Wednesday, May 8, 2019

OIL: It Gives and It Takes

Greetings and salutations, as I have returned from my journey into my forefathers land. Packed with new insights Dear Reader, I am ready to share with you over the coming months. We begin with the lube of all economies, Texas Tea which can take you from the country hills to Hollywood overnight.

With the Fed on pause and the world trade talks acting like a mini TV series that will never have an ending, it is time to watch the gyrations around oil. When oil is cheap, economies generally expand. When supplies are tight and the prices rise, economies generally contract. We are now in one of those sine waves.
The Fed had the gall to say inflation is below its 2% target rate. We know different. The price of gasoline has risen around .51-cents nationally since the end of February. I could add hosing and food, but why bother since the Fed never considers our daily expenses in their phony matrix inflationary gauge. It is what it is and we have to deal with it. So, at this time I bring to light what Sebastian stated back in January. He said, "Find a good, cheap oil stock and hop on it until the Fourth of July."
I ask, did you?
Oil's Outlook
If you recall, oil bounced around the low $40s until the end of the year 2018. It kept finding resistance at the low $50s. The following chart figures puts the price action in view with a window to where it may return. By the way, the final projection price is what happened during last year's driving season. Oil repeats this price action year-after-year. When oil spikes above $90, a recession soon follows. Something to think about since a red flag in bond rates has appeared.
There are two indexes. One is heavy oil(BRENT) which ironically is priced higher than sweet(WTIC) or American oil. The reason is there is more heavy and factories are set-up for this grade of oil.
*                                   LOW                                   High                                   Projection
$WTIC                        $42.                                      $66.                                     $75.
$BRENT                     $44.                                      $74.                                      $86.

The projection is based on past performance. Oil is made into gasoline and it has two blends: winter and summer. We are now in the transition into summer. We are also as a society in transition into summer driving season. This is demand and demand increases the price and thus, oil companies make their profits. This is the thinking behind Sebastian's oil call. I like to trade off the charts, but I also like to blend the fundamentals into the equation. They are shaping up nicely for the sine wave to follow past price actions.
Iran Sanctions
President Trump imposed sanctions again on Iranian oil. This gave oil a price bump due to supply concerns. In addition, civil unrest in Venezuela and Libya offer a positive price fundamentals. Recently, Trump has implored Saudi Arabia to keep the price low and with American production at record levels, oil is retracing in price. This is your opportunity. I like ECA or DVN, but there are many to choose from and all should climb in price going into July. One other point. The trade talks and the prospect of tariffs will have no effect on the present trend. Currently, we have tariffs by every nation in the world, and most, are levied against US products. President Trump is right and someone needs to stand up to China which is the poster child for hypocritical stance on tariffs. However, if the talks escalate into a mean trade war, then the market tanks to which everything goes down.

In a related aspect, the Iranian oil minister recently stated that he feels OPEC could collapse. This announcement is more dissatisfaction by Iran about its fellow club members. In the last period of Iran sanctions OPEC members picked up the slack in oil production and of course, this pissed off Iran. Can it happen again? This is the billion dollar question. Saudi Arabia announced cuts in their last meeting and Russia has agreed to cut production at least until the end of June. Meanwhile, Qatar has quit the cartel. There are other rumblings due to the religious conflict of Sunnies and Shiites. Some people will say that Saudi Arabia is OPEC, but 40% of the world's production can make or break any economy. Keep an eye on OPEC proceedings.