Oil Outlook

April 18, 2023No Comments

Today we’re going to talk about energy, specifically oil. We’re not going to bother with natural gas or clean energy. We’re going to focus strictly on oil. WTIC is the oil index that we will be looking at for this presentation. I covered oil a few months ago. It probably was end of last year, very beginning of 2023. I’m going to bring you back to a couple of the things that we looked at back then and take a look at where we may be going for oil and the producers. So let’s get started.

So we’re going to do an oil outlook. What I want to start off with is the API inventory figure. This is a slide that I took from my last video on oil and basically I’m describing what the API inventory count is. So it shows how much oil is available in storage. Now, you might have heard of the strategic oil reserves, so there’s storage of all types, and that’s one of them. It gives an overview, this inventory, of US petroleum demand and I’ll tell you how that does this. If we see an increase in inventories, that means that you’ve got weaker demand because the inventories you’re building up as production goes into storage and consumers aren’t using it fast enough to bring the levels down.

In fact, the storage levels are going up, which means that demand is actually not so good. So a decline in inventories on the other side of the coin means greater demand because, all things being equal, consumers are using more oil products, and therefore the inventories are going down. Now, there’s other things at work, and that’s what I’ll address just quickly now. There’s the strategic petroleum reserve dilemma, which is, and I’m pretty critical of North American governments right now for their rather often asinine policies surrounding energy and so many other things. The problem is there’s this pressure on these guys to be green and they want to look green. So what happens is that, especially in the States, recently what happened was just before the midterms, Biden wanted to get as many seats for the midterm elections. In order to do so, what he did was he opened up the strategic petroleum reserves.

Now, strategic petroleum reserves are usually used, in fact almost exclusively used, for emergency or other type situations where we really need to offer more supply onto the market to keep oil prices from surging through the roof. Now, that was not the case last fall. In fact, oil prices were quite subdued, but he wanted to open up the reserves just to keep prices low so that his party would have a better chance of getting more seats. Now, this has nothing to do with what’s right for the economy and what’s right for America. It was what’s right for getting elected, and that’s just so wrong in so many ways. So whatever the case, they drained the reserves and instead of refilling them, if you read my blogs, I talked about this a lot in some of my blogs, how they would have to refill those reserves, and that would create demand, they just left them effectively unfilled. So they have a problem now because they thought, oh, you know, energy prices aren’t so high, we’re going to just leave things alone.

Meanwhile, OPEC, meaning Saudi Arabia really, decided that they had been kind of, pardon the slang, but screwed over by the US by that opening of the reserves and in fact, Biden called the king of Saudi Arabia a pariah at one point. You don’t call people names when you need something from them. This is common business sense. If you’re a good client of mine, even if I don’t like your hairdo I don’t say anything about your hairdo to the public. So this is effectively what happened and the other factor was that they’re seeing the writing on the wall. Effectively what North America said is, Hey, our goal is to remove ourselves from ever buying your product again, or at least reducing greatly.

Well, guess what? If you sold widgets and your main customer said, we don’t want to have to buy your widgets in the future, what are you going do? You’re going make some hay while the sun shines. So you’re going to raise prices as much as you can. It’s just common business sense and I don’t blame them. I think, again, part of the recent cutback in production by OPEC was them schooling North America for all these rather not so forward looking policies because, quite frankly, we’re still quite reliant on these products, and it’s a while before we really do become green in our energy. By the way, the subject of green is another topic, but we won’t get into that right now. So there’s a number of factors here. We had a political vote buying decision to reduce the strategic petroleum reserves in the US back last fall.

We had Saudi Arabia. It’s not too happy with the US for many reasons. We’ve had also plenty of demand for the product, son of guy. So all these things are going to cause changes in the petroleum reserves. Now, I want to just bring us back in history, and you can see here, during the Covid crash and the Covid crisis of 2020, people weren’t driving as much. You remember this. So when usage was down, factories were shutting down, office buildings were shutting down, people were working out of their homes, all that stuff. When that was happening, inventories went through the roof and you could see that. This big dark area of inventories prior to that they were actually negative. They moved right into extremely positive into reserves. So what happened from there is, as the market kind of calmed down during 2020, and there really wasn’t a lot of reopening but there was some reopening, the reserves were drawn down and you can see that.

We got into this negative inventory level that lasted through basically the last half of 2020, right into the end of 2021. And that, of course, you’ll recall oil went from here, early 2020, at 40 bucks a barrel. At one point it was in backwardation where it went negative, but that’s another story. So we went from around 40 bucks a barrel to literally about $110 a barrel through this period of time. That was very good for oil investors, myself included. At ValueTrend, we owned quite a bit of oil during that period. Now we got out of energy largely in 2022, and we’ve just been buying back lately and one of the reasons why, as you can see, we went from where we had negative reserves to positive reserves and that’s when prices fell.

But now we’re going back into a negative reserve zone. That means that we’ve got less in storage than normal, and that means that we could have an undersupply for use. So it’s something to keep in the background. It’s not the typical type of charts that I look at, but it is a factor that we look at when we’re looking at oil on the whole. So this is a really big picture of WTIC since literally 2006. So the left hand side is 2006. I’ve got a bunch of indicators. It’s a weekly chart, so it’s pretty mushed up and you may not be able to see all the figures here, but that’s why I’ve written them out. Basically what you are seeing is some of the indicators like RSI and stochastics are hooking up from oversold levels, and we’re also seeing a longer term indicator, MACD, hooking up or at least not declining anymore.

So that is some positive signs on the momentum indicators, and you see a very strong support line. By the way, I have been printing this chart for the better part of 10 years and these lines I drew many years ago. You can see that this particular level, which used to be a resistance level during much of the late 2015 to 2020 area, is now acting as support and that was fully expected that. That’s what happens. So we’re kind of bouncing off this level, which is somewhere around 65 and now we’re near 80. Well, what’s next? You can see I’ve drawn levels that go way back to this old support level around 85 and that comes into around here as well, around 90. So I’m going to say 85 to 90 is my current target on energy and if that is blown through, we could hit 110.

So remember, we’ve got declining reserves and we’ve got OPEC pushing the production lower, and now we’ve got a chart that tells us, yeah, there’s a good reason for maybe this support level at around 65 not to be touched for a while and maybe we even see $10 higher at the least on a price. But let’s take a look at a nearer term picture and that’s this. So here’s a near temperature of what’s happened recently. Oil was in a down trend and you can’t really see it. I’m sorry, I would have to make the chart the whole page and then I wouldn’t have my neat little talking points here. But there is a breakout that you’re seeing here. So that brings us to probably 85 to 90, like I said, and then there’s your 110 target, but there is a breakout.

I’d like to give it another week or two before I got too excited by this. But there’s a darn good chance that if that holds over that trend line that I’ve drawn here, then we’re probably going to see that 85 to 90 touched at least. You can see that momentum has been diverging against the downtrend. So this is positive. We’ve got MADC, we’ve got stochastics, RSI more or less flat. So there’s some signs that maybe we’re actually going to see this breakout hold and that, again, brings us to probably 85 to 90 in the very short term. So it looks like the downtrend is ending. Stochastics and MACD and RSI is kind of flat, but MACD is definitely trending up again. You don’t see this on the chart, but the AD line and the money flow momentum, which is at the top of this chart, you can see is starting to pick up a little bit.

I’m picturing $85 to $90 as a very realistic target at the least. Seasonality as well can be favorable around this time of the year. Now the best time to buy energy is around the beginning of February and you saw that was kind of a low. From there, we see typically a pretty okay move from February right into the mid-summer. So maybe that’s the situation this time as well. Let’s hope. All right, final thought is XEG, which is the producer index, and what you’re seeing is the producers are at an old level of resistance and this chart goes back to 2009. So it’s got a fair amount of data here and you can see we’re just hitting that same level on XEG at around, let’s call it 16 and a half dollars. It’s really struggling there. Okay, so my thoughts are that you’re not getting the momentum studies showing the same upward trend as you are on crude oil itself and you’ve got a monster size piece of resistance that you’re at rather than $5 or $10 ahead of here when it comes to the actual underlying commodity.

Sure if oil does get to 90 and then eventually 110, then this old resistance level will probably break for the producers. But until that happens, I’m more inclined if I was looking at adding new oil, we do have a couple of producers, but if I was going to add the oil, I’m actually more inclined to buy the commodity rather than the producers. So that’s the bottom line right now as far as oil goes, I think it’s got some upside in the near term. I do think that there’s some potential for it to go even higher than that 85 or 90. It will have to break that level as resistance, but then we could see 110 and there’s probably decent reason for that happening with what’s happened with Saudi Arabia and whatnot. But we will have to see. For now, my only view on oil is to enter the trade via the product itself and less focus on the producers, albeit that we do hold some at Value Trend at this time. But to leg in further, I think I’m going to be looking at the commodity before I buy more producers. Hope that helps.


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