Why I Know Crude Oil Prices Have Much Further to Climb

It’s been four years since we’ve seen oil prices at levels anywhere close to this.

New York benchmark West Texas Intermediate (WTI) is now comfortably above $74 a barrel, while London-traded Brent Crude is closing in on $76.

For months now, I’ve been saying that despite the record surge we’ve seen this year, we’ve still only seen the tip of the iceberg for oil’s big comeback.

Year to date: WTI has surged 22%, with Brent posting a gain of about 13%.

But why am I so bullish on the black stuff’s future?

The most telling indicator is this one…

This Critical Price “Spread” Is Tightening in a Big Way

Since Thanksgiving 2014, when OPEC decided to defend market share rather than price – bringing global crude oil prices to their knees – Brent is now up 156%.

For West Texas Intermediate, that number is 182%.

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But there’s also another interesting figure we have to look at – the spread between these two benchmarks.

Both are better grades of oil (containing less sulfur) than over 70% of the oil traded worldwide.

But given its more central position in that global trade, Brent’s price has consistently been at a premium to WTI for the past eight years.

The spread, calculated as a percentage of WTI (the more accurate way of determining the differential) spiked to almost 15% recently and has averaged well into the double digits for the past month.

As of Thursday, it was 1.6%

The spread tells us that Brent had accelerated first, rising quicker than WTI.

That is not unusual, given that Brent’s preferred position in setting trade prices makes it more susceptible to market swings. WTI is more attuned to prices in the U.S. market, with that market reflecting a largess of shale and tight-oil reserves.

But what does all of this mean? And how do I know that oil prices still have room to climb from here?

Well, I’ve got three overarching reasons that will explain everything you need to know.

Let’s take a look…

Oil Is Moving Confidently Toward Market Equilibrium

First, the global market has been moving toward a balance between supply and demand for a while now.

Now, this balance must also include an ongoing surplus in storage.

“Just in time” management may improve efficiency if you are manufacturing widgets.

But applied to oil, it would be a recipe for unsustainable, whipsaw-style volatility.

This means that any appearance of a supply constriction or an expansion in demand will lead to an immediate surge in prices.

For its part, international demand has remained strong.

It is the supply side of the equation that has experienced production pressure.

The combination of an OPEC-Russia agreement to cap production, the implosion in oil volume coming from Venezuela, declines in Libya and Nigeria, and continued stagnation in Mexico has been augmented by a multi-month disruption from Canada.

Simply put, the recent Russia-OPEC production hike will not make up the difference.

And that means it just doesn’t have the legs to drag down prices for any prolonged period of time.

American Producers Are Turning on the Tap

Normally, a rising price would translate into an opening of the “spigots” among U.S. producers.

That’s been what we’ve typically seen, as the aggregate American production levels approach 12 million barrels a day, with 3 million going to exports (the highest amount in decades).

But there is now a more nuanced approach underway.

For one thing, the current market price allows for practically everyone in the American oil patch to run at a profit.

It prevents a need to produce as much as possible in desperate operations one step ahead of the sheriff.

These days, producers can leave more in the ground to serve as a hedge.

As I have noted several times recently here in Oil & Energy Investor, the advantage of American production being exported to higher-priced foreign markets is also pushing against its own ceiling.

There is little excess capacity remaining at U.S. ports.

That capacity will be expanded as trade moves down the coast from Houston and the channel to Corpus Christi.

But that will take some time…

There’s No Shelter from the Global Geopolitical Storm

The most decisive factor: Geopolitics.

U.S. President Donald Trump’s tariffs introduced uncertainty that tends to restrain the price, given the concern that such moves would have a debilitating effect on economies in many parts of the world…

Including the very U.S. sectors they sought to support.

However, it was what happened next that changed the entire trading dynamic…

Trump pulled the United States out of the Joint Comprehensive Plan of Action (JCPOA, the so-called “Iranian nuclear deal”) and has now called for a zero barrel import policy for Iranian exports.

That prohibition is set to take effect on Nov. 4.

The impact will be negligible on the U.S. market since there are virtually no Iranian barrels actually imported by American oil users.

However, there will be secondary sanctions applied to foreign importers.

These would include denial of access to the U.S. market, while having assets inside the U.S. subject to penalty.

Such secondary sanctions are having a chilling impact…

The prospect of having a significant portion of Iranian exports subject to removal from global trade throws estimates of the supply-demand balance completely out of whack.

The result has been major pressure for increasing global oil prices.

What used to seem like a walk up a staircase now feels like riding an escalator. The only question is: “How much faster can we go?”

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