Will Crude Oil Continue Powering Up? – Introduction
Last week, one of the most hurting news was a Wall Street Journal article on T. Boone Pickens. For those new to the world of crude oil trading, Pickens is one of the best-known traders and investors in the industry. He is the founder of BP Capital, a firm that specialises on crude oil.
The WSJ report stated that Pickens was shutting his fund. This was expected because; Pickens is now an old man and sick. He is 88 years.
The news was hurting to me because I have followed Pickens for years. I have watched his interviews and read his materials on crude oil.
The news came a few months after Andrew Hall closed his fund. Again, to people who are new to trading, Andrew Hall is foreign to them. To experienced traders, Andrew Hall is a legend popularly known as the Oil god.
The two men, although different, shut down their fund because of the changing field of crude oil. As a result of automated trading, oil prices no longer move according to fundamentals.
In the past few months, crude oil has been rising. The current bull run started in June last when prices touched the $42. Today, the price of oil has risen to a three-year high of above $64 and Brent has risen to more than $70.
The question for traders is whether the bull run will continue or whether a correction is imminent. To answer this question, a little background is important.
Between 2008 and 2011, the price of crude oil rose from $38 to a high of $140. Then, OPEC members became afraid of the United States which was working to become a dominant player in the oil market. To tame the U.S, the OPEC countries decided to overproduce which brought oil prices to a low of $26.
Their aim was to force the United States oil producers who were using the fracking technology out of business. This is because of the high price associated with fracking.
Sadly, the U.S based frackers adopted and lowered their cost of mining, In other words, the U.S producers won. Today, U.S has began exporting crude oil and with Trump, they are expected to do more production.
OPEC now has given up on the oversupply issue and moved to control the amount of oil it is producing.
Recently, a few additional issues have contributed to the rally. First, the Middle East is no longer at ease. In Iran, we have seen continued anti-government protests and in Saudi Arabia, the new crown prince has arrested the most powerful people in the country. Tensions are also increasing between Saudi Arabia and Yemen. As you recall, in December, Saudi stopped a missile that was headed to Riyadh. In addition, In Israel, there are tensions after Trump moved to recognize Jerusalem as the capital.
All these factors have contributed to the current rally. This is because investors expect that unrest could lead to tensions which could interrupt the production and transport of the crude oil.
Therefore, as long as the Middle East region remains in trouble, and as demand starts to pick up fueled by increased manufacturing, I expect crude oil to remain steady. However, you should be cautious as a major correction could be on the way.