It took a little longer than expected, but the price of oil finally broke out of its three-month trading range to the downside.
And Larry’s AI (Artificial Intelligence) model correctly called the price breakdown, disagreeing with most of Wall Street, which was calling for a break to the upside.
Again, our AI model was right on.
Wall Street forecasts were largely based on OPEC agreeing that it would cut 1.2 million barrels a day of production during the first half of 2017 AND that non-OPEC producers would cut about 600,000 barrels per day from their output.
We knew that wasn’t going to last … and our AI model wasn’t fooled either.
In fact, despite the production cuts, our research showed clearly that oil would make new lows in early 2017, followed by a sharp rally into May …
But patience is key right now.
Oil prices are down about 9% on the year and we could still see some further selling pressure, with oil heading down to around the $44 support level. Oil prices certainly have taken a beating this year, but some energy stocks have fared far worse.
In fact, the energy sector has been the worst performing sector this year, having sold off since mid-December.
But the Worst Might Be Over
Recent data shows that the global oil supply and demand balance is getting tighter. The latest data from the U.S. Energy Information Administration (EIA) confirms a tightening in supply, after inventories fell by 1.0 million barrels per day in February. This should propel oil higher, back toward the mid-$50 a barrel range near term.
Energy stocks should benefit as well. That’s especially true for some U.S. based producers, who have cut costs and streamlined production during the last downturn. Many U.S. shale producers have cut their breakeven price by half and likely won’t see their profits reduced unless the price of oil drops below $40 a barrel.
Bottom line: Oil stocks are out of favor right now, but that can offer the best opportunity to profit. It may take a little while to play out, but it looks like buying opportunities are emerging in the energy sector.
But don’t back up the truck just yet: There could still be some further short-term selling ahead and lower prices. But the opportunity to buy is coming soon.