As it turned out, my predictions of where prices would end up by the end of September were spot on.
And now, we’re entering a period of rather narrow trading in oil prices.
I continue to see the price of crude slowly move up in what I’ve called a “ratcheting” pattern here before.
What that means is that the overall price trend points in a single direction (in this case up), but there are occasional moves the other way.
Now, as I write this late on Tuesday morning, WTI (West Texas Intermediate, the benchmark crude rate for futures contracts written in New York) sits at $50.42 a barrel, down marginally by $0.18.
WTI did succumb to some profit taking yesterday after an exceptionally strong run up 12.2 percent for the month through September 28.
Brent (the other, and more widely used, global benchmark set daily in London) has had a similar performance – currently at $56.08, virtually flat for the day, after profit taking yesterday that followed from prices spiking 12.4 percent for the same month through September 28.
I remain consistent (and proven right by the past 18-24 months) in saying that the market price of oil is dictated by the floor of the pricing range, not the ceiling.
That will always dictate the true direction of price moves.
We’re now likely to experience some resistance at just north of $52 a barrel for WTI. That means there will be some narrow-range pricing until a breakthrough up or down takes place. Related: Activist Investors Crack Down On Shale CEO Salaries
My money these days is for the movement to continue higher. Let me show you why…
As well as give you my next set of oil price predictions – this time for the end of the year…
Oil Markets are Being Manipulated
That move higher will happen if the true, underlying market factors are allowed to dictate the price of oil.
Unfortunately, as you’ve seen me explain here before, there are still many oil market players who prefer to manipulatively (and artificially) influence crude markets.
They try this after every major move up in oil prices.
What they do is attempt to create a mindset among investors that the price is about to implode.
The reason is simple: These guys make money only by running shorts, and shorts require that bids move down to make money.
Of course, there’s nothing wrong with shorts as such.
They are a useful way to restrain unjustified movements up in either individual stocks or larger market sectors. They offset the “irrational exuberance” that markets sometimes get caught up in.
It’s only when the short acts as a device to manipulate genuine market prices that the practice comes into question.
Take a simple short example.
Say you’re convinced that a stock, let’s call it “ABC,” is heading down from its current price of $10 a share.
What you do is borrow ABC shares from a broker and immediately sell them.
Later, you turn out to be right and ABC’s stock price falls down to $8.
So you go back into the market, buy the ABC shares back, and return them to the broker.
But because you sold them for $10 per share, and bought them back for just $8 per share, you made $2 per share on the whole transaction (minus any borrowing fees from your broker).
The same applies to not only stocks, but contracts and other financial instruments.
Of course, there’s a major downside to shorts.
If you’re wrong, and shares move up, there’s theoretically no limit to how much money you can lose. If the underlying commodity (share or contract) starts shooting up in price, you still have to go back into the market and buy them, to return them to your broker.
To reuse our ABC example, suppose that instead of falling from $10 to $8 per share, the stock shot up to $1,000 per share. Well, your broker would still be calling you up, asking to get their shares back.
So even though you made just $10 per share selling the shares, now you have to go back into the market and pay $1,000 per share to get them back, so your broker can have what’s his.
In this case, the spread between what you received when you sold the borrowed shares initially and what you now need to spend to buy them back is a widening loss.
So shorting – whether for a good reason, or as speculation – is very dangerous.
Related: Supermajors Prepare For A Permian Bidding War
And those who engineer huge shorts must do three things to be successful.
Shorting is Very Dangerous for the Shorter
First, they have to move on a wide front involving a large number of plays.
Second, they will use an extensive array of options to serve as insurance to offset rapid movement in the underlying stock or commodity.
Third, they will need to convince a broad base of investors that the pricing decline is significant.
The more they can persuade on this last point, the greater is their profit from the spread. Because as the rest of the market starts selling, the short-artist’s spread widens, and so do his profits.
At this point, these actors race onto TV, give their version of Chicken Little from “The Sky is Falling” brokerage, and run right off the set to the bank.
Such manipulation aims at broad-based investor attitudes, not on the underlying market fundamentals.
These latter aspects will be cherry-picked by the “analyst” to emphasize a collapse in price, usually with some prognostication of prices moving down to the low $40s per barrel or even below.
The real object becomes those who are cutting oil futures contracts.
If futures traders see a big price change coming, they must hedge their bets and will set contract prices at the perceived highest cost for the next available barrel (when prices look set to rise) or the least expensive cost for the next available barrel (when the short artists make their money and are driving prices down).
But for the rest of us, the real objective is to have oil prices set by what the market is telling us, not by what the short artists want.
Despite the tug of war between the two, that’s slowly starting to happen.
Here’s Why Oil is Heading Up Anyway
The primary restraints to prices going up even more are (supposedly):
-“declining” global oil demand
-a “flood” of new crude production
-the ineffectiveness of the OPEC-Russia agreement to cap oil production
But the International Energy Agency (IEA), the U.S. Energy Information Administration (EIA), and OPEC all agree that demand has been growing.
In fact, all three have reported in recent weeks that the balance between supply and demand is arriving quicker than anticipated. We’ll end 2017 at the highest daily demand level in history.
Second, there’s definitely plenty of excess extractable volume worldwide, especially with the largess in shale and tight oil now available for pumping in the U.S.
Now, this oil in the ground will prevent prices from a medium-term race back up to the $100 a barrel range.
However, while it will discourage the most diehard believer in long-term, triple-digit oil pricing, it has no genuine effect on the current price unless it is actually lifted.
And there, restraint has taken over in the oil patch.
Finally, OPEC and main non-cartel producers (primarily Russia) will extend the production caps into next year.
Yes, there is some over-production beyond quotas.
But this is going to be offset by a continuing decline in Venezuelan production, along with intermittent interruptions in both Libya and Nigeria.
Mexico’s production malaise is also a factor.
That’s why, wishful thinking by manipulators notwithstanding, we are beginning to see a rebalanced market and an upward push on oil prices.
So my new oil price predictions, for the end of 2017, are as follows…
Here’s Where Oil Will Be by the End of the Year
I expect WTI to be at $55-$57 a barrel by the end of the year. Brent will be at $58-$60.
These are small improvements from current pricing levels. But the prospects of continued rises remain. If we are at these quite attainable prices by the end of 2017, we should see low $60s for both benchmarks in the first quarter of 2018.
By Kent Moors
More Top Reads From Oilprice.com:
a.) "Inauspiciously Trump-timed sales of crude from the United States' Strategic Petroleum Reserve on the part of the U.S. government."
b.) The moribund economic recovery in the U.S. has auto sales ex-Toyota for 2017 BELOW 2016 numbers. Doh.
c.) Trump has done little if anything to mitigate effects of the VW dieselgate scandal on the auto market in the U.S.
d.) Libya, a jihadist-controlled swing producer is manifestly un-stable, de-stabilized, and a certifiably failed state.
e.) OPEC reaped non-compliance from its members on account of the Anti-Qatar instigated by the ISIS-funding OPEC-pivot Saudis.
See, even a non expert like me can make predictions. and I dont even own any oil stocks or are otherwise dependent on the oil industry for my living.
2019 ... still rebalancing
2020 ... still rebalancing.
2021 ... too many EVs, never will rebalance.