WTI Oil just broke above the $70 price level for the first time since 2014. The chart this year shows a strong, almost linear march upward. On the five-year chart, oil seems to have “carved out a bottom.” That’s a very bullish pattern.
So is it time for “oil bugs” to break out the champagne? I’m sure many are already. And with this bona fide good news for producers, I can’t say they’re wrong. But I wouldn’t bet on the party continuing—and I’m not.
Pulling back to the big picture of oil prices since the 1970s oil shock, the current recovery still looks very strong. However, it could also be a dead-cat bounce after a major wave that has crested and broken.
I do think we’re seeing more than a simple, temporary bounce on an asset that sold off too hard, too fast. There are reasons for oil’s rise:
- OPEC and Russia have managed to make their production cuts stick, reducing the oil glut we had a couple years ago.
- The global economy is heating up again, even in Europe, increasing demand for oil worldwide.
- The US economic recovery is soaking up US shale production.
- The shaky ground the Iran nuclear deal is on has increased the risk of supply disruption.
- Venezuelan production is in decline, and there are reports that it could collapse.
My caution stems from reason #1, the most powerful driver here, being something easily reversed. Reasons #2 and #3 could change very quickly as well. Reason #4 may blow over. And #5 may be exaggerated—or swamped by new production from elsewhere, even if it’s true.
That said, if OPEC holds the line and Iranian oil is once again sanctioned, oil would head higher. If that happened and Venezuela went off the deep end at the same time, oil could go vertical. For a time.
So I’m not about to go out and short oil. But the strength of the trend today could turn out to be a “hollow oak,” soon to be revealed to be much weaker than it appears.
Since it could go either way, why take a chance?
But there’s more. The world is accelerating its shift into a new energy paradigm. I’m convinced that the days of Big Oil are numbered. More accurately, I should say the years of Big Oil are numbered. Car makers are already going electric. Governments are even banning gas and diesel engines. It may not happen this year, but soon, oil is going to be a terrible business to be in.
With this looming reality, I’m not interested in speculating that the oil party will continue long enough for me to make money in it. By this I mean something specific. I wouldn’t be interested in a major oil producer anyway. Modest leverage to higher oil prices is not what I’m after. An exploration play with new licenses to explore is more my cup of tea. And good exploration takes time.
So why should I bet on a waning industry, when I’m sure that the new energy minerals have a great, decades-long run ahead?
The oil party is in its 11th hour. There could be a lot of fun before the clock strikes 12, but I’m a rational, disciplined speculator, not a gambler.
