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Crude Oil Bulls Face Key Test of Summer High on OPEC Comment

October 11, 2016
Crude oil market faces potential rate hike according to stock market analysts.

Leave it to OPEC to shake and stir the oil markets. Crude oil prices blasted higher Monday, boosted by comments from a Saudi Arabia energy minister who suggested a rally to $60.00 per barrel oil was "not unthinkable" this year. Trading action saw November crude oil futures pierce the $51.50 per barrel level Monday for the first time since late June.

Oil ministers from a number of countries are gathered in Turkey this week for a meeting of the World Energy Congress. While a comprehensive oil deal isn't expected until the Organization of Petroleum Exporting Countries (OPEC) meets for its official meeting Nov. 30 in Vienna, headlines and speculation about production cuts have vaulted to center stage for oil traders. OPEC has already tentatively proposed to limit output to between 32.5 million and 33 million barrels per day. However, there remains some skepticism on whether the cartel will follow through on this plan. OPEC's production stood at around 33.6 million bpd in September, according to a Reuters survey.

Take It with a Grain of Salt

While energy markets are quite bullish at the start of start the week, it may be worth taking the OPEC headlines with a grain of salt, says Sam Stovall, chief investment strategist at CFRA. "When it comes to OPEC,” say Stovall, “don't listen to what they say, watch what they do.” He adds, “they are notorious for claiming to do one thing and work together, but then individual countries have a tendency to overproduce because they are looking to increase their own market share.”

The Trickle Down Impact

Nonetheless, the mere speculation that OPEC could strike an output freeze agreement has propelled crude oil prices significantly higher in recent weeks from a recent low at the $43.00 level on Sept. 20. This has already translated into higher gasoline prices for consumers at the pump. The national average for retail gasoline climbed to $2.25 a gallon, up 7.9 cents over the last month, according to gasoline price website

Gasoline prices rose in much of the country over the last week, said Patrick DeHaan, senior petroleum analyst at GasBuddy. "Among the hardest hit were the Great Lakes states as refinery issues also pushed fuel prices higher. And while hundreds of gas stations in Florida ran out of gasoline ahead of Hurricane Matthew, much of the increase was not because of the storm but due to the rise in crude oil prices."

What Higher Crude Oil Could Mean for You

Rising gas prices filter through the economy and markets in a variety of ways. Here's a quick snapshot of a few:

1.      Impact on the consumer’s pocketbook and disposable spending.  "Everybody looks at the gas pump," says JJ Kinahan, chief market strategist at TD Ameritrade. "If I'm a retailer, I'm not thrilled about this. The holiday season is approaching and they don't want anything to get in the way of consumers getting to stores and shopping," Kinahan says. 

2.      Weaker economic growth. "Investors worry about rising oil prices and rightfully so. For every $10 increase in the price of oil it takes off one quarter of one percent of real GDP growth," Stovall says. 

3.      Increased profit potential for some energy companies. For investors holding energy stocks in your portfolio, the higher crude oil prices are a key factor for energy stocks, like Exxon Mobile and Chevron Corporation, Kinahan says. Indeed, those stocks have gotten a lift in recent sessions.

Crunching the numbers, Stovall found there is a "93% correlation between oil prices and energy earnings."

What's next?

Kinahan pointed to the summer price high in crude oil as a key level for traders to monitor. November crude oil futures scored a high at $53.39 level on June 9, which marked the highest level traded in 2016. "Chevron is about 3% off its 52-week highs. If we can get crude oil to break out higher through the June high that would be positive for energy stocks," Kinahan says.

Looking at the daily chart for November crude oil, an impressive "bullish outside day" has formed, which means the contract exceeds the prior day's high and low and it trades higher. Technical traders generally view this is a positive signal.

TD Ameritrade clients can monitor the futures curve, or the various prices in the market at different expiration dates, for crude oil.  Figure 1 shows the cost of a barrel of oil for different delivery dates ranging from now through April 2017.

Crude Oil Futures Curve


Chart source: thinkorswim® by TD Ameritrade. To view the curve, go to Charts > Product Depth > type symbol “/CL” in the symbol box.  Make sure “Futures” is selected at the top.  In the “Curves” menu you can select exactly which futures contracts are displayed. 

For illustrative purposes only. Past performance does not guarantee future results.

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