On Friday, U.S. crude hit a six-and-a-half-year low as a confluence of market factors continued to crush commodities.
For four consecutive weeks, American crude oil producers have added more drilling rigs, bucking the trend for most of the year when, as prices fell, companies slashed rig budgets.
Now, though, it would seem drillers want to forgo any more delays and try to squeeze as much profit out of operations as possible.
Unfortunately for investors, the gung-ho attitude held by drillers creates negative sentiment when it comes to oil prices: More rigs mean more oil, which would further saturate a market already in a glut of crude.
Still, it’s for the best, since the market won’t be inflated by rig manipulation from Big Oil companies.
Also contributing to oil’s continued decline on the market was a production boost in North Dakota’s Bakken, as well as a stronger dollar.
With the U.S. (and global oil) currency strong, non-U.S. buyers have a tougher time converting currency to dollars to purchase more oil, which creates a squeeze on prices.
However, despite this squeeze and all of the bad press for oil over the last year, some people stand to make a lot of money later this afternoon…
Market Manipulation at its Finest
At 2:30 p.m. Eastern time, futures contracts for September crude oil expire, and a lot of options activity could cause a serious amount of money to change hands.
On Friday, CNBC reported that nearly $1 billion worth of contracts shorting September crude futures will expire this afternoon, and in the run-up to this event, a few different things could happen…
Basically, the owners of these contracts could see a lot of money fall into their laps if crude prices are lower than $40 at 2:30.
However, if prices stay above $40 per barrel, those traders get nothing. Many analysts feel that, if anything, prices will see a shocking surge before the contracts expire followed by another decline, most likely on Tuesday.
The significance for us is that we now have a chance to avoid any and all oil stocks that could be inflated by this sudden surge that some think could go as high as $46 per barrel.
Remember, oil will go back down after this, so it’s important to be wary and perhaps stay out of oil for the day.
The much better play on this sudden rise will be to buy up the shares sold off by panic sellers tomorrow.
The people today who think oil found a bottom and is headed higher will be all too ready to exit any positions before the damage is too great. That’s where we come in…
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Buy the Fear Tomorrow
Although the bottom for oil is back, it’s still smart to buy shares on these sudden dips. Oil could gain momentum at any time and fail to retreat again.
Of course, this may not happen soon, since China signaled its financial distress last week by devaluing its currency, the yuan.
By doing so, the Chinese have put even more downward pressure on commodities, which helped usher in the six-year low in crude prices.
Until China can shore up its economy (it just feels weird writing those words), the commodities market, especially for oil, will remain in flux.
When you couple this with recent reports out of the EIA that suggest Iran could soon upgrade its production by 600,000 barrels per day, the outlook for oil becomes more and more bleak.
In December, Iran’s 2.8 million barrel per day of production was 20% less than it was in 2011 before the hardest-hitting sanctions took effect. But as of July, the country had 3.13 million barrels per day of production.
Iran has steadily boosted its output, and when sanctions are lifted fully, it could be less than a year before Iran surges beyond its 2011 production numbers.
Plus, Bloomberg reported last week that Big Oil hasn’t cut enough spending to maintain dividend payments at current prices. Collectively, the major firms will have to cut $26 billion more.
Big Oil will have to cut more capex to maintain dividend payments, cut dividends, or take on debt, so it would seem that more capex cuts are on the way since cutting dividends could be disastrous for share prices.
If no capex cuts are announced, expect a sell-off for big firms that could weigh down some of the smaller drillers in the market.
Each of these contributions to the oil glut will suppress prices further for a while now, so don’t mistake any spikes this afternoon as something relevant… There are just some foolhardy bets coming to fruition.
Come tomorrow, it would be a good idea to get ready to buy again when prices drop back to our new normal.
Of course, you’re probably wondering why I’d urge you to buy when there’s so much doubt in the oil sector, but the answer is simple: There’s blood in the streets.
Sure, the saying feels overused since the bear market began, but its truth outweighs its cliché right now.
Oil always goes up, so whenever you can buy low, you should.
Good Investing,
Alex Martinelli
With an eye squarely focused on the long-term, Alex Martinelli takes the art of income investing to a higher level within the energy sector. His research has helped hundreds of thousands of individual investors identify well established companies that have a long history of paying out dividends to their shareholders. For more info on Alex, check out his editor’s page.
