OPEC is getting desperate.
When oil bounced 20% from $45 lows in February, one prominent OPEC insider called for a potential return to $200 a barrel.
At the time we warned:
OPEC can say what it will. But there’s no clear indication of a bottom [in oil] 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.
Since then oil prices has given back all those gains and are now hitting new lows.
Despite the decline, OPEC is at it again with more “insight” that will surely attract some investors back into oil.
Here’s the one thing you need to know about it now.
OPEC: Prices are firming…(Really?)
Ibrahim al-Muhanna, an advisor to Saudi Arabia, recently said oil prices have just begun to stabilize and will continue to “firm up, while crude demand will grow stronger.”
That’s quite a statement given how oil has turned. And from someone with close ties to OPEC’s leaders.
Will it prove true?
Well, we expect this time isn’t any different than last time.
It’s another prediction aimed more at getting investors excited about oil and cause them to buy in and so they can get a better price.
It’s something that has happened time and again throughout the downturn.
As we’ve noted here in the Profit Alert, investors plowed $334 million into four large oil ETFs in November. A few weeks later oil prices fell 40%.
Then in December oil industry executives got aggressive. Insider buying of oil stocks surged to the highest level in years. Oil fell another 36% after that.
Then in February, after oil prices bounced 20% from their earlier lows, billionaire oil investor T. Boone Pickens predicted a rebound.
He cited reports of oil drilling rigs getting sidelined as a clear indicator oil prices were bottoming.
Unfortunately, after years of a bubble-like investment in oil production, oil rig data meant absolutely nothing.
Today that prediction was proven just as bad as the others and we continue to see oil as one of the worst trades in the market today.
The Simple Truth About Oil
It’s a simple case of supply and demand.
Demand is flat.
Supply must - and will - drop sharply. This is a long process and it’s only just beginning.
Last month, for the first time ever, shale oil production from North Dakota fell. It dropped from 1.23 million barrels per day to 1.19 million barrels per day.
The thing is, that’s just 40,000 barrels per day, or about 0.04%, of a 90 million barrel per day global market.
It’s just too small. It’s going to take far bigger decline in production to matter.
On top of that, there’s just no upside in oil.
As we’ve mentioned before, big oil trading companies are providing a lot of support for oil prices.
They are buying millions of barrels and putting them in tank farms and on offshore oil tankers.
In Cushing, Oklahoma, the main storage point for oil in the United States, total supplies soared to about 50 million barrels today. There’s capacity for 70 million barrels in Cushing. It’s on pace to be filled by June.
The problem with all that storage is what happens when it hits the market and the wells are still running at 90% or 95% capacity?
The best case-scenario for the oil industry is not much at all. The worst-case is an absolute collapse in oil prices to $20 or $30 a barrel.
That price range is the “undershoot” we’ve been talking about as the time to buy oil if and when it comes.
Frankly, Pickens and OPEC can talk about rig counts, insider buying, OPEC as much as they want. The supply and demand will win out every time.
For now oil is still a high-risk/low-reward trade. And when the bulls have left the room and no one takes OPEC and other poorly-constructed oil predictions seriously, your editor will make his move.