10-29-2018: December Crude OIl: Iranian Sanction Effects Over-Estimated

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Point & Figure

Internal Progrm
Third System

Historic Range

Random Chart
Calendar Spread

Level Table
Other Factors


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The effect of tariffs, embargos, and resumption of sanctions on Iran after breaking the treaty with it was in our opinion, over-estimated, causing a spurt in the cash oil market. Fears were that advance contracts would go higher and suppliers were rushing in to establish deliveries. The futures market did not quite agree so much and did not rally to the extent of cash prices. The effect of cutting oil supply from Iran was offset by declining world demand, bulging oil reserve stocks, and a general global economic climate that was deteriorating somewhat reducing demand. Geo-political concerns could still touch off a rally in ol prices sending them shooting up, such as an event like blocking the Strait of Hormuz. But Iran still has the ability to deliver oil elsewhere beside to allied countries. New discoveries and sources for crude oil are being discovered every day, especially in Africa. High oil prices, such as those resulting from high shale oil production costs, result in countries finding alternative power sources, such as electric vehicles.

Intermarket Analysis

We fed Crude Oil, Gasoline, and Heating Oil into a neural network to get the following result:

Parabolic Chart

December Crude Oil:

Parabolic Chart

Nirvana Chart

December Crude Oil:

Initial Chart

News Analysis

Kenya has invited international bids for the design and construction of a crude oil pipeline linking the oil fields in Turkana to the future port of Lamu, and later extend it to Uganda, South Sudan, and Ethiopia. This was the result of an acknowledgment made in 2015 that the country's oil resources have attained commercial thresholds and that it was time the country started preparing infrastructure ahead of commercial production in about three years. Feasibility studies were contracted to ILF Consulting Engineers, a German-Austrian company. As most of Kenyan - Ugandan crude is waxy, a heated crude oil line or a line with in-built flow improvers would be required. Pre-treatment points would also be needed to clean up the crude and flow improvers. Toyota's construction subsidiary, Toyota Tsusho Corporation is among firms that have drawn up preliminary plans for the project. Northern Kenyan sites could eventually lead to the production levels in excess of a billion barrels of oil. Ugandan sites could contribute 3 billion barrels of oil. Infrastructure costs there could go as high as $22 billion.

Crude oil prices have been tumbling for three consecutive weeks after reaching nearly four-year highs. A sell-off in the stock market coincided with the rout in oil prices with traders closing out bullish bets on oil. At the start of October, oil prices were rising on signs that U.S. sanctions are shrinking Iran's crude oil exports faster than anticipated, potentially leaving the world with a shortage of oil. The sanctions are expected to cut crude oil exports from Iran, OPEC's third-biggest oil producer, by about 1 million barrels per day. But concerns about faltering demand and rusing output from OPEC and Russia now have traders focused on potential oversupply. The supply crunch from Iran got offset by a burst of supply that came from OPEC, Russia, and Saudi Arabia. Saudis hiked their output to 10.7 million barrels per day in October and will increase production toi 11.0 million next month. Russia says it pumped a post-Soviet-ear peak of 11.36 million bpd in September. The 15-nation OPEC group also managed to increase its collective output last month, despite supply declines from IOran and Venezuela. Trade tensions, high oil prices, and currency weakness in some emerging markets have been tempering the outlook for global oil consumption. Hedge funds and money managers are now liquidating their long positions in oil. Traders are shedding risks and taking profits after the recent rally. U.S. crude futures prices have flipped into contango, meaning that forward contracts are more explensive then near-by ones. Thus U.S. crude is less attractive for traders who roll positions into the following month's contract. This "contango" situation suggests traders do not see a shortage of oil on the horizon as that would cause them to bid up nearby futures contracts. The futures curve barely budged when actual crude oil prices shot up to $86/barrel at the start of October, suggesting the price hike would not last.

Saudi Arabia's OPEC governor said the oil market could be oversupplied by the end of the year. Forecasts for world economic growth in 2019 are down 3.8% from 4% on slowing global trade volumes, a deteriorating outlook for most emerging markets, and a view that growth in Europe and Japan has already peaked. Indicators of oil demand growth are underperforming while signs of supply gains are strengthening.

Trade war concerns have been overshadowing market fears that OPEC and Russia might cut production. The market has had to digest the latest geopolitical flareup with the killing of a Saudi journalist and the international outcry over the incident, leading to a Saudi threat that it might realliate against any sanctions against it. Saudi Arabia claims it has no intention of repeating the 1973 oil embargo and will meet all the customer demand there is.

The American Petroleum Institute reported a huge build of 9.88 million barrels in U.S. inventories. Exxon is reporting interest in many discoveries of oil sources off the coast of Guyana in Souoth America, capapble of ultimately supplying 4 billion barrels of oil. It is already pumping up to 120,000 barrels per day from that site. Guyana's crude is pure sweet, light oil that is much easier to refine than the heavy crude of its neighbor Venezuela. The size of the reserves would allow a breakeven point for discoveries there below U.S. $40/barrel. Rystad Energy projects Guyana's total oil production to exceed 600,000 bpd by the end of the next decade generating U.S. $15 billion frop oil and gas sales.

A Saudi-Russia alliance could set up a new era for oil. It could allow for a governing structure affecting production from the twoi sources. In such an arrangement, Russia would probably assume the leadership over OPEC oil producing countries in regulating production. Outages in Venezuela, Iran, Mexico, Libya, and Nigeria would require action and response from OPEC in a coordinated way.

Oil prices are down a bit, but are still close to multi-year highs. That should leave the shale industry flush with cash. However, a long list of U.S. shale companies are still struggling to turn a profit. There are "alarming volumes of red ink" within the shale industry. A review of 33 publicly traded oil and gas fracking companies are posting negative free cash flows through June. They had $3.9 billion in negative cash flow in the first half of 2018. The International Energy Agency previously issued a report arguing that higher prices and operational improvements put the U.""S. shale sector on track to achieve positive free cash flow in 2018 for the first time ever. Only 7 out of the 33 companies had positive free cash flow. These negatives some at a time of record production levels from shale, with 11 millioin barrels per day of oil from the U.S. alone predicted that soon the U.S. could become the world's largest oil producer.

There is a fluorishing black market in oil worth about $133 billion in fuels stolen or adulterated each year. These sources include Islamic states, Mexican drug cartels, Italian Mafia, Eastern European criminal groups, Libyan militias, and Nigerian rebels. The top five countries in oil trafficking, Nigeria, Mexico, Iraq, Russia and Indonesia are also producers. Pipeline tapping has been a problem. Turkey is a major transit route for stolen oil. Even Ireland estimates it loses $200 million each year because oif fuel fraud, and 20% of fuel sold in Greece regular gas stations is illegal. The more this exists, the more direct investment is likely to go into an area where it exists.

Sanctions on Iran does not stop it from sending record amounts of oil to China.

Documents from various U.S. agencies regarding Iranian sanctions give countries doing business witih Iran 180 days to wind down deliveries. Many sanctions involving agreements with other countries were lifted along withi the treaty with Iran when it was revoked by the Trump Administration. India has begun cutting down on Iranian oil imports.

Libya will reoen four export terminals in its eastern oil production heartland, ramping up oil supply sharply. The war-torn country boasts the largest proven reserves in Africa. As Saudi Arabia indicates it has no plans to restrict production in the near future, the world's fastest growing oil buyer, Indian Oil Corp. Lrd. (IOCL) says, "Demand cannot be seen in isolation to prices, especiallyi for a price sensitive market like India." Electric vehicles and other alternatives will become more prominent if oil prices stay high.

Iran is talking about possibly blocking the Strait of Hormuz where 35% of all seaborne oil passes daily. If they succeeded in that, $100/barrel oil is predicted.

Saudi Arabia has been jerking around oil market prices with various statements from oil ministers all over the map, but the truth is the Saudis are actively pursuing diversification to survive a drop in oil prices. The Saudis face a dilumna of whether to invest in new sectors at home where it does not have a natural advantage or invest around the woirld.

Our reading of this news is that the main factor driving oil prices up was the Trump reimposition of sanctions on Iran and breaking the treaty with Iran. The effect of doing that in regard to world oil supply was probably way overdone in terms of the cash market, less so in the futures market, but in both markets oil was "overbought" and is now sinking back toi more realistic market conditions.

Point & Figure Chart

 79.0|                                                                  T 10/26
     | NYM - Jan-19 Crude Oil, 1000 bbl, $/bbl     Cm.=0.03  Lim.= 1.6
     |                                         X
     |                                         XO
     |                                         XO
     |                                         XO
     |                                         XO
     |                                       X XO
     |                                     X XOXO
     |                                     XOXOX
     |                                     XOXOX
     |                                     XOXO
     |                                     XOX
     |                                 X X XOX
     |                                 XOXOX
     |                                 XOXO
     |                                 XOX
     |             X                   XOX
     |             XOX     X   XO      X
     |O            XOXO    XO  XO      X
     |O          X XOXOX   XO  XOX     X
     |O          XOXO OXO  XO  XOXO    X
     |O      X   XO   OXOXOXOXOXOXOX   X
     |O      XOXOX    OXO O OXO O OXOX X
     |O      XOXOX    OX    OX    OXOXOX
     |O  XOX XOX      OX          O OXO
     |OX XOXOXOX      O             OX
     |OXOXOXOXO                     OX
     |OXOXOXOX                      O
     |OX    OX
     |O     OX
     |      OX
     |      O
      1                     1111                1
The above chart is giving a conventional buy signal.

Cyclical and Seasonal Factors

We are headed toward a cyclical high and a weak seasonal up period.

Cyclicals Cyclicals Seasonals

Internal Program

Our best-performing internal program is "Zondr". It is giving a buy signal.

Internal Printout 1 Internal Printout 2

Results of "Zondr" for Crude Oil (blue lines = successful trades, red, unsuccessful): (Always in the market.)


Third System Confirmation

Our third system has triggered a sell signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


The point value is $1,000. Initial margin on a single contract is $3,410. Use of options is advised.

Historic Range

Scale traders are not a factor in this price range.

Historical Chart

Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are getting increasingly-short.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3

Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that an uptrend remains intact from the last volatility low point.

Range/Volatilitiy Chart

Possible Future Prices

Random Chart

Option Recommendation

Our option trade recommendation is to Buy (1) Crude Oil March 70 Call and Sell (1) Crude Oil March 69 Call @ 0.46 to the sell side or greater.

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o 3

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Calendar Spread

What the Jan. - Jul. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down in the long run. The best time to enter or leave the above spread is when it is at -0.24 or narrower selling the far as prices are falling and then buying the near, and entering or exiting when it is at +1.40 or wider buying the far as prices are rising and then selling the near. At this time, we appear to be at the sell the far, buy the near point.

Level Table:

Level Table

The path of least resistance is down.
 75.5|                                                                  R 10/26
 NYM - Jan-19 Crude Oil, 1000 bbl, $/bbl     Cm.=0.03  Lim.= 1.6
 48.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO= 0.625
       1 1 1 1 1                                       1 1           1
       0 1 1 2 2 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 8 9 9 0 0           0
       3 1 2 1 2 1 2 0 2 0 2 0 2 0 2 0 1 0 1 0 1 2 1 2 1 2           2
       0 0 7 1 6 0 5 8 3 9 3 9 3 7 1 5 9 3 8 1 5 9 3 7 1 5           6

Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary

Here's an intraday chart for a previous day ( 10/26 ).

Intraday Chart

                 Risk Versus Opportunity Report

                   CLF9    January Crude Oil

                      High Price:  70.82
                   Current Price:  67.75
                       Low Price:  61.46

                            Risk: -0.093
                     Opportunity: -0.190

                    (O/R) Ratio =  2.049

Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis + 1
Parabolic Chart - 1
Nirvana Chart - 1
News - 1
Point & Figure + 1
Cyclicals + 1
Seasonals - 1
Internal System 1 + 1
Internal System 2 0
Third System - 1
Historic Range 0
Commitment of Traders - 1
Range/Volatility + 1
Level Table - 1
Other Factors - 1
Total - 3
Place 4 January Crude Oil on a Sell Watch with stoploss @ +4.00 above the get-in point when recent price is represented as "67.75".