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Conditions Are Right for a Drop in Oil Prices

By Matt Badiali, editor, S&A Resource Report
Wednesday, April 4, 2012

We're up to our ears in oil...
 
Even while the benchmark U.S. oil price remains over $100 per barrel, commercial crude oil inventories are hitting 353.4 million barrels.
 
That's about 24.4 days of supply for refiners. And it's at the top of the range for this time of year.
 
Now, the glut is creating the right conditions for a big drop in oil prices.
 
You can see how much oversupply we have in the chart below...
 
 
 
The current inventory is 10% above the 10-year average for this time of year.  
 
In short, we have an enormous supply of oil right now... And we're not the only ones. According to Petroleum Economist magazine, oil supply in Saudi Arabia is growing. The Saudis claim they have another 2.5 million barrels per day of spare production ready to come on line.
 
Supplies are high... But demand is falling. U.S. oil demand peaked in 2007 at over 20 million barrels per day. Demand has fallen 13% since then. Our demand for foreign oil imports is also down 15% from its peak in 2005.
 
The International Energy Agency (IEA) cut its forecast for global oil demand growth to 0.9% this year.
 
The only reason prices are still high is continued tension in the Middle East. The market is concerned that come July 1, 2012, the oil sanctions on Iran will cause shortages around the world.
 
And as long as the market is worried about the outcome, prices can stay high. But as soon as tensions ease, the conditions are right for a big drop in oil prices.
 
It happened last year... 
 
In March 2011, we had 362 million barrels of oil in storage. It was far too much oil for demand. The price peaked in April at $113 per barrel then fell over 36% to bottom in September.
 
We could see the same happen this year.
 
I don't believe that fear can sustain this oil rally much longer. There is simply too much oil piling up, especially in the U.S.
 
If you are long oil producers now, tighten your trailing stops and prepare to take profits. For the rest of us, I see the coming crash in oil prices as a buying opportunity.
 
Good investing, 
 
Matt Badiali




Further Reading:

Porter Stansberry sees U.S. oil production continuing to increase over the next 10 years... which he says will create an enormous amount of wealth for investors. "This is the biggest investment opportunity of my lifetime," Porter writes. See what makes this boom so powerful... and how to get in on this megatrend here: How to Own Your Share of the Next Wave of American Oil Wealth.

In The Daily Crux
Market Notes
Silver looks to break its recent downtrend... prices jump to their highest level in more than two weeks.  
 
Tech fund XLK hits an 11-year high... fresh 52-week highs for Apple and IBM.  
 
Biotech stocks are still in a long-term uptrend... big fund XBI is sitting less than 1% below a new all-time high.  
 
"Slow and steady" pipeline uptrend continues... Enbridge, Kinder Morgan, and El Paso hit new multiyear highs.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1413.38 -0.4% +6.1%
Oil (USO) 39.66 -0.9% -8.1%
Gold (GLD) 159.89 -1.9% +14.9%
Silver (SLV) 31.65 -1.3% -14.1%
U.S. Dollar 79.37 +0.7% +4.4%
Euro 1.32 -0.7% -7.0%
Volatility (^VIX) 15.66 +0.1% -10.0%
Gold Stocks (^HUI) 466.69 -1.8% -16.1%
10-Year Yield 2.20 +0.5% -36.2%

World ETFs
Symbol Price
Change
52-Wk
USA (SPY) 141.26 -0.4% +8.3%
Japan (EWJ) 10.06 -1.3% -0.3%
Singapore (EWS) 12.88 -0.9% -2.4%
S. Africa (EZA) 68.45 -1.8% -4.9%
S. Korea (EWY) 61.07 +0.7% -5.9%
Lat.America (ILF) 47.85 -0.9% -9.6%
Taiwan (EWT) 13.06 -2.2% -9.8%
Canada (EWC) 28.37 -1.5% -14.6%
Israel (ISL) 13.91 +0.2% -14.7%
China (FXI) 37.20 +0.3% -16.7%
India (IFN) 22.45 -0.3% -30.0%
Russia (TRF) 16.71 +0.5% -31.0%

Sector ETFs
Symbol Price
Change
52-Wk
Retail (PMR) 25.66 -0.4% +26.5%
Big Tech (QQQQ) 68.23 0.0% +19.9%
Consumer Svcs (IYC) 81.10 -0.2% +15.4%
Health Care (IYH) 78.66 +0.2% +15.1%
Big Pharma (PPH) 73.61 +0.6% +14.1%
Utilities (XLU) 35.20 -0.1% +13.1%
Real Estate (IYR) 62.41 -0.5% +9.0%
Biotech (PBE) 22.85 -0.2% +4.2%
Industrials (IYJ) 71.44 -0.6% +1.4%
Financials (IYF) 58.78 -0.4% +0.3%
Media (PBS) 15.13 -0.4% -0.2%
Defense (PPA) 20.19 -0.5% -0.3%
Transportation (IYT) 94.30 -0.3% -1.5%
Insurance (PIC) 16.40 -0.4% -1.5%
Software (PSJ) 27.01 -0.6% -1.6%
Construction (PKB) 14.02 -0.6% -3.5%
Internet (HHH) 70.21 +0.1% -3.8%
Telecom (IYZ) 22.27 -0.1% -4.3%
Water (PHO) 19.34 -0.5% -4.5%
Semis (PSI) 15.86 -2.0% -8.5%
Oil Service (OIH) 121.00 +2.4% -11.4%
Basic Mat (IYM) 70.65 -1.1% -11.9%
Nanotech (PXN) 6.46 -1.7% -31.8%
Alt. Energy (PBW) 5.43 -1.5% -48.1%

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