Where Crude Goes Next... and How to Play It

Posted On Nov 25, 2013 By Dave Gonigam

November 25, 2013

  • Crude backing down, but Byron King bets it’s not for long
  • Market’s new highs not sustainable? Hogwash, says Jonas Elmerraji
  • The gold number to watch, warns Greg Guenthner
  • The “this is it” moment from China
  • The biggest blow to savers, on the Fed’s agenda
  • Pimping for Obamacare… Do you censor yourself?… The old “separating economics and politics” question… and more

  Crude is climbing down as the new week begins. A deal over Iran’s nuclear program is done. The war drums haven’t fallen silent — but they’re beating more quietly.

At last check, a barrel of West Texas Intermediate is fetching $93.72. Brent Crude — a better reflection of what most of the world pays — is $109.29. Neither is cheap… but both are well below highs reached around Labor Day.

An Iran deal isn’t the only thing pushing down crude at the moment. “There doesn’t seem to be any shortage of oil,” says our resident energy expert Byron King. “There’s no news of tanker disruptions, for instance. U.S. pipelines are full. Across the country, U.S. and Canadian railways are hauling tanker cars of ‘shale oil’ hither and yon. Heck, just the other day, I saw a long train hauling carloads of oil right through residential areas of Pittsburgh, near where I live. I NEVER used to see that!

  “But if history is any guide,” Byron hastens to add, “oil prices ought to rise in the months to come.”

It’s a seasonal thing. Winter’s coming. People in the northeast still use home heating oil. Snowplows and salt spreaders need gasoline. Check out a weekly chart of Brent Crude going back the last three years:

“Between December 2010 and March 2011,” Byron points out, “Brent prices went from about $85 per barrel to over $125, before correcting downward. Then between December 2011 and March 2012, the Brent price went from $105 to $125 per barrel. This past year, from December 2012 to March 2013, the Brent price climbed from $106 to $118.

“So over each of the past three winters, we’ve seen oil prices rebound. And that’s with Brent, meaning that it’s an international phenomenon, not just a ‘local’ North American issue.”

 “I foresee a price rise for oil in the next four months,” says Byron — “basically, the coming winter.

“Brent Crude could move from $108 to $120, for a rise of over 10%. In the U.S., WTI could move back over $100, for a similar rise in the 10% range.”

That makes now an ideal time to load up on some of the “Re-made in America” energy plays Byron has been so enthusiastic about the last two years. The biggest gains are still ahead… for reasons he makes clear in this presentation.

  Another day, another round number comes into view among the major U.S. stock indexes.

The Nasdaq punched through 4,000 on the open this morning — a level last seen in September 2000. The Dow and the S&P, meanwhile, are pushing further into record territory.

“Typically,” says one of our technicians Jonas Elmerraji, “Thanksgiving week is pretty quiet for investors. U.S. markets will be closed on Thursday, and they’ll close early, at 1 p.m. on Friday. So it’s common for trading desks to be running on a skeleton crew in the latter half of the week.

“But quiet doesn’t mean flat. Even though the shortened Thanksgiving week is usually uneventful, stocks historically end this week higher than they started around two-thirds of the time. And then comes December, a month that also statistically comes with big upside for stocks.”

  And what of the argument the new highs aren’t sustainable? “Hogwash,” says Jonas.

“Most investors in the market today don’t trust highs because they’re not used to them. But that doesn’t mean that they’re not sustainable. In fact, stocks spent the period between 1975-2000 in a prolonged bull market — one that lasted 25 years!

“Longer term, the data are even more telling: Since 1950, 60% of all S&P 500 trading days have been within 10% of an all-time high. And since 1982, 46% of all days were within 5% of an all-time high — even with our decade of sideways trading, that’s nearly half the trading days!

“Truth is stocks have historically spent most of their time within grabbing distance of all-time highs. The most recent high-water marks in the big indexes aren’t some kind of statistical anomaly — they’re just a return to normal.”

  “Gold is sick,” says our other technician Greg Guenthner — as the Midas metal opens the week at $1,241.

“Every single recovery since the initial dump below $1,550 seven months ago was met with more selling. Failing to hold $1,350 last month let the air out of any potential comeback heading into 2014. The downtrend remains intact.

“If gold continues to push lower in the coming weeks, we could very well see it break below the June lows before the year is up…

The danger zone, he says, is $1,200, and not the actual June low of $1,178. “There were only two days in late June where gold dipped below round-number support,” Greg explains in today’s Rude Awakening. “Each time it slipped into the $1,100s, buyers stepped in before the close. That helped spark a two-month rally that shot gold futures from $1,200 to $1,420. But that move stalled out — leading to this next leg lower…”

Greg’s ultimate downside target of $1,000? Still intact…

  “It’s happening,” EverBank’s Chuck Butler thought to himself on Friday. “It basically shook me to my foundation, chills went up my spine.”

That’s when he saw remarks by Yi Gang, a deputy governor at the People’s Bank of China: “It’s no longer in China’s favor to accumulate foreign-exchange reserves.”

Yep, $3.66 trillion — mostly in dollars — is now deemed “enough.” Which means, Chuck explains, “China will cap its purchases of U.S. dollars in an effort to limit the depreciation of the yuan. China’s move to make the renminbi/yuan a ‘player’ is really taking shape now.”

The next step will be whenever the People’s Bank of China gets around to declaring the new total of its gold reserve. As Currency Wars author Jim Rickards has reminded us all year, a large stash will give China “a seat at the table” whenever the international monetary system collapses and needs to be reorganized.

 Until that time, the punishment of savers may be elevated another notch.

“Leading U.S. banks,” according to the Financial Times, “have warned that they could start charging companies and consumers for deposits if the U.S. Federal Reserve cuts the interest it pays on bank reserves.”

The Fed started paying that interest — 0.25% — to shore up the banks during the teeth of the 2008 crisis. According to the highly politicized “minutes” of the Fed’s October meeting, “most” Fed governors think cutting that rate is at least worth talking about in the event they choose to “taper” their $85 billion a month in bond purchases.

“Executives at two of the top five U.S. banks,” the FT reports, “said a cut in the 0.25% rate of interest on the $2.4 trillion in reserves they hold at the Fed would lead them to pass on the cost to depositors.”

  So much for Colorado’s “edgy” attempt to get young people to sign up for Obamacare.

From scantily clad young women handing out flyers… to the “brosurance” ad… and the accompanying “hosurance” ad… the keepers of the Centennial State’s exchange have spared no effort to get young, healthy people to sign up, the better to subsidize the care of the old and sick.

Now comes word that Colorado’s enrollment total “is barely half the state’s worst-case projection,” reports The Denver Post. The total? 6,001. No word on the demographic breakdown, but at this point does it make any difference?

  There’s one profession pleased with Obamacare’s advent — the oldest profession.

“It is truly a miracle,” says Bella Dawn, one of the legal prostitutes at Nevada’s Moonlite Bunny Ranch. Up to now, they were all but uninsurable — weekly physical exams required by the state notwithstanding.

“They [insurance companies] just, they absolutely equate us to illegal working girls that have very high rates of STDs and AIDS,” Caressa Kisses explains to Sacramento TV station KXTV — which saw fit to dispatch a reporter 2½ hours away to Carson City to cover this highly important local story.

Moonlite Bunny Ranch: Giving “hosurance” a new meaning…

The story’s gone viral (as it were) the last couple of days, thanks to Bunny Ranch owner Dennis Hof, never one to overlook a publicity opportunity; in 2012, he snared some attention with a “Pimpin’ for Paul” campaign backing Ron Paul for president.

“The working girls, it’s wonderful,” Hof says of Obamacare now, “because finally they’re going to be able to get insurance as the independent contractors they are, and some with pre-existing conditions.”

Not so wonderful for Hof himself; he now must fork over an additional $250,000 to cover his payroll of 150 barkeeps and other nonprostitute employees.

  “Yes, I monitor my talking,” begins the first of several emails after we posed the question whether the NSA is prompting you to self-censor. “I do not talk about bombs or explosives when I talk to gun owners.”

“In talking on the phone to people who said they wished Obama would not survive to finish his presidency,” writes another, “I suggested they might get a knock on their door from Big Brother, so yes, I have been guilty of self-censorship.”

“In the eyes of politicians and their enforcement arms, the IRS and the Department of Homeland (In)Security,” writes a third, “you are always guilty until proven innocent — Constitution be damned. A philosophy the old Gestapo and NKVD would have supported wholeheartedly.

“We Americans already live in a totalitarian state, whether we know it or not. The politicians simply ignore any inconvenient freedoms we think we have, in their awareness that what you think is yours is really theirs to do with as they choose. If a court tries to say differently, they can always write a new law or regulation to get what they want. They let you keep enough to hold unrest to a mumble. Maybe it’s time to start a howl.”

The 5: Or use the tools that can make yourself invisible to the NSA…

  “You are correct regarding the concept that politics and economics are not inseparable,” a reader writes after another reader wrote in to complain last week.

“I’ve posed this question for years: ‘Is politics a tool of economics, or is economics a tool of politics?.’ Of course, they might simply be a john and a hooker in bed with each other, but that might not meet the Presbyterian standard for publication.”

The 5: After careful consideration, we decided it did. Heh…


Dave Gonigam
The 5 Min. Forecast

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P.P.S. A cryptic message just in from Byron King, beginning with this image…

“Just as this icon marked American ingenuity of mid-20th century, I’m sitting on a set of meetings not far from here that are part of an utter revolution in material science. Within five years, much of how we build our world will be on the way to obsolete. In 10 years, you won’t recognize the place. If the politicians don’t screw it up (big if!!!), it’s investable. Stay tuned…”

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