Thomas H. Kee Jr. is the president and CEO of Stock Traders Daily (dotcom), where he offers strategies and newsletters to both institutional and individual investors, and he manages money privately for both institutional and individual investors through Equity Logic LLC. A specialist in technical analysis, Kee is also the founder of one of the leading, longer-term fundamental economic and stock market indicators in history, The Investment Rate. This proprietary tool, which is available to clients, too, predicts major economic cycles well in advance, and has been accurate since 1900. Using his broader observations of the economy to define disciplines, Kee has been able to accurately predict market cycles in advance using his multi-tiered technical indicators, and that combination has kept him ahead of the curve since starting Stock Traders Daily in January 2000.
On Thursday, May 28, 2015, I placed a strong buy recommendation on iPath Goldman Sachs Crude Oil Total Return Index ETN OIL, +4.48% when the ETF was testing 11.50. This recommendation was emailed to clients and all media networks. The call is a bullish one on oil prices, and we believe that OIL is positioned to increase handsomely in the year ahead, and that can impact consumers adversely.
Currently, OIL is trading over 12.00, having increased about 4.5% in a very short time, but that is not unusual given the volatility in this ETF and the oil space in general. There are very strong currents in this commodity, deep-pocketed players on both sides of the fence, and there is sure to be turmoil and additional volatility as the current issues are settled, but we believe the tides have turned.
The big issue here is all about supply and OPEC’s unwillingness to lose market share.
The supply issues as OPEC views them come from the multitude of smaller drillers — and in most cases, high-cost drilling operations — that depend on higher oil prices to make a profit. They have, in OPEC’s view, at least, flooded the market with supply, and it is that oversupply that is really causing prices to come down. If OPEC were to cut supply itself to offset falling prices, like it has in the past, they would lose market share because it is unlikely that the other producers would do the same.
With that understood, OPEC’s recent decision to add supply, and Iraq’s somewhat surprising addition, signals that the Middle East wants the high-cost producers to drop off the map (or most of them at least) before they start controlling price again. From what we see, that has started to happen.
Thursday’s inventory report and corresponding data suggested that about 50% of the high-cost producers (frackers) had come offline. The impact that will have on supply has not yet been felt.
In addition, the supply data was also very clear in pointing out that inventory levels remained high, and there was little immediate indication that would change. Much of the focus was on tankers based in the Middle East as well, but that leads us back to the intention of OPEC. What better way to cause more supply to come offline than to suggest — by keeping inventory levels extremely high — that prices will not be moving higher. The high-cost producers who were struggling to stay afloat and who see data like that might very well decide to go offline until prices recover, which is exactly what OPEC wants to see before they start to control prices again (they do not want prices to stay low).
That leads to the second part of my analysis.
Although I am bullish on OIL, and therefore, oil prices, too, over the next six- to 12-month timeframe, it is also quite clear that once supply levels come down and inventory gets worked out of the system those high-cost producers will come back, and we will likely see this cycle repeat itself.
Lastly, with high oil prices come higher gas prices, and I think that much of America is already experiencing a relatively high degree of sticker shock after the increases that have already happened at the pump over the past few months. I expect prices to get higher as oil prices move up over the next year. This will not bode well for consumer sentiment or for spending and that can cause downward pressure for retail stocks.
Our Stock of the Week this week was to short Nordstrom’s (NYSE:JWN), supporting our general concern for the sector.