Advertise | Bookmark | Contact Us | E-Mail List |  | Update Page | UraniumSeek.com 

Commentary : Gold Review : Markets : News Wire : Quotes : Silver : Stocks - Main Page 

 GoldSeek.com >> News >> Story  Disclaimer 
 
Latest Headlines

SELLING OUT OF PRECIOUS METALS AND BUYING BITCOIN…. Very Bad Idea
By: Steve St. Angelo

The Bitcoin Bubble Explained in 4 Charts
By: Jake Weber

VXX Sends an Awesome Message from Another Galaxy
By: Rick Ackerman

Asian Metals Market Update: November-22-2017
By: Chintan Karnani, Insignia Consultants

Gold Seeker Closing Report: Gold and Silver Gain With Stocks
By: Chris Mullen, Gold Seeker Report

Ira Epstein's Metals Video 11 21 2017
By: Ira Epstein

Bitcoin, Bail Ins And Bullion
By: Mike Maloney

Tactics For The Gold Bull Era
By: Stewart Thomson

Dow Peaking? The Quick Guide to Diversifying Your Stock Profits
By: Jeff Clark

What History Says for Gold Stocks in 2018-2019
By: Jordan Roy-Byrne CMT, MFTA

 
Search

GoldSeek Web

 
Here’s What Oil Did the Last Time OPEC Cut Production


 -- Published: Tuesday, 6 December 2016 | Print  | Disqus 

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Here's What Oil Did the Last Time OPEC cut Production

It finally happened. For the first time since 2008, the Organization of Petroleum Exporting Countries (OPEC) agreed to a crude oil production cut last week, renewing hope among producers and investors that prices can begin to recover in earnest after a protracted two-year slump, one of the worst in living memory.

The last three times the cartel agreed to trim output—in 2008, 2001 and 1998—oil rallied in the following weeks and months. Of course, there’s no guarantee the same will happen this time around, as other market forces are at play, but it’s helpful to look at the historical precedent.

OIl Historically Rallied in the Two Years Following OPEC's Agreement to Cut Production
click to enlarge

OPEC’s decision follows a strong endorsement from Goldman Sachs, which upgraded its rating on basic materials to overweight for the first time in four years. Analysts see commodities gaining 9 percent on average over the next three months, 11 percent over the next six months.

As reported by TheStreet’s Paul Whitfield, Goldman’s change of heart was prompted by “the recent acceleration in global PMIs (purchasing managers’ indexes),” which “suggests commodity markets are entering a cyclically stronger environment.” 

The JPMorgan Global Manufacturing PMI rose slightly in November to a 27-month high of 52.1, extending sector expansion for the sixth straight month—very encouraging news.

JPMorgan Global Manufacturing PMI continues upward momentum
click to enlarge

As I’ve shared with you many times before, our own research has shown a strong correlation between PMI performance and commodity prices three and six months out. I’m thrilled to see Wall Street and media outlets coming around to this realization as well.

In short, OPEC’s production cut is constructive for energy in the near term, while a rising PMI is good news for the long term.

$70 Oil Next Year?

Since oil collapsed in September 2014, as much as $4 billion have been wiped from oil workers’ wages in the U.S. alone, according to Bureau of Labor Statistics data. Countries that rely heavily on oil revenue—Venezuela, Colombia, Russia and Nigeria, notably—have had to stretch balance sheets. And for the first time in nearly 40 years, Alaska, where the oil industry accounts for half of all economic activity, is scheduled to impose an income tax by 2019.

Many analysts now find reason to be optimistic about a recovery in energy. Speaking to the Houston Chronicle, David Pursell of energy investment bank Tudor, Pickering, Holt & Co. predicts “2017 will be a better year for oil and gas activity than we anticipated.” Pursell sees crude possibly rallying above $70 a barrel sometime next year. 

The OPEC deal, announced last Wednesday, aims to reduce production by 1.2 million barrels a day, or about 1 percent of global output. For comparison’s sake, the cartel, which controls a third of all oil production, agreed to a reduction of 2.2 million barrels a day in 2008. Although not an OPEC member, Russia has also agreed to trim production—by about 300,000 barrels a day—the first time it’s cooperated with OPEC since 2001.

Following the announcement, West Texas Intermediate (WTI) crude surged above $50 a barrel.

Crude oil surges above $50 a barrel on OPEC production cut announcement
click to enlarge

Meanwhile, investors piled into oil ETFs, with inflows into one surpassing $1 billion on Thursday alone. Shares of Halliburton, Continental Resources and California Resources all saw dramatic spikes.

Oil explorers & producers jump on production cut news
click to enlarge

The Challenges Ahead

Some investors are understandably cautious. OPEC doesn’t have the authority to enforce compliance from its 14 member-nations, and output has typically exceeded quotas.

What’s more, it’s likely U.S. shale producers, which today operate at lower costs compared to other players, will be first to take advantage of a bump in prices. Drilling activity is already accelerating. Since May, the number of active oil rigs in North America has climbed 50 percent to 474, as of November 23.

Most low-cost oil is in U.S. Shale Reserves
click to enlarge

“U.S. oil production growth is all but guaranteed to return in 2017,” according to Joseph Triepke, founder of oil research firm Infill Thinking. Triepke adds that as many as 150 rigs could be reactivated next year in Texas’ Permian Basin alone.

It’s there, in the Wolfcamp formation of the Permian, that the United States Geological Survey (USGS) recently discovered 20 billion barrels of “technically recoverable” oil, the largest deposit ever to be found in the U.S. Bloomberg reports that the deposit is worth an estimated $900 billion at today’s prices.  

On the demand side, higher prices could spell trouble in emerging countries whose currencies have weakened against the U.S. dollar in recent months, especially since Donald Trump won the presidential election. Because oil is priced in dollars, it’s become more expensive in China and India, the second and third largest oil consumers following the U.S.

Gold Looks Technically Oversold, Ready for a Price Reversal

As I often say, every asset class has its own DNA of volatility, which is measured by standard deviation. Specifically, standard deviation gauges the typical fluctuation of a security or asset class around its mean return over a period of time ranging from one day to 12 months or more.

This brings us to mean reversion, which is the theory that, although prices might trend up for some time (as in a bull market), or fall (as in a bear market), they tend to move back toward their historic averages eventually. Such elasticity is the basis for knowing when an asset is overbought or oversold—and when to sell or buy.

As you can see in the oscillator below, gold looks oversold right now and is nearing a “buy” signal, after which we can statistically expect it to return to its mean.

Gold 60-Day Percent Change Oscillator
click to enlarge

Gold’s current standard deviation for the 60-day period is about 7 percent—you can reasonably expect it to move this much over a two-month period, therefore, 68 percent of the time.

For more on standard deviation and mean reversion, I invite you to download my whitepaper, “Managing Expectations: Anticipate Before You Participate in the Market.”

The J.P. Morgan Global Purchasing Manager’s Index is an indicator of the economic health of the global manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 9/30/2016.


| Digg This Article
 -- Published: Tuesday, 6 December 2016 | E-Mail  | Print  | Source: GoldSeek.com

comments powered by Disqus



 



Increase Text SizeDecrease Text SizeE-mail Link of Current PagePrinter Friendly PageReturn to GoldSeek.com

 news.goldseek.com >> Story

E-mail Page  | Print  | Disclaimer 


© 1995 - 2017



GoldSeek.com Supports Kiva.org

© GoldSeek.com, Gold Seek LLC

The content on this site is protected by U.S. and international copyright laws and is the property of GoldSeek.com and/or the providers of the content under license. By "content" we mean any information, mode of expression, or other materials and services found on GoldSeek.com. This includes editorials, news, our writings, graphics, and any and all other features found on the site. Please contact us for any further information.

Live GoldSeek Visitor Map | Disclaimer

The views contained here may not represent the views of GoldSeek.com, its affiliates or advertisers. GoldSeek.com makes no representation, warranty or guarantee as to the accuracy or completeness of the information (including news, editorials, prices, statistics, analyses and the like) provided through its service. Any copying, reproduction and/or redistribution of any of the documents, data, content or materials contained on or within this website, without the express written consent of GoldSeek.com, is strictly prohibited. In no event shall GoldSeek.com or its affiliates be liable to any person for any decision made or action taken in reliance upon the information provided herein.