How to Play the Oil Market for the Rest of 2019
Oil prices opened this week cooling off as the market digests reports that Saudi Arabia has already restored production to over 75% of capacity and will return to full output as early as next week following the drone attack on the nation's facilities on September 14.
The strike on the Abqaiq and Khurais facilitates (some of the largest in the world) started massive fires and reportedly caused major damage that halved Saudi Arabia's oil production — some 5.7 million barrels of crude per day.
Some have suggested that the Saudis’ ability to restore production so quickly demonstrates a critical level of resiliency against such attacks. That's positive thinking.
But the speed of recovery also raises doubt (at least in my mind) that the actual damage done to the oil facilities was as bad as initially reported. I mean, would it be the first time initial reports were exaggerated?
Either way, the oil market is quickly recovering. WTI crude for November delivery was trading at just over $58 per barrel at last look.
But I wouldn't count on prices falling much farther.
I think it's pretty clear to everyone at this point that the entire goal of this attack was to raise oil prices. In the six months leading up to last week's strike, oil prices have been on a generally downward trend.
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In fact, if we take a look at a six-month oil chart, we can see that the biggest jump in prices (before last week's attack) was back in June when Iran reportedly shot down a U.S. surveillance drone.
It seems to me that OPEC doesn't want crude prices to go below $55 or $50 per barrel. And if they do, there will be a coincidental oil facility attack, drone shot down, oil tanker captured, or some other geopolitical drama that ends up moving crude prices higher.
Of course, I don't have any hard evidence of that. But it's logically sound, and I don't think you'd find many folks who would disagree that the cartel wants to keep crude price above at least some certain level.
And there are a lot of ways to look at OPEC manipulating oil prices to keep them above a certain level. You could look at it as some greedy cartel getting rich by manipulating a critical market.
Or you could look at it like this: OPEC (one of the most power organizations in the world) is actively working to ensure oil doesn't slip below (I think) $50. So anytime the price of crude gets near that level, you should be an oil buyer.
In other words, let OPEC do the work for you.
This is probably the best way to play the oil market for the rest of the year. If oil slips to anywhere near $50 per barrel, you should be a buyer... and wait. Wait for OPEC to do what it's going to do anyway. And let it make you money.
Don't paddle against the current here.
Until next time,
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.
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