Crude oil is breaking down…
Prices plunged more than 5% on Wednesday – the biggest one-day decline since February 2016. They fell another 2.5% Thursday to their lowest level since late November.
West Texas Intermediate (“WTI”) crude – the U.S. benchmark for prices – fell to as low as $49 per barrel on Thursday. Brent crude – the international benchmark that tends to trade at a premium to WTI – fell to around $52.50.
Most notably, both WTI and Brent crude are now trading below their 100-day moving averages (“DMA”) – a metric followed by many technical analysts – for the first time since OPEC's historic deal was announced last fall.
The recent decline is being blamed on a flurry of news this week…
On Wednesday morning, the U.S. Energy Information Administration (EIA) reported U.S. oil stockpiles jumped for the ninth consecutive week to another new all-time record. Supplies rose another 8.2 million last week to 528.4 million barrels, the most in history.
The EIA also said U.S. oil production has moved back above 9 million barrels per day (“bpd”) for the first time in nearly a year. It now expects the U.S. to produce an average of 9.2 million bpd for the full year.
And it predicts the U.S. will produce an incredible 10 million bpd by the end of next year, for an average of 9.7 million bpd in 2018. This would top the all-time record of 9.6 million bpd set nearly 50 years ago in 1970.
Doubts are also growing about OPEC's commitment to cut production…
OPEC recently reported that it has reduced its output by about 70% of the 1.2 million bpd it promised. But this figure is misleading…
Saudi Arabia – OPEC's largest producer – and Kuwait have cut their production by far more than originally promised. Without this, OPEC's compliance would be far lower. As financial-news network CNBC reported this week…
Despite claims from participants that the existing agreement is functioning well, it actually has fundamental flaws if you peek behind the headlines, according to Eugen Weinberg, head of commodities research at Commerzbank. “Compliance within OPEC is less than 50% if you exclude Kuwait and Saudi Arabia, who cannot shoulder the whole burden over the long term,” Weinberg told CNBC by phone on Thursday.
Furthermore, while production cuts might be underway on the part of some participants, export numbers have not softened, hence why market supply is still elevated. “The export numbers are at the same level as last December, which demonstrates that the oil production cut is having little effect on market levels,” he added.
“The market is looking for a price recovery from here, but as there is still not enough of a cut to send supply into deficit, I think $50 per barrel is more likely to be a ceiling than a floor with prices potentially slipping down to $40 this year,” opined the Commerzbank analyst.
Of course, non-OPEC members of the deal aren't living up to their promises either… They have achieved just 66% of their promised cuts to date. And Russia – the largest non-OPEC producer – recently admitted it has cut production by just 100,000 bpd, or just one-third of what it originally promised.
At the annual CERAWeek energy conference in Houston this week, these members reaffirmed their commitment to reach their promised cuts before the deal expires in May. But they would not commit to extending the agreement any further.
In other words, even if OPEC can somehow reach its promised cuts in the next few months, production is likely to rebound soon after.
And according to Pioneer Natural Resources (PXD) Chairman Scott Sheffield – who also spoke at CERAWeek on Tuesday – oil will fall back to $40 per barrel or less when it does.
In the Digest, w
e've been warning of the rising risks in crude oil for weeks now…
While we didn't know exactly what would eventually set off the decline, we knew that sooner or later these problems would “matter.” As we wrote in the February 7 Digest…
This mix of speculative fervor, rising production, and weakening demand is a dangerous combination… It's a recipe for dramatic declines if the rally falters.
As always, there are no guarantees in the markets… These extremes could grow even more extreme before they reverse. But if you're still long the oil sector, be sure to keep a close eye on your stops.
Steve Sjuggerud believes there's more downside ahead…
Earlier this month, he told his readers about the two main reasons to expect much lower oil prices. As he wrote in the March issue of True Wealth Systems…
It's going to get ugly for oil prices… The question isn't if this will happen… The question is when. The fall could be dramatic, as I'll explain. A 50% decline is entirely possible once things get going.
I know that might sound crazy. But I'm not overselling it. We could be on the verge of a major decline, based on history. Right now, all signs point to lower oil prices. There are two big ideas working against oil today…
||Sentiment is at extreme levels based on our favorite measure. Oil prices fell 75%-plus after similar extremes in recent years.
||Oil fundamentals point to lower prices. The supply-and-demand dynamic is working against oil right now.
These are scary points. Cheap and hated are two of the things I look for when investing in positions going up… So expensive (bad fundamentals) and loved (extreme positive sentiment) are good signs for a short position.
In other words, oil is expensive and loved – the exact opposite of what he looks for in a good long investment. But crude prices were still in an uptrend, so he didn't recommend shorting oil just yet.
This week, that changed… Steve says it's now time to short oil. As he wrote in a special True Wealth Systems update on Thursday…
Last week, we laid out the case for betting on lower oil prices… But oil hadn't broken down enough yet. We couldn't bet against the trend, so we told you to wait. Well, the trend in oil has broken down. And that means it's now time to bet against oil prices…
Nothing has changed since our issue last week… Both of these [reasons] are still true. What has changed is the trend. Last week, oil prices were still trending higher. But after a 5% fall [Wednesday], that's no longer the case. Take a look…
Oil fell by 5% [Wednesday] and is down around 3% [Thursday] morning, as I write. This is a clear breakdown in prices. And that means we want to place our bets against oil now.
But Steve doesn't actually recommend shorting oil or oil stocks…
Instead, he has found an even better, “one click” way to profit from crude's decline… He expects True Wealth Systems subscribers could see quick 30%-40% gains as crude continues to fall. And history suggests triple-digit upside is possible before it ends.
You can get instant access to Steve's recommendation with a 100% risk-free subscription to True Wealth Systems. But we should warn you… if you've never tried this service, you may be surprised.
You see, True Wealth Systems is unlike any other service we publish. In fact, it's based on a strategy that runs counter to much of the advice you've learned from Porter and our other analysts over the years. But the results are undeniable…
Steve's True Wealth Systems approach has trounced the market by 50%, on average, on every trade it has made. And these aren't “cherry picked” results… These are Steve's actual audited results of every single True Wealth Systems recommendation across 90 trades over the last five years.
You can learn more about True Wealth Systems – including how you can try it for 30 days absolutely risk-free – right here. (This does not lead to a long video presentation.)
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