Why WTI Crude at US$100 is Kite Flying

Hello, friends. This is Vijay Bhambwani and in this video I want to talk to you about crude oil, a commodity that fascinates us, confounds us, and bewilders us like no other.

It's common knowledge amongst traders that crude oil is not just a commodity which you treat like a commodity. It's about geopolitics. It's about speculation. It's about financial premium. It's about terror premium. And it's also about a whole lot of pull and push between buyers and the sellers.

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I have been making videos since at least 2 to 3 quarters saying why crude oil, in terms of dollar denominated price of course, and I am talking of the WTI, the Western Texas Intermediate grade of crude oil, will possibly not go to US$100 or, if it does go to US$100 it will be a photo opportunity of just touch and go. And at that point in time, it's a good sell.

Now a lot of water has flown from under the bridge since I last made my video on crude oil, and I think my readers, my viewers, and Weekly Cash Alert subscribers deserve an update.

You see, I wrote in an interview a text interview on 12 November 2021 with Equitymaster, which I am sure you would have read on Equitymaster's website that natural gas and crude oil are like the intestinal gas in a human being or maybe even the urine that you hold in your bladder.

It doesn't help you to keep it inside your body, just as the oil and gas selling companies and countries can't hold gas and oil under the sands, buried under the sands, because it's not really earning them revenue.

The one thing you have to understand is that creating an artificial shortage by cutting output, as OPEC has suggested and I have said unequivocally in my past videos that OPEC and the others are trying to talk the markets up. If you been reading my morning mails as an Equitymaster subscriber that they are trying to talk the market up and trying to impact prices with their output hikes and/or output cuts.

Now in the past, in the recent past, in the last two or three days, and I'm recording this video on Wednesday, which will be uploaded on Thursday, I saw OPEC actually brandishing the oils sword. Now this is an event which occurred in the 1970s, when the Arabs embargoed the West, where oil supplies were concerned, after the Israelis hammered Lebanon in what is now known as the Yom Kippur War.

So the Arabs cut the output of oil and supply of oil to the west. It is called brandishing the oils sword. After that, OPEC, really in no uncertain terms, said if the buying nations were to touch their strategic petroleum reserve, which is dipping into their stored crude oil, we will cut back on the output hikes, which we have promised at the rate of 400,000 barrels per day.

Now this is like you and me saving for a rainy day, all right, and God forbid, for whatever financial distress, you lose your job or you lose money in a trade or whatever, instead of going to a money lender and borrowing money on interest, you decide to break your fixed deposit and access your reserve and the money lender telling you hey, I will not allow you to access your savings, which you have amassed for a rainy day.

In my humble opinion, I think OPEC is setting itself up for a lot of friction with its buyers if they insist on cutting output if the buyers are basically accessing their strategic reserve. The strategic reserve belongs to the country which is hoarding it and OPEC cannot really say we will not allow you to access it. It's like saying you can't put your hands into your fixed deposits.

So currently, only the Saudis, Iraqis, and the United Arab Emirates have spare capacities and it's not that there is no oil. It's that the other countries, including Kuwait, you will be surprised Kuwait a very rich country and a friend of America, is also feeling financial distress. They have time and again said they might run out of money to meet the national expenditure.

So even Kuwait has not been able to invest money to basically explore for new oil wells and in the existing oil wells to drill and in something known as EOR, Enhanced Oil Recovery techniques. It needs more money like for examples surfactants detergents, steam, water is pumped at very high pressure into the oil head so that the oil basically comes up higher and you can extract it like low hanging fruit. But that requires money, and only the Saudis, the Iraqis, and the UAE, have that kind of money or oil wells that are yielding spare capacity very easily.

As a matter of fact, the OPEC plus as a conglomerate, as a consortium, has fallen short of 730,000 barrels a day, three quarters of a million barrels a day, as compared to their own self-appointed quota. Now why is this output falling short? It's because of primarily because of two nations. One is Angola and the other is Nigeria. Both are financially distressed nations.

In the case of Nigeria it's not just financial distress. It's also mismanagement. Exactly like what you're seeing in Venezuela. But what people are not noticing is that many of these countries, for example, Iran, for example, Venezuela sell oil on the sly, on the sly. So a lot of oil sales that Venezuela etcetera are trying to notch up is masked as off the records.

So anything and everything that you see in commodities, what you see is true, but always keep your mind open to the fact that something that is exactly opposite can also be true. There is always a possibility of shadow inventories. There is always the possibility of off the books transactions, just like in any other market.

So what has caused this pressure is the ESG, the environment friendly activists have basically a pressurised the oil drilling, marketing, and refining companies to cut down their budget. But off late arm sensing that these guys are now saying, okay, we don't want to do this at the expense of inflation hitting us in the face and therefore they might just back off a little.

Currently, OPEC plus spare capacity is between 4 to 6 million barrels per day. So it's not that OPEC cannot raise the output. They have basically made the market nervous by announcing that they will roll back the oil output hike, which is supposed to go on till next year at the rate of 400,000 barrels a day.

Will they actually confront their buyers and try to fight with the very countries to whom they are selling oil? I think it's a bluff. Why do I think so? Here, if you actually Google search as to how many oil exporting countries have issued bonds in the last two years alone, of course, the debt prior to that is left aside. Now just calculate how many billions of dollars they have either notched up by way of fresh debt that they have taken and remember, this is sovereign debt.

The country's like UAE, which have not taken as much debt, have invested money in their state oil companies, like ADNOC Abu Dhabi National Oil Company, to ramp up output in their oil or gas fields. Wafra, Khafji, Fujairah, the supergiant gas field that Saudi Arabia is spending US$108 bn for.

Do you think they can actually service and repay this debt by simply jacking up the price alone and not being able to sell at that price? Demand destruction at higher levels in commodities is an undeniable fact.

This is a pure case of playing chicken. Who blinks first and now, unfortunately, it's coming to a point where the buyers and the sellers are coming towards a collision course. OPEC itself is saying that there is a possibility of very high possibility that 2022 will see surplus oil capacity available because these countries, which are selling oil and higher prices, thanks to the shortages created, will have the spare money to invest in enhance oil recovery technique. So the output will rise.

What happens in 2022 when oil surplus goes up? What happens in 2022 when shale and other energy sources start to go up? What if the winter in 2021 starting from now is not as harsh as it is feared?

These are questions that you need to keep in your mind before starting to bet 100, 200 even 300 dollars per barrel of crude oil. Amazing and bizarre figures that are floating around in the internet domain are claiming to be. I went on television on CNBC, Awaaz and CNBC English on behalf of Equitymaster as early as May and April 2021, when I debunked the theory of 100 plus dollars per barrel of WTI crude.

You know, the guys who are pushing for US$100 a barrel as price have to be taken seriously to remember, it's been more than eight months since they have been saying that prices will go this far. So as Steve Buscemi said in the movie Armageddon, 'Are we going? Are we not going? Are we staying? Are we going? Make up your mind.'

So eight months and not yet triple digit levels on WTI crude yet. If it all and I reserve the right to go wrong, if it all the price does go there at US$100 will Weekly Cash Alert subscribers get an SMS or a mobile app or an e-mail alert telling you to act upon crude oil?

As far as commonly known data available in the public domain, as I record this video on this Wednesday is concerned, yes, you will get an alert to act accordingly.

I don't think triple digit levels of oil will either hit or if they hit, they will stay too long. I'm sticking my neck out.

On this note, I bid goodbye to you in this video, not before reminding you to click like on this video if you agree with what you saw. Subscribe to my YouTube channel. Click on the bell icon to receive instant alerts about fresh videos being put up out here. In the comments section, do let me know what you think about this video and help me reach out to fellow like-minded investors and traders by referring my video to family and friends.

I thank you for your patience. Till we meet again in my next, this is Vijay Bhambwani signing off for now. I wish you have a very, very profitable day. Bye.