nuggetrouble

Oil Prices Normalize as Economic Growth is Called into Question!

TVC:USOIL   CFDs on WTI Crude Oil
Oil is a turbulent market because its price is heavily determined by future economic growth, the landscape of the worlds' Oil cartels, airline and car travel, investor sentiment (speculators in future market) and the pace of distribution and refinement. The new Omnicron virus has threatened the recovery in financial markets as, current valuations are based on the hopes we would be able to contain Covid. The price of Oil in the next year will be heavily dependent on how much faster the economy grows. As you can see from the chart above USOIL , Oil prices suffered one of the worst ever one-day dives, down 11%- on Red Friday. Market bears took advantage of this low liquidity day causing a frenzy of banks to dump their heavily leveraged oil positions. Is Oil facing an economy with declining future growth due to a new variant or a supply shock due to a disruption in the supply chain or is there simply not enough oil out there to sustain current demands or did the government QE cause there to be an unsustained artificial demand?

Ever since Oil contracts went negative in early 2020, they have rebounded strongly on the backs of a normalized economy. However, Oil has been declining since 2008. Low Oil prices led to a lack of capital expenditure from corporations due to Oil spending much of its time below the $50 breakeven price (the price producers are able to sell Oil for no profit). This lack of investment ensured that Oil rigs were not planted or updated so, IF there will be a continued long tier demand for Oil then the Oil market can see much higher prices due, to the market being in a structural deficit to maintain an expanding economy.

However, a big blow came to the Oil markets from President Biden and OPEC. Biden formulated an agreement between the biggest Oil consuming countries to release a fraction of their reserves to combat the price manipulation undertaken by OPEC; in the act, US created a Resistance Group of Oil consuming countries to combat the Oil producing Cartel, OPEC. OPEC is a group of 13 countries who collectively account for 44% of the Oil production and 82% of the world's proven reserves ( Oil still in the ground). OPEC controls the gas pedal; it keeps production low to keep prices high - much to the chagrin of Oil consuming countries. OPEC benefits the most in these volatile environments when there is a sudden demand for Oil therefore, giving them more pricing power in the market. This can be seen in the Oil future market with contracts currently in backwardation. Backwardation is usually seen when demand is higher in the current months than those in the future. OPEC decided not to increase production citing "no more oil supply deficit come Q1 as more Oil comes online and growth disapates". However, in order to maintain this economic recovery we need low oil prices to increase consumer sentiment and not hinder potential growth. Biden realized this and told the other big Oil consuming nations that they need to work together to increase Oil supply in the market to ensure this recovery (95+ million barrels consumed globally per day) doesn't fall, flat on its face. We have never witnessed a coordinated act like this which, surprised OPEC. Biden stabilized Oil prices for now by tapping into the US's Strategic Petroleum Reserve. This the biggest release ever by the US, 50 million barrel. This really gave China,Japan, India confidence. Tapping into reserves is Bidens best option because he can not incentives US Oil producers to produce more due to his green revolution? OPEC vey clearly is looking to profit from the suffering.


Technical Analysis:

Long Term - Oil typically follows cycles where economic growth spurs oil demand leading to higher oil prices as well as higher prices on the countless goods and service that rely on Oil as an input. Eventually this demand at higher prices dissipates as consumers reject higher prices. We see Oil in 2009, 2016, 2018 and potentially now in 2020 roll over after forecasted economic growth declines and higher oil prices become a burden on consumers. In general high Oil prices never seem to stay around for long as shown by the general decline since 2008. Oil will eventually sell off from the peak as demand wanes and the cycle restarts again. The sine wave shows how Oil markets move cyclically. A seen by these previous bull runs in oil , they last around 2-3 years. Oil in this time usually appreciates by 100%+ from the lows. When Oil falls it usually falls by more than 40%. In 2020, we saw Oil contracts go negative representing how fickle of a market it is. The US Treasury 10 Year Bond Yield does a good job in measuring inflation . The Bond market says that general prices will not stay elevated for a long period. Even if a SHORT term supply shock causes Oil to go to $180, that would reduce consumers purchasing power in their other expenditures to fall. "A consumer who fails to reduce the quantity purchased of an item by as much in percentage terms as its price goes up will find that the item comes to consume an ever-larger fraction of her budget." This deflationary pressure will lead to lower economic growth. Observe the relationship between the US10Y and USOIL . Yields across the board are still very low and are not anticipating long term inflation .

Short Term - Looking at Oil after 03/2020 it has been in a steady uptrend. I have noticed that USOIL consolidates in these ~$10 ranges and increases in the same increment. Oil has found some support at the $66 - $70 level with $76 serving as overhead resistance.

How do changes in the pace of growth in the Monetary Base and M2 Money Supply, affect Consumer Prices?
The Monetary Base is the fed's Balance Sheet and where QE is shown. When the Monetary Base's growth decreases and the Fed slows down the pace of asset purchases, consumer prices usually drops with it. M2 shows roughly how much money is in checking and savings accounts. The Monetary base and M2 follow each other very closely. Notice how all three of these charts general follow the same structure. CPI YoY numbers are very high right now but in the coming months with less QE occurring, higher prices may be rejected.

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Energy Positions from 2020 to now.

Uranium hit my first target of 3x. Exiting Uranium Equities, they have higher prices already priced in. Now playing this via SRUUF, Sprott physical uranium is safe and there are big buyers.

UNG and TELL. UNG last year was beaten down and ravaged for no reason. It was the lowest valued commodity. Got on the train early. Exited Nat Gas.

OIH , KMI , DNOW , Oil , XOP has not grown nearly as much as the other energy sectors I have been. I like DNOW because they maintain/make/organize drilling equipment. With more drills coming back up they will be needed. This a "pic and shovel play". In the gold rush, you want to be the person selling the pics and shovels to the hopeful lot. XOP is also relatively undervalued for what the price of Oil is. Honestly, I don't like the Oil sector for investments right now. Exited OIH , KMI .

SRUUF has the best potential in the Energy and Commodity sector right now and honestly the lowest risk and least amount of speculation imo.SRUUF has guaranteed business coming its way. XOP is relatively undervalued. Playing these two 3-6 months and will observe stops. I like MSOS too if it holds the low.






1. https://www.worldometers.info/oil/ - how much oil do we have left a live look at our reserves


Comment: The time for Oil stocks was last year. Now we will need to wait for another demand uproar.
Comment: 2 cent: Economic growth is slowing due to the Covid fears and a slower pace of asset purchases by the fed, this will lead to a lower demand for Oil decreasing the price of many consumer goods.
Comment: MSOS may be a dud. Dont know why I threw it on here. It was worth a shot

I aim to provide institutional level research covering global equities, fixed income markets, commodities, currencies and alternative investments.

Cash is King! until it isn't?



|always do your own research|