Oil is heading higher but....

Fours years ago when oil hit and broke out the $100 level, I started to talk down oil. Don't believe me? See my famous call: Oil is going to drop😄😄 Since then, I had been consistently bearish as a long term oil trend in most of the past 4 years. I was even calling for $20 oil. It didn’t go down that much but close enough as it briefly dropped below $30 during this enormous downtrend. But since early this year, I have started to notice some clear technical evidence suggesting oil has likely bottomed and is poised to move up. Now oil has broken out through the $70 resistance and is clearly in an uptrend. I can confidently say oil is indeed out of the woods and in a sustainable uptrend moving forward. There are many reasons but mainly due to the supply and demand ratio in favor of oil to the upside. After two years brutal correction, many oil companies could not survive and have been knocked out permanently. For those surviving the crash, their oil production has been largely cut back. So we definitely see a lot less oil coming out now. Nevertheless, from the other end of the equation, we are starting to see more demand due to recovering economy globally but especially in the US thanks to Trump’s economy stimulus policies and tax cuts. Then come with the geopolitical uncertainties in the Middle East that may further cut back the supply side. And finally, there is one another one time oil stimulus factor that is very unusual but powerful to put a strong bottom for oil. Let me first ask you, which is the world largest oil company? You may easily think about Exxon Mobile which is indeed the current largest public traded oil company. But its crown won’t be kept long. The largest one, I’m sure many of you don’t know, is Saudi Aramco, the world's largest energy company wholly own by the Saudi Arabia government as of now. However, it will soon become a public company as the Saudi government is planning to do an IPO for Aramco in NASDAC, which is going to be the historically largest IPO ever, estimated to be worth $1-2 Trillion. So you may ask why this IPO has anything to do with oil prices? Well, if you don’t know yet, Saudi has an enormous influence on the oil countries organization, OPAC, which can effectively “manipulate” the oil prices by playing the production increase or cut game. I guess it can easily be understood that Saudi wants to have a high oil price for its IPO with Aramco and it is reported that Saudi is aiming to have an $80 price tag for that. Due to the significant volatility of the oil prices, they have postponed the IPO towards end of this year or even next year. This will give them enough time to try to “push” up the oil prices. Of course, ultimately the market will determine the price but at least with Saudi/OPAC, there is a good floor to support the oil price to minimize its downside risk.

With the above in mind, I think the long term trend for oil is up, probably a lot higher than the current price. But, this is a big but, can we simply expect oil to jump high straight line now? I really don’t think so. I think the near term trend for oil is likely downward and we may see 10-15% decline of oil prices in the next few weeks before it can march higher towards $80. One major reason for my bearish view on oil at the moment is the euphoric sentiment in the market now. Per the recent COT report, the bullish bet from the dumb money (speculation traders) has reached the historically high level, which often is a good contrarian indicator to expect lower oil prices moving forward. Similarly, I think oil stocks will have some tough time in the near future.