Oil and Gas

Is Crude’s Crash for Real?

My investment strategies are built on trends. Over the years, I’ve proven that the markets are far more predictable than most investors believe they are.

When markets behave in a pattern I recognize – even if it’s bearish – I find comfort. Because I have an action plan ready to follow.

Of course, when we talk about commodities – things that are consumed – it’s easier to spot the trends.

There are periods of high and low demand. The commodities sector is dominated by seasons. And commodities prices often reflect that.

In fact, when I started in the financial world, this is where I learned to apply seasonality successfully.

That’s important to remember when watching the crude markets at the moment.

The price of U.S. crude peaked on January 26 at $66.27 per barrel.

Investors cheered because this was the highest level West Texas Intermediate had been at since December 2014.

But since the late January peak, the price of crude has tanked – just as we’ve seen with equities

It tumbled below $60. And some energy investors are worried.

But crude is subject to seasonality.

And because of that, investors should consider the recent pullback with a grain of salt. The fact is, crude has a predictable pattern.

As I’ve pointed out here before, crude’s price tends to mimic the refinery utilization rate…

This is something we’ve seen again and again, regardless of what the broader markets are doing.

The price of U.S. crude typically peaks during the summer months, which bring the summer driving season. At the same time, refinery utilization also hits a peak.

Crude prices will generally dip during the winter maintenance season, which we’re in now. Refineries go offline in preparation for summer fuel grades, and then prices bounce higher again.

And then the cycle repeats all over again.

It’s simple… When refineries aren’t using crude, there’s slack in demand. In turn, prices fall.

Every 1% in refinery utilization represents roughly 185,000 barrels per day (bpd).

Since the start of the year, the utilization rate has slipped from 95.4% to 92.5%.

That means crude inputs have declined 520,000 bpd from an average of 17.32 million bpd to 16.8 million bpd.

So the economic backdrop for crude is bullish.

Since OPEC and its allies implemented a deal to curb output in late 2016, global stockpiles of crude have fallen 80%.

And they’re now at their lowest levels since November 2014.

This is what helped crude surge 60% to close out 2017.

Now, U.S. crude output is expected to hit a record in 2018. And the U.S. working rig count is quickly approaching 1,000. That’s a level it hasn’t seen since April 2015.

But as U.S. production is rising, our crude imports are on the decline. At the same time, since the ban on crude exports was lifted in 2015, our exports are on the rise. We’re on pace to be a net exporter of crude this year.

I believe U.S. crude will hit $75 per barrel in 2018. And the recent pullback doesn’t change that view. It’s all part of these predictable patterns that we see in the market.

So it’s nice to know that the markets are at least making sense somewhere. And it’s up to us as investors to take advantage of these opportunities.

Good investing,