The 19% rally in crude oil prices from the late June low has been impressive. But I think there’s more gas in the tank for this advance.
Reasons: A softer U.S. dollar, a tightening supply-and-demand balance and geopolitical tensions.
Plus, our E-Wave cycle forecasts call for higher prices into October.
These are the same bullish forces I wrote about in late June.
But first, let’s review the recent action to get a read on future oil market direction …
The June-to-August oil rally corresponds with a more-than-5% slide in the U.S. Dollar Index. That decline makes commodities priced in U.S. dollars cheaper to overseas buyers and increases demand.
While the greenback is ripe for a technical bounce from severely oversold levels, the Fed’s ultra-accommodative monetary policy track should keep dollar gains in check over the intermediate term.
Additionally, President Trump voiced desire for a low-interest-rate environment to stimulate economic growth. That’s another positive for robust demand and higher oil prices.
For sure, oil contends with abundant supply. But that’s largely already baked into the market. This includes a doubling of U.S. oil drilling rigs in the last year, U.S. crude oil production hitting a two-year high, and higher-than-expected production levels coming out of Nigeria and Libya.
One thing’s for sure. OPEC wants higher oil prices — and they’re prepared to do whatever it takes.
Key OPEC member Saudi Arabia wants steady-to-higher oil prices going into their Initial Public Offering of state oil company Saudi Aramco. And non-OPEC member Russia wants higher oil prices to boost revenues ahead of next year’s presidential election.
If that’s not enough, U.S. supply is also tightening. Oil inventories held in Cushing, Okla. — the storage hub for West Texas Intermediate crude oil — fell in 15 of the last 16 weeks. And they’re down 13% compared to year-ago levels.
As supply tightens, demand is getting stronger.
For a read on demand, look no further than the July Short-Term Energy Outlook from the Energy Information Administration (EIA). They see global oil demand this year at 98.39 million barrels per day, which is up 1.5% compared to last year.
And weekly EIA stats confirm this: U.S. gasoline demand climbed to a fresh record high just last week of 9.84 million barrels per day.
Even more bullish is strong demand for U.S. petroleum refined products around the world. That’s apparent by the surge in U.S. refinery activity and corresponding drawdown in U.S. distillate and gasoline supplies.
In addition to tighter supply and increased demand for oil, there are several geopolitical forces poised to push oil prices higher …
Geopolitical Force #1: Uncertainty surrounding Iran’s leadership change and President Trump threatening to scrap the nuclear agreement. With this comes prospects for tougher sanctions against Iran. Those could escalate tensions in the region and jeopardize oil transportation through the Strait of Hormuz in the Persian Gulf.
Geopolitical Force #2: North Korea’s growing nuclear ambitions and shaky U.S. relations with China could disrupt oil supply flows through the South China Sea.
Geopolitical Force #3: Growing possibility that the U.S. will slap sanctions on Venezuela’s oil sector following the late-July election turmoil. This has the potential to reduce that nation’s production and disrupt supply flows.
Adding even more bullish evidence: Our E-Wave cycle projects higher oil prices into early October. Take a look:
The above chart shows the impressive rally from the late June low that’s now entering into a period of consolidation before another wave higher. I’m looking at late August as an opportunity to buy more oil and position for another wave higher. This includes taking long positions in the U.S. Oil Fund (USO) and ProShares Ultra Bloomberg Crude Oil (UCO).
You might want to consider doing the same. And if you want to be alerted when it’s time to make a move, click here.