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Mar 10, 2023

Watch Out: Is the Price of Crude Oil About to Gush Higher?

By Joe Duarte • May 25, 2023 • Stocks to Watch

By Joe Duarte • May 25, 2023 • Stocks to Watch

Those who are bearish on crude oil may face a rude awakening, at least according to a recent announcement by Saudi Oil Minister Prince Abdulaziz bin Salman, made during the Qatar Economic Summit in Doha on 5/23/23. The oil sheikh told oil market speculators to "watch out" ahead of the upcoming OPEC+ meeting scheduled for 6/4/23.

I can't remember the last time I read such a headline.

The prince was likely alluding to what is being described as the most bearish positioning on the future price of crude oil by speculators since 2011 and may be signaling that a trend-changing moment is near. Contrarian investors know that when everyone is bearish, it's often a sign that a bullish trend is about to emerge.

The Calm Before the Storm

Usually, the month of May signals the start of a move up in the oil markets as the combination of summer driving and Hurricane seasons tend to trigger seasonal trading patterns. But this year, it's not happening, at least not yet. Of course, this may be about to change, especially if you read a few of the developing tea leaves, while keeping the prince's warning in mind.

To focus on what may happen, it's important to consider the fact that at least according to mainstream views, oil and natural gas are on their way out as renewable energy takes over. Thus, the majority is bearish on oil.

But there's a bit more to it than that, especially when you consider that a more tangible reason for slowing crude demand in the near term largely stems from the global economy's deceleration. This economic slowdown, of course, is due to higher interest rates engineered by global central banks, such as the Federal Reserve, and the ongoing post-pandemic changes in the world.

Supply Is the Dominant Factor in Energy

Regardless, the dominant factor which governs oil prices is supply. If there is any shortfall in supply, even when demand is dampened, the outcome to what's next is predictable: prices will eventually rise. Therefore, all arguments about what the present holds and what will unfold in the future begin with the supply status.

Until recently, global oil supplies have outpaced demand, which is why OPEC+ has cut production. Certainly Russia and likely other producers have been cheating on their quotas creating a temporary glut. Moreover, the release of U.S. Strategic Oil Reserves (SPR) crude also is a factor.

Read This Story: OPEC+ Gets Hoisted by Its Own Petard

Oil prices have fallen, due to the combination of uneven economic conditions in the U.S. and China, the world's largest economies, and the steady growth in electric vehicles which causes dampened appetite for gasoline and diesel.

But that dynamic may be changing.

Oil Companies are Adjusting

Prior to the Saudi warning, the market was already signaling that change is afoot, as oil companies have been cutting back production. You can see that in the decreasing number of active rigs, which has plateaued and is slowly receding.

That's not a new strategy. More interesting is that even as they’ve begun to decrease the number of active rigs, and cut back on their corporate digs, they are not cutting back on global exploration, not cutting their dividends, and are starting to make deals.

Those are signs that they are hunkering down as they prepare for bumpy times.

Mergers are Increasing

In the last month, we’ve seen Exxon Mobil (NYSE: XOM) buy Texas natural gas producer XTO Energy for $42 billion. This follows the purchase of two California pipelines from Plains All-America. Rumors are flying about that they may buy fracking giant, and recently taken private, Pioneer Energy. These moves come in tandem with Exxon Mobil selling its huge Irving, Texas headquarters and downsizing to Houston.

On 5/22/23, Chevron Texaco (NYSE: CVX) announced its purchase of shale drilling company PDC Energy for a total of $7.6 billion including the assumption of debt. Meanwhile pipeline operator OneOk (NYSE: OKE) recently bought Magellan Midstream Partners (NYSE: MMP) for a reported $18.8 billion, including debt assumption.

What makes the last referenced deal most interesting is that OneOk will use the acquisition to enter the oil pipeline business.

So, what gives? If oil prices are never going to rise again, why are oil and gas companies buying up oil assets?

Signs of Stabilization Appear

A look at the price chart for West Texas Intermediate Crude (WTIC) shows that the oil market, heretofore in decline, is now is stabilizing. Specifically, note that the $70 per barrel price area is starting to solidify while the Accumulation Distribution Indicator (ADI) and On Balance Volume (OBV) are both flattening out. These are positive signs which suggest that the flow of money is reversing. ADI is a reliable way of measuring the activity of short sellers, while OBV offers a glimpse into the mind of buyers.

Together, in this setting, they suggest that the recent selling spree may be pausing.

You can learn more about ADI and OBV in my recent interview with Investing Daily Editorial Director John Persinos, here.

At the same time, it's important to note the $80/bbl price area is a key decision point. That's where the 200-day moving average combined with a very large Volume by Price bar (left of chart) provided stout price resistance.

A move above $80/bbl would signal that buyers are back in charge of the market.

A Return to an Old Strategy

Although their timing is not usually pristine, oil industry executives know their market. They also know what's worked in the past. And so, they are preparing for the next leg up in prices, whenever that develops.

They are doing so by taking steps which cut supply in the present but assure there is supply in the future, when demand improves. Perhaps what marks a significant difference in the way the industry is operating is that the adjustments seem to be happening at a faster pace.

You can see that in the way that the price of oil has not collapsed during this economic slowing cycle as it has in the past. That's because oil companies have turned the spigot off faster than they have in the past.

Something's About to Happen

From an investment stand point, we are being presented with a prelude to what could be a significant buying opportunity. Investors with long-term time frames should start to consider slowly building positions in the energy sector. An excellent way to do so is via exchange-traded funds (ETFs).

The iShares U.S. Oil and Gas Exploration ETF (IEO) is an excellent vehicle as it houses oil exploration and production companies which are likely to be attractive takeover candidates. You can see that buyers are moving in (rising OBV) while short sellers are betting against the sector (falling ADI). This sets up an interesting situation for investors.

At the same time, you can see that the Bollinger Bands (green lines above and below prices which form an envelope) are closing in. That's a sign that a big move is coming.

Contrarian Alert

I am cautiously bullish about the potential for a market bottom in crude oil. The prince's warning, the moves by the oil companies, and the flow of money into the oil sector suggest that I’m not alone.

At the same time, it's clear that there is still an ongoing battle between the bulls and the bears. As a result, small bets combined with a quick trigger finger on the buy side make sense.

Finally here's an interesting headline from Oil Price.com: "Shale drillers are auctioning off Rigs at Bargain Basement Prices." According to the report: "Texas auctioneer Kruse Asset Management will auction off two unused, top-of-the-line drilling rigs valued at $40 million and $30 million when built in 2019 at starting bids of just $12.9M and $2.3M, respectively."

That type of headline is what makes contrarian investors giddy as they often signal that a market has hit rock bottom. Moreover, the news hit a day before the most recent U.S. Energy Information Agency (EIA) released its weekly oil supply numbers which showed a 12.5 million barrel of oil draw putting oil inventories at 3% below their five-year seasonal average.

All of which brings to mind the warning from the Saudi Oil Minister.

Watch out.

In the meantime, we could be facing a tectonic upheaval in the financial world that shakes out the winners from the losers. My colleague Dr. Stephen Leeb has pinpointed a way to not only survive this upheaval, but also thrive from it.

Dr. Leeb is chief investment strategist of The Complete Investor. His research has unearthed an obscure investment that's poised to reap outsized gains from the paradigm shift he sees ahead. Click here for details.