Oil continues to gush out of the Middle East, North Dakota, Texas, and the Alberta tar sands in Canada. My oil prices outlook continues to be neutral at this point, even with the recent decline.
Some would argue there have been over 800 or so oil rigs placed in idle. But the reality is the best producing oil rigs are still pumping out the black crude.
Not only is oversupply an issue worldwide, but the global demand is not there. Also considering the high oil reserves and stockpiles, I just cannot fathom a sustainable upward move in oil prices given the current metrics. Unless oil fields are disrupted by ISIS in Iraq and elsewhere, I’m neutral.
The West Texas Intermediate (WTI) oil has fallen back towards the $50.00 level after recent moves to above $60.00. We could see a break at $50.00, but expect oil prices to rally should this happen. This would mean a trading opportunity for oil traders at below $50.00 and selling into strength towards $60.00.
Chart courtesy of www.StockCharts.com
Why My Oil Price Outlook Isn’t Promising
Overseas, news surfaced that Saudi Arabia, the largest and most influential member of the Organization of the Petroleum Exporting Countries (OPEC), produced record oil in June on expectations of rising demand in 2016. Now Saudi Arabia may be correct in its forecast. But for this to happen, many things must play out in the global economy.
The International Monetary Fund (IMF) just cut its gross domestic product (GDP) growth forecast for the global economy. China is estimated to see its GDP drop below seven percent this year, although I believe this has already occurred. Without strong demand from China and Asia, I can’t see oil prices launching much higher.
You also have the possibility of an Iran nuclear deal. This would likely result in the flow of Iranian oil into the market, pressuring oil prices in the Middle East and globally.
Closer to home, we continue to see strong oil production and expect rigs to come back online as prices rise, which would again put pressure on oil prices.
At the same time, Canada is continuing to hope a pipeline will extend from the Alberta tar sands to the refiners down south. Such a move—if it is ever approved—would drive up supply and place further pressure on oil prices.
How to Play Oil Right Now
The oil sector is not for buy-and-hold investors. When it comes to the buy on weakness and sell on strength approach, I recommend that only traders play oil at this time. I see a tight band at between $45.00 and $60.00.
Traders should also consider looking at accumulating some of the major S&P 500 energy companies in both oil exploration and production, along with the integrated oil plays. Here I’m talking about stocks like Chevron Corporation (NYSE/CVX), Exxon Mobil Corporation (NYSE/XOM), Schlumberger Limited (NYSE/SLB), and Continental Resources, Inc. (NYSE/CLR) to name a few.