By Nigam Arora
With OPEC and Russia negotiations in play this week, I have been getting a lot of emails from investors about oil.
Many have strong opinions. Some think oil is going to go down to $25 a barrel. Others think it is going to go up to between $75 and $100.
Given my history of providing high-conviction opinions that have often been contrary, both bullish and bearish oil investors seem to want me to agree with their arguments. Take a look at the annotated long-term chart of oil . The chart is of a continuous futures contract, and for the sake of accuracy, I have not updated it. In terms of spot oil prices, I was steadfastly bearish on oil and calling for short-selling oil when it was around $108 per barrel. I stayed bearish all the way down to $26, before turning neutral at $29.
Now the good news is that arguments on both sides are solid. The bad news is that for the short- to medium-term, I cannot agree with either side. Let me explain.
Trust OPEC and Russia
The premise behind my ZYX Change Method is that most money is made with the lowest risk by identifying changes ahead of the crowd. The big change is that now both OPEC and Russia can be trusted to mostly meet their announced commitments of production cuts. Yes, I know that for years I was writing that OPEC could not be trusted. Those calls were spot on. What has changed is that OPEC and Russia have figured out that they make the most money now by meeting production-cut agreements. Previously they made the most money by announcing big cuts, but then cheating on those agreements.
This is the main bullish argument.
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Don’t trust shale producers
A big problem with the bullish argument for oil is that shale producers in the United States cannot be trusted in terms of their forecasts and their intentions. Over the last two years, I have listened to conference calls of a large number of shale companies, including EOG Resources /zigman2/quotes/204634330/lastsale EOG -8.93% , Pioneer Natural Resources Co. /zigman2/quotes/206736173/lastsale PXD -7.65% and Continental Resources /zigman2/quotes/200740136/lastsale CLR -14.37% . Invariably, it turns out that, on average, they produce more oil than they said they would. Further, their costs keep declining.
This is the main bearish argument.
Here are The Arora Report ratings on oil at this time that are provided to our subscribers. We review the ratings daily.