Where Is the Price of Crude Headed?

Matthew Carr By Matthew Carr
Emerging Trends Strategist

Oil & Gas

October was a frightening month for stocks.

The Nasdaq lost double digits in the month, careening into correction territory. As did the small caps on the Russell 2000.

Meanwhile, the S&P 500 and Dow Jones Industrial Average came close to that 10% loss threshold.

Panic was at a premium.

And through the chaos, few were covering the fact that crude was struggling with its own declines… even as it plunged past correction levels.

What’s going on there?

Well, this month, the renewed U.S. sanctions against Iran take effect. For the past couple months, that catalyst has sparked a rally in oil.

But that came to a sudden, screeching halt.

All thanks to the market’s biggest influencer: OPEC.

Recently, Saudi Arabia stated that OPEC and its allies are in “produce as much as you can mode.”

The kingdom has ramped up its oil production to a near record of 10.7 million barrels per day. But many are expecting this to surge even higher.

Saudi Arabia has declared it’ll increase production as needed to fill any shortfalls left by the U.S. sanctions against Iran. And this is a topic I’ve covered in-depth here before.

But for the global crude bulls, this is an unwanted signal.

Even though there are OPEC members, like Venezuela, that have seen their oil industries collapse precipitously to near ruin.

For the past two years, OPEC and its allies have instituted production cuts to alleviate the oil glut that was flooding the market and drove crude prices to lows not seen in more than a decade.

Though we all knew that would eventually come to an end.

The current downdraft gripping the market is taking place just as U.S. oil prices top multiyear highs and rig counts hit nearly four-year highs.

And with U.S.-Saudi relations currently strained, the markets fear OPEC might use the same tactic it used in 2014, when the cartel and its allies ramped up crude production to drive down global prices.

That was part of an attempt to bankrupt and destroy the U.S. oil industry.

But it could get even worse.

Ruffling feathers further, Saudi Arabia and Russia are working on a strategic partnership. This potential partnership is spooking investors.

The kingdom’s oil minister alluded to the fact that the majority of the power to manipulate the global markets resides in the hands of just two countries: Saudi Arabia and Russia.

This new agreement will be open-ended, lasting indefinitely and formalizing the current OPEC+ alliance.

And since peaking above $76 at the start of October, U.S. crude prices have slipped more than 16%

Crude prices are now well into correction territory. Though, as we can see from the chart, this happened from mid-June to July, as well as in May.

But despite three significant pullbacks, crude is enjoying a fairly good run. It’s gained around 5% year to date. This performance still outpaces that of equities.

Now, I mentioned above that U.S. rig counts were at four-year highs.

Obviously, more working rigs means U.S. oil output should be soaring. And that’s what we’ve been seeing…

Currently, American producers are pumping out nearly 11 million barrels per day.

That’s adding to the bearish sentiment.

Taking all of that into consideration – as well as the glut we’re seeing in Canada because of pipeline constraints – investors might be quick to think this pain is just the beginning.

But I believe we’re more than likely closer to the end. (Despite all the “nervous Nellies” who are chewing their fingernails down over headlines.)

The fact of the matter is we’re racing headlong into winter. Halloween is behind us. Thanksgiving is ahead.

For my longtime readers, you know trends are my thing. And the first trends I embraced came from the oil and gas industry in the early days of my career. Plus, I’ve written about the seasonality of crude… which you can read all about here.

Here’s the short of it: In recent Weekly Petroleum Status Reports from the Energy Information Administration, we’ve seen U.S. refinery utilization drop below 90%.

Currently, it’s at 89.3%.

That’s actually a little higher than the 85% to 87% utilization we normally see around late October. Though it’s down significantly from the 97% range we see in the summer months.

This time of the year, refineries go into winter maintenance to prepare for U.S. winter grade gasoline. Every 1% drop in utilization represents approximately 185,000 barrels per day in demand. The lower the demand, the lower the price of crude.

So we have these headlines coinciding with the seasonality of crude. On top of that, there’s the broader market collapse.

I believe in the next couple of weeks, as refinery utilization rates start to tick back higher, crude will rebound. Though we’ll once again see declines in February when U.S. refiners enter spring maintenance season.

The long-term picture will be clouded by Saudi Arabia, Russia and OPEC. But that’s nothing new.

Good investing,

Matthew