Three factors combined in the last week. It's because of these three factors we feel oil is primed for a rise today.
Firstly, global oil inventories are extremely low. The International Energy Agency noted in its Oil Market Report last month that US oil inventories have slipped below their 5-year average. The chart below shows what we mean. That black dot on the left hand side is the level where stocks are right now; below average and getting close to a 5-year low.
What this does is create a fertile breeding ground for fear and speculation. The oil market is tense. People are now more concerned there may be a real shortage that could affect them. Regular disruptions in supply-perceived or real-don't help. Political events in Nigeria and Venezuela are a constant threat to supply. Recently, OPEC has even talked of reducing production.
In late February, oil pushed through the US$100 barrier and stayed there for an overnight close in New York. It was the first time the oil futures price has actually closed over US$100. We wrote to readers of our free e-letter, Money Morning, about the significance of the event. Gabriel André, our technical analyst and trader, considers US$100 oil to be a pretty important marker.
"With this renewed pace, a break of the US$100 barrier could strongly accelerate upward momentum," he wrote.
Well, it has come to pass. US$100 is broken. If oil keeps moving up in the next week, the break could be large. How large? It's pretty hard to tell. Once oil passes US$103 the price is breaching unmarked territory, in real or nominal terms.
Oil's upside could be a lot higher than any of us expect.
However, the reason oil's your best bet this month is that a genuinely big shock hasn't happened. Sure, it moved up to US$100, but it's been there before. It needs something to push it over the line, to release the tension created by skimpy inventories and technical strength. It needs an X-factor.
You wouldn't be reading about oil here and now if there wasn't plenty of scope for an X-factor to emerge. Something exactly like an Eskom. In the last five years, there hasn't been a bad time to add oil assets to your resource portfolio. But in the last few weeks, political and fundamental tensions have risen.
Venezuela is still jousting with Exxon over exports. As we've said in the past, politics play a big part in oil. The price itself holds a geopolitical premium. When OPEC meets again on March 4, Iran will be pressuring the cartel to cut output. Is this the "something else" that'll send oil over the brink? It's not terribly likely...but if it did come about, it would come as a large surprise to most.
The Second Reason Now Is a Good Time for Oil
A Goldman Sachs analyst summed up the market's sentiment rather well a couple of days ago (we've added emphasis in bold):
'After trading from the beginning of the year in near lock-step with the equity markets, crude oil prices have decoupled and moved sharply higher as economic growth concerns have been trumped by the same long- term structural supply issues that have driven the energy price rally during the past decade.'
If the argument for a short-term move doesn't grab you, there's always the long term. Oil scarcity isn't going away. While the market's attention is focused on two other rare, big-time events, oil lingers in the shadows. Now is the ideal time to pick up a cheap producer or explorer.
Most Australian oil companies would do well out of a big price shock, or a long-term appreciation. They all tend to track with the oil price pretty closely. But the one we found has recently been depressed. We reckon it'll cheer up over the next two months.
So just what is our comeback story in the making...
They could well be referring to INP.
INP Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
