|Dow||-142.20 to 17,928.20|
|S&P 500||-25.03 to 2,089.46|
|Nasdaq||-77.60 to 4,939.33|
|10-YR Yield||+.041 to 2.176%|
|Gold||+$4.90 to $1,191.70|
|Crude Oil||+$1.48 to $60.41|
Ding, ding, ding! We have a winner folks!
U.S. crude oil futures breached the $60 a barrel mark earlier today, then kept on going. That extended the rally off the March lows to more than 43 percent … and it put oil at its highest level since mid-December. What’s more, the move is being confirmed by corresponding breakouts in everything from gasoline to heating oil to natural gas.
The good news: You should be profiting nicely! That’s because I begged and pleaded with you to buy oil and energy stocks when they were trading at their lows in December and January, and I trust you followed that advice.
The better news: I don’t think this move is over, even as we see occasional pullbacks like today’s. I’ve shared several reasons with you, including in yesterday’s piece on my “Enough is Enough” indicator. Now I want to talk about yet another powerful force — geopolitics!
Look, it’s no secret the Saudis helped crater crude last year by declaring war on U.S. shale producers. Rather than agree with other OPEC nations who wanted production cuts in the summer and fall, the Saudis said they would keep the taps wide open. That helped send oil into a tailspin — from around $80 to $42.
The Saudis figured they could handle the pain. That’s because they spent the last few years building up cash reserves when prices were high, giving them a financial cushion.
But I always maintained the country couldn’t keep up the fight forever. Reason: Saudi Arabia gets more than 90 percent of its revenue from oil sales, and its breakeven oil price is estimated around $85 a barrel! That’s putting it under immense financial pressure.
The country faces a budget deficit of a whopping $100 billion this year. That’s around 15 percent of GDP, a huge gap that has the International Monetary Fund spooked.
It’s not just the revenue side of the equation that’s hurting, courtesy of falling oil prices. The Saudis are also spending like mad to wage their expensive proxy war with Iran in Yemen and elsewhere in the Middle East. They’re also keeping social spending high to tamp down discontent among the populace.
As a result, they’re bleeding cash like crazy! Take a look at this chart of Saudi cash reserves, courtesy of Zero Hedge. You can see that reserves have plunged by almost $50 billion just since October. That’s the fastest, most severe drop on record, and it leaves reserves at their lowest point in around two years.
Click chart for larger version
Bottom line: The Saudis are now clearly losing this oil war! They’re backed into a corner. They’re drowning in an ocean of cheap oil and red ink, and they need a life preserver!
Oil Minister Ali Al-Naimi just told CNBC today that the next move in oil prices was “up to Allah.” But divine intervention isn’t the answer. Production cuts are. And that’s where things get interesting.
You see, the next OPEC meeting is looming in early June. Iran has already come out and said it wants a 5 percent production cut. That would equate to 1.5 million barrels per day, given the current quota of 30 million BPD.
Other OPEC countries like Nigeria and Venezuela would like to see cuts too. Plus, I’ve seen a handful of reports suggesting there are talks going on between OPEC members and non-OPEC countries like Russia, Mexico, and Oman.
Could the Saudis finally be ready to cave, and agree to production cuts? Could OPEC cuts be bolstered by cuts from non-OPEC countries? That’s exactly what happened in 1998-1999 when prices collapsed to $10 a barrel.
|“Massive pessimism in energy is still pervasive, despite the recent rally.”|
I don’t know. Al-Naimi hasn’t called me to tip me off (yet, anyway!) But they have the motive to do so. They have the means to do so. And they have the opportunity to do so. So that certainly raises the possibility.
But even if we don’t see explicit OPEC cuts, I believe the outlook is bullish. U.S. drilling is collapsing. U.S. production is starting to decline in key shale regions. Global demand is still rising. And massive pessimism in energy is still pervasive, despite the recent rally.
What about you? Were you expecting to see $60 oil, and are you profiting from it? What about the prospect of OPEC production cuts … is it real and/or likely? What do you think that would mean for oil prices over the next year? Let me know over at the website.
|Our Readers Speak|
Oil and gas continue to be in focus, and no wonder given the intense interest in the future direction of prices. We have been having that discussion internally, as some of you have noticed, and frankly I believe that can be healthy.
At different times, different analysts can have different views based on different research. That’s what makes a market. My conclusion — based on all of my work — is that energy stocks offer the most compelling values in three decades. That’s true even after the recent bounce.
Could oil go down further? Sure, anything could happen. But I don’t think so. And even if it did, energy stocks have ALREADY priced in Oil-mageddon. So I’d be willing to take the mild pain of a short-term pullback … in exchange for the huge, long-term profit potential of a multi-year rally!
Hopefully that makes my stance as crystal clear as possible! And with that, let’s move on to a comment from Reader Jeff, who said:
“I agree with Mike that oil and energy stocks are a fantastic long-term bargain, and will pay off big time two-three years and more down the road. But this year and next year, I think the oil price is likely to stay in the $50-$60 range.
“If there is a global economic slowdown, especially in China and the U.S., that could bring the oil price back down to $50 or below again for a while. Investors are overreacting to every small move in the oil price, but stock prices could continue to yo-yo for the next year or two.”
Reader Jim added the following on the oil storage issue: “For the short term, you are right to watch U.S. storage numbers. The big price bump last month was based on much lower numbers than expected at the biggest storage facility at Cushing, Oklahoma.
“I also think many analysts missed the fact that a lot of the storage overflow was caused by the refinery strikes last fall. This rally will indeed fail quickly if storage numbers start to jump again.”
Reader Dave H. said energy prices will also be impacted by what’s happening in other countries. His take: “The rig count may be down and the amount of oil being produced from American drillers may be down, but the amount of oil flowing into American storage tanks from Canada and elsewhere is still rising.
“All the other storage capacity in the world is full, so lots of oil looking for storage is coming to American shores. What happens when the storage tanks are all full worldwide? I suspect total market collapse. I really want to buy my favorite oil companies right now but am staying away in case the total collapse scenario comes true.”
Lastly, Reader Robert asked: “What oil stock is the best buy for a beginning investor? A stock with the best potential upside?”
I appreciate all the thoughts and questions. Storage levels will indeed be a key area of focus for energy investors, as we need to see the tanks start to drain to give this rally more legs.
I believe we are very close to that happening, what with refinery demand picking up, U.S. production in key shale areas topping out, and more. I’ll be keeping a close eye on the weekly EIA data that comes out every Wednesday at 10:30 a.m. Eastern to confirm that.
With regards to oil investments, I’ve shared some general ideas about what you can buy to profit — in this column and this column, for instance. But naturally, it wouldn’t be fair to my paying subscribers to share specific names, “buy” and “sell” targets, trading strategies, and so on here. I’m sure you understand.
The good news is, I’m always welcoming new ones on board. Click here for details on my Safe Money Report, which has some specific energy names you may want to target.
If you have any other thoughts, please do fire them off when you get a chance — especially now that oil is breaching $60! Here’s the link!
|Other Developments of the Day|
The U.S. trade deficit exploded by 43 percent to $51.4 billion in March. That was the biggest jump in any month going all the way back to 1996, and it left the deficit at its worst level since 2008.
Some of that stemmed from the reduction of the West Coast port standoff, which allowed more imports to stream onto our shores. But the bigger issue is the strong dollar. It has made U.S. exports less competitive on the global stage, while driving down the cost of U.S. imports.
Bottom line: The surge in the deficit will give the Federal Reserve (and Washington politicians) even more reason to push back against the buck’s advance. That means my call for a top in the dollar continues to look right on target.
The Republican field got even more crowded in the last 36 hours, with former Arkansas governor Mike Huckabee announcing his candidacy today, and former Hewlett-Packard (HPQ, Weiss Ratings: B) CEO Carly Fiorina doing so yesterday. Retired doctor Ben Carson also joined in.
I’ve been talking for the last few months about how beaten-down emerging market stocks and bonds were looking more and more interesting. Now, it looks like global investors are warming to EM real estate as well!
The Wall Street Journal reports that several large foreign firms are starting to hunt for bargains in Brazilian office, residential, and industrial property. The process is in the early stages. But it could be another reason to take a look at the iShares MSCI Brazil Capped ETF (EWZ) as a possible investment. It has been perking up nicely in recent weeks.
Any thoughts on the crowded Republican field? The global currency war, and its impact on trade? Foreign investments? Here’s the place to share those comments with me and your fellow investors.
Until next time,