Uh oh. Will Oil Hit $120 Again?
Oh no, here comes gasoline on the fire
OPEC+ is meeting this week and the big news is that both Saudi Arabia and Russia are pushing for a 1-2 million barrel a day cut in oil production. The reason is simple. They both need the cash that would come in from higher prices. But are they cutting their own throats?
Here is what is going to happen.
OPEC sill cut production by about 1 mbd. That is about 1% of total production and demand. That amount of cut will cause oil to move back up above $100 per barrel. That may not sound like a lot. What's the big deal with a 1% change in supply? But it is a big deal.
The oil market is a very balanced market with supply and demand very very balanced. A small change in demand or supplly can push the price of oil by tens of dollars. This 1% change should move the price of oil by at least $20 per barrel.
So look for oil to move higher over the next several weeks due to this cut.
But then it gets interesting.
We have been seeing raw material prices declining over the last two months. Raw material prices are a leading indicator of the economy and are clearly signaling the decline of the economy. Oil is about to break that pattern.
A hike in oil prices will cause many raw material prices to start to increase. In particular, look for food prices to spike and take CPI higher with them. This will then lead the Fed to be even more adamant about bringing down inflation and tightening even further.
In addition, an increase in the price of oil is like a tax increase. It reduces people's income so the recession is exacerbated even more.
So the net effect of the rate hike will be:
• Higher oil prices
• Higher food and energy prices
• Higher inflation
• Tighter Fed
• Weaker economy
• Weaker stocks
So how do we make money?
The market has rallied strongly over the last couple of days. This rally will be short lived and the bear market will continue.
So we need to remain with bearish strategies but we can play the long side of oil and energy companies for a trade that would last several months.
This will also hurt the bond market.
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