'Dar she blows!'
Crude oil broke out from beneath major resistance on Thursday. This resistance has held the price back for the past nine months. In doing so it has created a very bullish technical picture. (See chart below). Whether you believe in 'peak oil' or not, the fact of the matter is that supply, (estimated at 84.5 million barrels) and demand, (estimated at 84 million barrels), does not leave much room for disruptions.
Saudi Arabia, for many years a 'swing producer', in the past could increase the flow of oil at will, but now either will not, or cannot, pump more oil. The Saudi oil fields are aging, and have probably already peaked. While foreign experts have a difficult time obtaining accurate information from the Saudi oil officials, there have been reports that the Saudi's are pumping sea water into the oil cavities to keep up the pressure. This procedure has an immediate benefit, but presents longer term problems, as this oil becomes less and less pure, and therefore you have to pump more oil to end up with the same amount of saleable oil. This oil requires extra treatment, to get rid of the salt water.
Mexico and Venezuela are also unable to produce as much oil as they could in the past. Nigeria is having supply problems caused by armed rebels.
Canada is increasing its Alberta Tar Sands production, but due to environmental concerns, it takes a long time and billions of dollars to put a plant into production.
Chevron's recent find beneath 5 vertical miles of ocean, will take years to develop.On the demand side, the public has yet to get serious about curbing demand. The roads are still clogged, in North America and Europe, while India and China are witnessing a steady growth in their middle class. These people are trading bicycles for motor cycles, and motor cycles for cars.
China has a ten year plan to build 85,000 km of roads! This plan is even more ambitious than President Eisenhower's plan for the US Interstate highway program of the 1950's.China also plans to build over 100 airports per year for the next 10 years.
There appears to be no let up in the demand for oil, and on the supply side, there have not been any new 'elephant size' oil discoveries for some time.
On the political front, the fanatical leadership in Iran, cannot be counted on to make rational decisions, as their leaders believe that destiny has placed them in a position to hasten the return of the Twelfth Imam, and they are willing to risk a holocaust to facilitate this event.
In view of the fact that President Ahmadinajad has threatened to wipe Israel off the map, it is just a matter of time till fireworks erupt in the middle-east and oil will rise to all-time highs once this occurs.
BP has just released its annual report on oil. For the first time in 17 years the report cites a drop in available reserves. During the past year the total oil reserves dropped by just over 1 billion barrels. Assuming current levels of consumption, the estimated oil reserves will last another 40 years. Should the levels of consumption increase, the time frame will decrease, unless more oil is discovered. The conclusion is that we will not run out of oil, but that the price may well continue to rise.
The technology exists to replace oil with liquid from coal, using the Fischer Tropsch method. This procedure which was used by Hitler during WW2, and is currently in use in South Africa. It converts carbon monoxide from coal, along with hydrogen, to produce a synthetic fuel. The problem is the cost involved in changing the current infrastructure from oil to oil substitutes. At some point we will 'bite the bullet', but in the meantime, we better get used to higher oil prices.
Charts courtesy of www.stockcharts.com
Featured is the daily bar chart for crude oil. This is a very bullish technical formation. It combines an ARAT (Advancing Right Angled Triangle), with an inverted 'Head and Shoulders' formation. On the assumption that this breakout is confirmed during trading on Friday, it sets up a target at 75.00, the highest oil price since last summer.
Featured is the USO oil fund. The picture bears similarities to the crude oil chart, and once price surmounts the 200 DMA (green arrow), USO will likely move on up to 55.00 - 57.00, on the assumption that the breakout in crude oil is confirmed by follow-through price action. (It usually takes at least two trading days to confirm the breakout is genuine).
Please do your own due diligence. I am NOT responsible for your trading decisions.
Peter Degraaf is an on-line stock trader with over 50 year of investment experience. He sends out a weekly Email alert to his subscribers. For a free 60 day trial, contact him at ITISWELL@COGECO.CA
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June 4th, 2020
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