Hedge funds are marking the starting line for the next major bull run in oil.
Around this time last year, oil had just come out of a rally. Prices for a barrel of oil rose from around $30 to $45.
The talking heads in the media were already calling for the next bear market in oil. U.S. shale output was supposed to flood the market and drive prices down.
The last thing on most people’s minds was another 50% rally. But that’s exactly what happened.
Below is a chart of oil prices and the long position of hedge funds.
Hedge funds, or “smart money,” in purple, built up their positions through 2016 and sold off in the summer.
In August they started buying again. That early smart money saw oil rally another 50%.
This summer smart money sold off again. After bottoming in July, smart money is buying in again.
That’s our signal to get in.
If prices rally another 50%, we’ll see oil at $115 a barrel. That’s not unheard of. Brent crude traded around there in 2014.
The market is tight enough that another major disruption could get us there.
American pipelines are already maxed out moving light shale oil.
Venezuelan oil production continues to fall with little hope for recovery.
Sanctions on Iran are looking to curb millions of barrels of oil per day this fall.
Most telling is Saudi Arabia’s delay of the kingdom’s Aramco initial public offering (IPO). The oil minister stated that it is waiting for “more favorable conditions.” That’s code for higher oil prices.
Despite these big-picture issues, the media is quick to put out headlines of week-to-week changes in inventory that suggest a bear market is right around the corner.
There is an old adage that a bull market climbs a wall of worry.
Capture the next run-up in oil prices with the iShares MSCI Global Energy Producers ETF (NYSE: FILL). This exchange-traded fund tracks major oil producers and yields 2.8%.
Good investing,
Anthony Planas
Internal Analyst, Banyan Hill Publishing