OPEC is dead. Saudi Arabia rules the oil markets all by themselves and they are THIS close to hearing the sweet tones of the the final death knell to all their competitors.
Houston, we have a problem.
The pain is coming to an Oil and Gas producer near you, all it will take now is a little more time… If crude prices stay down below $50 for another 6 months I anticipate bankruptcies – which has been the Saudi goal all along. Even the IEA expects weak demand and over-supply to last through 2016 (see their November report here).
This is the perfect storm of commodity collapse:
- Declining Demand
- Already over-supplied markets
- Strengthening US Dollar
- Saudi Arabia in control
For signs of oil bottoming, the very first thing you need is for the narrative out of Saudi Arabia to reverse. I’m not talking about the kind of one-liner that came out this morning:
“Perhaps it would be fitting here to mention the role of the Kingdom of Saudi Arabia in the stability of the oil market, and its continued willingness and prompt, assiduous efforts to cooperate with all oil producing and exporting countries, both from within and outside OPEC, in order to maintain market and price stability”
Frankly, that’s weak sauce and the markets know it. The second thing you need is global economic growth to help the demand side. Finally, you need some production destruction; not a declining rig count – I’m talking about fracking bankruptcies, oil sand bankruptcies, more offshore projects shelved, etc. The icing on the cake will be a weakening US Dollar.
Right now, the supply imbalance is GETTING WORSE, see below:
So Here’s the Trade:
Use any strength in the oil and gas sector to short it. My two favorites are currently ConocoPhillips (COP) as I detailed in Commodity Not-So Super Cycle, and Anadarko Petroleum (APC).
Technically, APC has been resting above resistance which was first established in August at around $58.50. The strength today (currently trading at $60) makes a good entry point to short APC. Add to the position when resistance breaks, use a stop level of around $63 to limit your risk. Refer to the chart below:
When do you see the USD weakening and what could be the catalyst? It has been a very crowded long trade for quite some time and I think it will lay waste to a lot of flat footed traders when it does reverse.
I hinted at this at the bottom of my article Fed Trade School: http://ibankcoin.com/dyer440/2015/11/06/fed-trade-school/
I believe it all depends on the Fed’s narrative coming out of the Dec. 15-16 meeting. My view is that since they are tightening into economic weakness, they might change the narrative from the current jawboning for higher rates to a “One and Done” scenario.
This could have HUGE ramifications across all assets. It would be in effect a reversal of policy; even though the Fed hasn’t raised rates yet, the constant talking about it has led to a higher US Dollar. If they hint at a “One and Done” you will likely see a top in the US Dollar, and a bottom across most commodities (and emerging markets).
If instead their narrative is for more rate hikes – then stay short all the commodities, and long the US Dollar, the trend continues. I think it’s an opportunity for an inflection point, at the very least.
I think the “one and done” is the most likely scenario. They have floated ample warning to the markets that they are hell bent on a Dec raise. I think it happens because they have talked it up so much and certainly not because of a robust economy. Should be interesting to see how the USD reacts in the face of the weakening efforts by EUR and JPY, etc. Don’t think other CBs will sit idle. Fireworks for sure.
Appreciate your perspective.