The Time to Play the Oil Rebound is Now



The price of oil hit the Saudi target price of $60 per barrel by the end of 2014. But it kept going down. The price hit $45 per barrel in January 2015 and $40 per barrel by this past summer. That was due to normal market overshooting and momentum trading. It was also due to the fact that desperate frackers actually increased production to meet the interest payments on their debt even thought they were in the process of going broke.

The Saudis knew this was a temporary overshoot. The frackers could not get financing to drill new wells. Also, overpumping the existing wells would just make them disappear faster.

As soon as the price of oil crashed, another human bias began to creep into Wall Street analysis. The same prominent voices that earlier said oil would stay high were now saying it would keep dropping!

Some well-known analysts were calling for $30 per barrel oil; one analyst even set his target at $15 per barrel. These low-ball figures were just as much off base as the earlier expectations of $130 per barrel oil. In fact, the Saudis had things mostly under control.

Using our market intelligence, we could see that when oil hit the $60 per barrel level (as it did in early May), it would soon head down again. When oil got too low (as it did in late August at $38 per barrel), it would soon head up. This analytical frame based on our intelligence sources has proved to be a highly accurate short-term predictive tool.

Absent a geopolitical shock in the Persian Gulf, oil is not going to $100 per barrel, and itís not going to $30 per barrel. It will remain in a range of $50-60 per barrel (with occasional overshoots for technical reasons) until 2017. Thatís how long it will take to destroy thefrackers.

After that, the Saudis can gradually increase the price without having to worry aboutlost market share.

This story has been bad news for frackers and even worse news for leveraged commodities traders such as Glencore. Are there any winners? The answer is yes, but it takes some detachment from the herd to see who they are.

The oil industry is permeated in gloom right now because of oversupply and weak demand. Small producers are going out of business and a wave of energy-related bond defaults is about to wash over the fixed-income markets.

Who wins in this scenario? The answer is that the major global oil producers win. They have the diversification, financial strength and hedging ability to weather the storm.

The majors can bide their time and pick up oil assets for pennies on the dollar once thefrackers file for bankruptcy. They also have close relations with the Saudis (through Saudi Aramco, the state-owned energy company of Saudi Arabia). This means that they are insiders when it comes to strategies such as the plan to destroy the frackers.

Because of human biases and crowd behavior, the stock prices of the major oil companies have been beaten down along with the price of oil and the stock prices of smaller players.

But the oil majors are in a league of their own and are positioning themselves to benefit from the rebound of prices in late 2016 and early 2017.

The time to play this rebound is now, not when the crowd catches on.

All the best,

Jim Rickards