After the earthquake comes the aftershocks.
The aftershocks of oil’s collapse are still spreading throughout the market.
Drillers have filed for bankruptcy. Oil-driven economies are in recession. Those $100,000/yr trucking jobs have disappeared.
And, surprisingly to many, oil prices are bouncing back sharply.
Over the past two weeks oil prices have rebounded 20% from a low below $45 to more than $53 today.
That bounce has brought the oil bulls back in force. Even an OPEC insider who warns oil’s going to back to $200 doesn’t sound so crazy now that oil’s on the uptick.
Is he right? Is it time to get into oil now before it’s too late?
Here’s the simple answer.
OPEC: The Bottom Is In…
Saudi Arabia’s oil minister Ali al-Naimi has committed to keeping the oil spigot open regardless of price.
He told us OPEC’s largest oil producer wouldn't cut production even if oil fell to $20 a barrel.
That was the catalyst for oil markets to plunge well below the $70 to $80 price range once viewed as “too low.”
Now that oil prices have collapsed though, OPEC’s Secretary-General Abdalla al-Badri is out with a much different story.
He says oil prices have hit bottom. According to al-Badri, “Now the prices are around $45-$55, and I think maybe they [have] reached the bottom and we [will] see some rebound very soon.”
Al-Badri further warned the result of the current downturn is a potential bull run in oil far greater than the last. He says $200 a barrel is more than a possibility.
These comments, straight from OPEC, helped drive the current rebound in oil prices.
And if you’re watching the oil market, you’re surely getting that panic feeling you may have missed out.
Don’t be. There are much bigger factors at play here.
First, don’t forget this is OPEC. It has a self-serving agenda. They don’t have your financial well-being in mind.
Second, despite the rebound in oil prices, there’s no clear indication oil prices hit bottom just yet.
There have been a number of quick rallies throughout the downturn.
Each one sucked investors in thinking the worst had passed.
In November, we featured right here how Bloomberg reported investors plowed $334 million into four of the largest oil ETFs.
Oil would fall another 40% from there.
In the middle of December, we noted oil company insiders were aggressively buying shares.
Traders took it as a sign to buy, thinking insiders know all.
Oil would fall another 36% shortly afterwards.
This time, we expect, will be no different because the two drivers of the current rally won’t last.
In addition to the OPEC comments, the other big driver of the of this rally have been massive cuts to capital expenditures by oil companies.
The cuts have been sizable:
- BP just cut its capex spending by about 20%, and delay investments
- CNOOC will cut spending by as much as 35%
- Gazprom will cut by $8 billion
- Royal Dutch Shell is cutting $15 billion
- Chevron will cut up to 13%
- Anadarko expects to announce big cuts within a month
Those are massive cuts to investments in exploration and development costs of new oil wells and infrastructure.
They will have an impact on oil supplies. But the thing is, they won’t have any impact any time soon.
Frankly, a major oil company delaying the development of a major oil well that was expected to produce 50,000 barrels a day in 2017 or 2018 just doesn’t matter much today. They could (and are) pushing projects like that back to 2020. It won’t matter at all in the short run.
Today, supply still outpaces demand by more than a million barrels. And in a market driven by Wall Street where “long term investing” means the next quarterly results, oil production projects scheduled to hit the market in 2017 don’t matter at all.
That’s why our expectations for oil haven’t changed at all.
Sell Hope, Buy Despair
The current rebound in oil prices have actually increased our conviction there are far better opportunities in the market than oil.
The rally has brought a lot of hope back into the market.
Hope, when it comes to investing, is a bad thing.
Hope keeps prices high. That’s why true contrarian value investors wait for despair to really buy in.
OPEC can say what it will. But there’s no clear indication of a bottom just yet. And traders and investors who are reacting to fears they missed the bottom are about to learn that the hard way yet again.
When all of the bulls have left the room, then we’ll look to really make our move.