Crude continues its month long slide to fresh lows today.
West Texas Intermediate crude (WTI) is trading for US$60.65 per barrel. That’s down from a recent high of US$76.41 on 3 October. The fall of 20.8% is enough to officially put crude into a bear market.
We’ve been warning that crude was overpriced since April. And it all comes down to a massive supply of oil coming from the world’s top three producers — the US, Saudi Arabia, and Russia.
Yet while WTI fell another 1.8% overnight, get ready to hear that the bottom is in…and prices are going back up.
Iran will be pressing for output cuts
OPEC meets again on Sunday. And Iran will be pressing the organisation, and Russia, for output cuts in 2019.
This may have the oil bulls excited. But we wouldn’t put much stock in it.
Don’t forget that Iran is on the US blacklist. And the Saudis have long aligned against the Iranian government. The Saudi royal family also remains eager to please the US following the horrendous assassination of journalist Jamal Khashoggi in the Saudi embassy in Istanbul.
With its weak ruble and relatively low extraction costs, Russia is unlikely to be in a hurry to cut its own production levels either. Not at today’s prices, in any case.
And the story out of the US just keeps getting better. That is, if you like a good supply glut story.
First, news from the oil rich Permian Basin indicates that the past months’ delivery gridlock is nearing an end. At least three new major pipeline projects are scheduled to come online in 2019.
Then there are the ever-growing US stockpiles. As Bloomberg reports:
‘Oil fell to the lowest level since March after a U.S. government report showed the seventh straight weekly increase in domestic crude stockpiles and a jump in production… Prices climbed earlier in the session on a report that OPEC and its allies are considering fresh production cuts.’
You can see the surge in US stockpiles (blue line) and the plummeting price of crude (white line) below:
What could this mean for Australia?
If you have a look at the chart above, you’ll note oil spent the last year setting a series of higher highs. It also continued to set higher lows following each retracement.
From a charting perspective that’s very bullish. Right up until late October (circled) when the price broke below the July lows. And it’s kept tumbling since.
How low will it go?
We believe WTI is unlikely to fall back below US$30 per barrel, as last happened in February 2012. But US$50 is certainly possible before crude finds a floor.
If we’re right, that should translate to cheaper petrol prices here in Australia…hopefully before the summer holidays.
It should also prove good news for the airlines and other energy intensive transportation stocks.
Something to keep in mind.
PS: Free report reveals the political lie that costs us $4 billion a day. You pay for it on your power bill, at the fuel pump, and when you buy your groceries. Find out more here.