Most traders have a strong opinion on energy prices. With oil near $50, almost double its February lows, some traders see higher prices ahead. Others see an overdue pullback. I see things closer to the middle right now. It appears that oil prices are likely to trade in a range over the next few months. An extreme move, in either direction, seems less likely now.
Here are the three key reasons I see that happening:
Oil demand and supply remains sluggish.
Despite a massive drop in rig counts, suggesting lower production, oil supplies still remain near historically high levels. There have been some recent drawdowns, and we’re now into the consumption-heavy summer driving season. Time will tell if we’ll see further drawdowns in inventories which will suggest that we’re truly closer to an equilibrium between supply and demand. Until then, the picture is mixed.
OPEC rumors have remained just that—rumors.
Sure, it makes a great story and speculation. But so far, OPEC remains committed to producing near its maximum output. In fact, its production levels are now at their highest since 2008. That brings us back to the supply part of the supply/demand equation for oil.
While a few oil-producing states have spoken about cutting back production to get prices back into the $70-80 range at least, there’s been no actionable item. Until the facts change, rumors might move prices here and there, but not in a long-term, fundamental way. I agree with many of these countries—even at $50, most oil projects still aren’t profitable. But if OPEC didn’t budge under $30, they won’t now.
The energy industry bankruptcy wave is still in the early stages.
Low energy prices have revealed just how extensive America’s economic recovery was dependent on energy production, namely with investments in the shale space. Many companies obtained high-interest rate loans to produce oil, with the expectation of $100+ per barrel indefinitely. Those projects, which were marginal at that price, are still hemorrhaging capital today.
We’ve seen a few shotgun mergers, and some bankruptcies in the energy space, but there’s still a long way to go on that front. Many producers have continued to pump oil out to meet cash flow obligations now. Until the sector has a bigger contraction on the whole, caution is warranted.
Bottom line, the phrase “all things in moderation” makes sense when it comes to energy prices right now. If you bought in the past few months and you’re looking at a sizeable gain, either take some profits or sell covered calls to hedge yourself. If you’ve been looking to buy, there may be lower prices in the coming weeks. They won’t be as extreme as the lows earlier this year, but they’ll be there.
Oil prices determine the entire energy sector as well. That means beware non-oil energy investments as well. Wind, solar, natural gas all compete, at least on some level, with Texas tea. Until we get a clearer signal, your best bet is to hold what you have, collect an income if you can, and wait until the next move becomes apparent.
is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and is managing editor of Financial Intelligence Report. To read more of his work, GO HERE NOW.
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