inventories, and a wager that further policy action to shore up global growth is on the horizon.
Oil Prices and Iran Tensions
Concerns about Iran had calmed over the past month along with the sagging worldwide oil prices, but those worries were stoked Tuesday by an army general in Iran.The general reportedly said that the country wouldn't "sit idly by" as the U.S. and Europe built a missile-defense shield program that could target Iran.
Late Monday, Iranian authorities staged missile drills to test weapons reportedly capable of hitting targets as far away as Israel. Iran officials also announced possible legislation targeted at closing the Strait of Hormuz, one of the world's most important choke points. Approximately 20% of the world's oil, nearly 17 million barrels a day, passes through the narrow strait.
Iran's move came on the heels of the European Union's full embargo on Iranian oil that went into effect Sunday. The EU embargo halts the vast majority of imports into Europe, ending exemptions for contracts signed before 2012, and barring insurance for Iranian oil shipments.
"Iran is always a factor and it has the potential to have a dramatic impact on oil prices," Ben Le Brun, a markets analyst at OptionsXpress in Sydney, told Reuters.
While Iran was the biggest catalyst behind oil's ascent Tuesday, it wasn't the only factor moving oil upwards.
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Why Crude Oil Prices are in Steep Retreat
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Crude oil for August delivery fell yesterday (Thursday) below the $80 line to $78.20 a barrel on the New York Mercantile Exchange.
Oil prices breaking the $80 line can have a psychological impact on traders, which could send oil spiraling even further.
"Oil is participating in the broad decline of equities and commodities," Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago, told Bloomberg News. "We broke an extremely key level for oil, the previous monthly low around $81."
Oil prices fell more than 3.5% the day after the Fed announced a disappointing extension of Operation Twist.
The commodities market, measured by the S&P GSCI Spot Index, entered into a bear market yesterday, off 22% from its highest close of the year on Feb. 24.
Many experts think oil is reaching a bottom - but there are other factors still in play.
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Oil Prices Due to Rise With Iran Oil Embargo Looming
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From May 1 to June 1 crude oil prices fell 21.8% from $106.50 to $83.23 a barrel, the steepest monthly drop since December 2008.
One week later oil is still hovering around the $83 mark. But why is oil still down?
Oil has also been hampered by weaker than expected economic reports in the United States, suggesting that the world's biggest economy is still struggling in its recovery.
Also the Eurozone debt crisis has had a strengthening effect on the U.S. dollar, which has helped push oil prices down as the dollar is the global currency for oil.
But many experts say the rise in oil prices is inevitable. From a projected 25% increase in global demand by 2015 to the possibility of Iran closing the Strait of Hormuz, there are many factors in play here.
As Money Morning's Chief Investment Strategist Keith Fitz-Gerald stated, "demand isn't the only driving force in oil prices." Also contributing, he says, "are geopolitics, supply constrictions, wars and tyrants with their hand on crude spigots."
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My Strategy for Uncertain Times in Energy
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Paltry new jobs figures (69,000 new jobs, less than half of what was expected) have combined with the ongoing mess in Eurozone and lagging figures from China to sap investor confidence.
This latest action will further depress oil prices, as the rash of bad news translates into even more knee-jerk projections of reduced demand.
Of course, it's much too early to make such predictions based on the news, but the pundits do it all the time.
In any case, we are now in a downward movement that will end only when the market manipulators say so.
When this happens, individual investors always take it on the chin.
That's why I want to take a moment today to outline for you the strategy I use for my Energy Advantage and Energy Inner Circle subscribers.
Of course, if we could time the market, or invest in perfect hindsight, we wouldn't need an investment strategy.
But while some of the largest investment banks are getting it (very) wrong these days, crystal balls seem to be in short supply.
So what should we do?...
Well, there are three overriding considerations you must keep in mind when approaching the energy sector in an environment like this.
- First, know that this, too, shall pass. Take a deep breath and relax.
- Second, keep your power dry. There is no point in chasing uncertain shares in an uncertain market, simply because some talking head on TV says they are undervalued. In the current situation, almost 80% of the shares I follow are well below market value. However, until the market finds equilibrium (something it always does, by the way), the undervaluation means little. Nibble when you feel targets are cheap enough, but never go all in.
- The third point is the single most important thing to remember here. A situation like this one demands that you preserve your investment capital. Uncertainty is always the mother of discretion. The energy sector has been hit harder than the market as a whole for much of the last six weeks. That means you need to set up an exit strategy and stick to it.
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