Oil is a volatile beast. Last year, it fell from $62 to $28 a barrel. In February of this year, the price reversed and almost doubled to $50.
As you can see, the chart is wishy-washy, undetermined, consolidating. We have a classic pennant formation that will break up or down over the next two months.
Today, I will get you three solid reasons why, when the breakout occurs, it will be to the upside.
1. The Fed can’t raise rates.
Last week, I wrote about the Fed meeting in Jackson Hole. I predicted that oil, gold, and silver would sell off as the hawks talked up a rate hike. I further said that it would be the last best time to get in on those commodities before the market realized it was nothing but talk. We are now at that stage.
Yellen and the Fed made it clear that rate hikes depend on employment numbers. Case in point: this Friday’s August payroll number. The consensus expects a reading of 180K, down from last month’s 217K print. A number in the mid-200s would signal a rate hike. I can’t see the future, but leading indicators including car sales, housing sales, savings rates, and a revised lower GDP point to a slowdown.
2. Mergers and acquisitions are booming.
Increased buying or M&As always signal a bottom of the oil price cycle, and smaller companies are being snapped up by the big boys.
According to Bloomberg:
More than $11 billion of transactions were announced globally in July as crude’s recovery fueled hopes of a steadier market, Wood Mackenzie Ltd. said. That’s the highest monthly total this year and brings the amount since May to $32 billion, triple that of the previous three months.
Exxon Mobil Corp. and Statoil ASA were among the buyers after crude’s rebound from a 12-year low earlier this year bolstered confidence. Acquisitions will allow the companies to ensure future growth as the industry has slashed $1 trillion in spending to protect their balance sheets during the downturn.
The price volatility in the first quarter derailed M&A, as companies focused on survival. Now, with oil prices up, buyers and sellers are coming together.
Exxon agreed last month to acquire natural gas explorer InterOil Corp. for as much as $3.6 billion to add discoveries in Papua New Guinea. The company also is in advanced negotiations with Eni SpA to buy a stake in gas finds off Mozambique.
Crisis and Opportunity readers own a small $6 company that is tied to Exxon’s Papua New Guinea property. It is an incredible value at this point in the oil cycle.
Statoil, Norway’s biggest oil producer, agreed last month to purchase an oil block off Brazil from Petroleo Brasileiro SA for $2.5 billion, its biggest acquisition since 2011. Last year, Shell bought BG Group for $70 billion.
Expect more big deals in the second half of 2016.
3. Iran, through its Yemen fighters, will score a missile hit on a major Saudi oil infrastructure.
It is not getting much press, but there is an Iran/Saudi proxy war going on in Yemen that is not going well for the Saudis.
This is a tribal fight that pits the Shia against the Sunnis. The Iran-backed rebels are fighting an invasion force of Saudis.
The Saudis cannot afford to leave a hostile Iranian-supported enclave on their southwestern border, and it appears the Saudis feel they have to do whatever it takes to crush the rebel alliance. This includes air strikes and tanks.
The Saudis recently bought 153 new Abrams tanks from the U.S. to replace up to 40 lost. Two Saudi tanks were actually captured and had to be hunted down by airplanes. Some estimate that more than 6,000 soldiers have been killed and $14 billion in treasure spent. Three million civilians have been displaced.
Yesterday, in the northwest, Yemeni Shia rebels fired a rocket at the Saudi town of Najran and killed two civilians and wounded five.
Our analysts have traveled the world over, dedicated to finding the best and most profitable investments in the global energy markets. All you have to do to join our Energy and Capital investment community is sign up for the daily newsletter below.
Oil Panic
A few days ago, reports of a Yemeni rebel missile hitting a Saudi oil facility in southwestern Saudi Arabia caused a brief panic in the oil markets, and the world oil prices briefly rose 2%. What actually happened was that a rocket fired from Yemen hit the fuel storage area for an electrical power plant near the Saudi town of Najran.
Before that, on August 22, the Saudi air defense systems shot down a ballistic missile fired from Yemen which the Yemeni army said it had aimed at oil installations in the south of the kingdom. Iran has the largest and most diverse ballistic missile arsenal in the Middle East, mostly North Korean, and has been smuggling them to Yemen.
Over 3.8 million barrels a day (b/d) pass through the 18-mile Bab-el-Mandeb Strait off Yemen, one of the world’s key choke points for crude oil supply.
The Saudis know they are vulnerable to one of those rebel ballistic missiles hitting a major oil facility. This would crush Arab resolve and is a long-held fear of Iranian capabilities.
The American (Raytheon — NYSE: RTN) and Israeli firms that supply anti-missile systems have told senior Arab leaders that there is always a small chance a missile will get through. During the current campaign, Saudi patriot anti-missile systems have intercepted all rebel ballistic missiles aimed at important targets.
There is also the idea that Iran is seeking bargaining chips in negotiations with OPEC to push oil prices higher.
Buy the dips,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
