Oil prices have broken out.
The price of West Texas Intermediate (“WTI”) crude oil – the domestic benchmark – bounced from a low of around $27.50 in mid-February to a high of nearly $42 in mid-March… a huge, 50%-plus move in just four weeks.
Since then, oil has headed lower.
But I’m not ready to say oil prices will climb higher from here. In today’s essay, I’ll explain why…
You can see oil’s powerful move higher in the chart below…
If you caught the rally and made some money… great job. But it’s time to take your profits, because things could get ugly again.
You see, the international oil-supply situation is about to get interesting.
[ad#Google Adsense 336×280-IA]As we’ve discussed in previous Growth Stock Wire essays, we have a whole lot of oil on the market.
And Saudi Arabia – the leader of the Organization of Petroleum Exporting Countries (“OPEC”) – has no plans to slow down production anytime soon.
That’s a recent development position for the Saudis.
Back in February, Saudi Arabia put together a deal to freeze oil production at current levels.
I called the deal “worthless” when it was announced, because it relied on Iran to agree to the terms as well.
Iran, as you may know, is just emerging from years of economic sanctions. Those sanctions cut crude exports from 2.5 million barrels per day in 2011 to around 1 million barrels per day today. The country’s single biggest economic engine is oil exports. As you can imagine, Iran is eager to get those exports rolling to buyers again.
So Saudi Arabia won’t freeze production unless Iran agrees to do the same… But Iran needs the income from oil exports, so it isn’t going to agree to curb its production.
Plus, not all of the available Iranian oil is getting to market yet. The problem is insurance.
According to an article in the Insurance Journal industry news outlet, shipping companies are finding it difficult to insure Iranian oil cargoes. (Lifting a ban on oil exports is one thing. Convincing companies to do business with Iran is another.) That has created a bottleneck in the process.
In February, Iran had roughly 40 million barrels of crude oil in floating storage just waiting to be shipped to market. To put that in perspective, nearly six weeks of oil supply is waiting to go to market. A ton of Iranian crude oil isn’t being accounted for in the supply. And when it comes to market, it will push crude oil prices even lower.
According to Iranian oil minister Bijan Zanganeh, Iran’s exports rose by 250,000 barrels per day in March. That puts Iran at more than 2 million barrels per day. Once the insurance situation clears up, Iranian oil will flood the market.
Things are still up in the air for oil prices. Bankruptcy risks and catastrophic losses of reserves are still possibilities. The supply situation with Iran doesn’t offer much hope for oil prices to rise in the short term. OPEC members meet on April 17 to discuss the situation again. But I can’t see Iran changing its opinion two weeks from now. And until that happens, I’m staying away from oil stocks.
Good investing,
Matt Badiali
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Source: Growth Stock Wire