Earlier this month, I wrote about the bearish headwinds facing the oil market and laid out my forecast.
And since then, oil prices dropped a staggering 11%. And in just a few weeks’ time!
While I don’t like to crow, no doubt about it that forecast was right on.
And there’s more where that came from. In fact, I expect oil prices to continue to drop over the short-term, before turning higher into the fourth quarter.
And when that turn happens, watch out! Oil may be in for a monumental upside surge. In fact, my signals tell me that $60 oil isn’t out of the question for this next run higher.
But before that bullish turn can happen – and a definite bottom comes into play – three bearish factors need to be addressed …
#1: U.S. supplies need to come down. As it stands, U.S. oil inventories are roughly 100 million barrels above their five-year average for this time of the year. This comes from a surge in drilling activity that’s increased for 23 consecutive weeks and from domestic oil production reaching the highest level in nearly two years.
#2: OPEC and non-OPEC members must address the surge in Libyan and Nigerian production. Both nations were exempt from the output-cut agreement and have since turned up the spigots. With the current drop in oil prices toward $40, it’s increasingly likely that the cartel will pursue a larger cut in production.
#3: Companies need to draw down oil stored at sea. Estimates from Kpler SAS put the amount of oil stored on tankers at a new high for the year at 111.9 million barrels.
Once these headwinds are behind us, we should have clear sailing for higher oil prices.
And just like I expected, my E-Wave cycle forecast calls for just the same action:
A bottom in late July followed by a nice tradable rally into the fourth-quarter. See for yourself …
The above chart shows oil declining into late July, and then a significant rally into early October. Once oil makes that turn, I expect additional upside support from a handful of fundamental factors …
Improvement in U.S. gasoline demand. There was substantial improvement in this metric last week, with average daily gasoline demand at 9.816 million barrels per day. This is within striking distance to the record set in May 2017.
I expect U.S. gasoline demand to remain near these levels – and possibly increase – in the coming weeks as consumers hit the road for vacation and take advantage of cheaper prices.
More Middle East Tension. This includes the latest powershift in Saudi Arabia, with the controversial new crown prince – Mohammed bin Salman Al Saud. He threatens to disrupt stability in the region with his well-known antagonism toward Iran and Qatar. This tension will likely intensify over the short-term and build more geopolitical fear-premium in oil prices.
OPEC and non-OPEC member jawboning and headline flow to support the market. This includes talk of larger production cuts as well as indications that global oil supply-and-demand is coming back into balance.
What to do?
I’m monitoring the oil market closely for signs of waning selling pressure and for evidence of new demand. But I think it’s still a few weeks away. When the time’s right, I’ll recommend my members buy the ProShares Ultra Bloomberg Crude Oil (UCO) to take advantage of the coming advance.