An Important Shift in Oil Prices

Trends for oil are shifting... A few inflationary catalysts... Oil is up 20% since mid-December... Thanks, Houthis... A 'golden cross' sighting in energy stocks... A few picks from our Stansberry's Investment Advisory team...

The trade winds for oil are changing...

If you've been looking for clues that high(er) inflation might persist for longer than Mr. Market appears to believe, the International Energy Agency ("IEA") recently dropped a big hint.

The international organization's 31 member nations, including the U.S., and 13 association countries account for 75% of global oil demand... and the group purports to coordinate oil reserve policy among them.

It also makes forecasts... And like a global economic football game, the OPEC cartel – which controls 40% of global oil supply and 80% of reserves – has frequently disputed them.

The two "teams" date back to the aftermath of the 1973 oil crisis... when the IEA was created. The U.S., U.K., Germany, Japan, Spain, and Italy were among the founding members.

OPEC has a longer history, dating to 1960 when five nations joined oil forces: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. The group now has a dozen members. In 2016, these unapologetic oil price fixers joined up with 10 more nations, including Russia, known as OPEC+.

Pick your side... or none at all.

But today, I (Corey McLaughlin) am focusing on the oil-consuming nations... That's where investors appear to be paying attention, too. And big, global trends could push up the price of oil... energy costs in general... and, in turn, inflation.

The price of West Texas Intermediate ("WTI") crude oil – the U.S. benchmark – is trading at a four-month high of nearly $83 per barrel... It's the same story for Brent crude, the international standard, which now trades near $87 per barrel.

Both are up about 2% in the past day and roughly 20% since mid-December.

Inflationary catalysts...

Last Thursday, the IEA predicted a "tighter" oil market in 2024. It raised its view on oil-demand growth for this year, tied to expectations for accelerating economic activity. At the same time, it cut its supply forecast as a result of the continued OPEC+ supply-cut policy and disruptions related to the war in the Middle East.

As global news service Reuters reported...

The IEA raised its view on 2024 oil demand growth for a fourth time since November as Houthi attacks disrupt Red Sea shipping but warned that "the global economic slowdown acts as an additional headwind to oil use."

The energy watchdog forecast demand will rise by 1.3 million barrels per day in 2024, up 110,000 bpd from last month, but still lower than growth of 2.3 million bpd last year.

The IEA also cut its 2024 supply forecast and now expects oil supply to rise by 800,000 bpd to 102.9 million bpd this year.

Add it up and the IEA report predicted a global oil deficit in 2024... "a complete flip from its position six months ago," as our colleague Sean Michael Cummings wrote today in the free DailyWealth newsletter.

Some analysts are attributing the most recent move to recent Ukrainian attacks on Russian refiners. That's part of it, but it's all happening within a global supply-demand picture that has already been shifting toward higher prices.

These shifts aren't entirely surprising...

Almost a year ago, in an April 2023 Digest, we wrote about how the "oil cartel is at again." Several large OPEC+ countries and others had announced an unexpected cut in daily crude-oil production that was intended to last through the end of the year... as they sought to goose the price of a commodity that they heavily rely on for income.

That story hasn't changed. In fact, as Sean wrote today in DailyWealth...

Saudi Arabia and its allies – known as OPEC+ – issued an announcement shortly after the IEA made its projection. The nations said they would cut oil production by about 2 million barrels a day starting in January 2024.

The change was supposed to be temporary. But this month, OPEC+ announced it would keep the cuts going through the second half of the year.

Now, the IEA believes the measure won't stop until the end of 2024 at the earliest.

And in our first Digest of 2024, we issued a "Red Sea Alert"... We talked about the Iranian-backed Houthi militants in Yemen disrupting one of the world's largest shipping channels – and how it could spike prices and raise questions about future global oil supply.

As we wrote...

The Houthis have been fighting a civil war with the Yemeni government for years... But now they've also begun attacking commercial freight ships in the neighboring Red Sea and Gulf of Aden in support of the Hamas group fighting Israel in the Gaza Strip.

This was notable because...

Roughly 10% of the world's oil and liquefied natural gas moved by ship goes through the area, mostly headed to Europe. As Stansberry Research analysts Brian Tycangco and Bill McGilton wrote in the latest issue of their Commodity Supercycles newsletter, that includes nearly 5 million barrels of oil per day through these waterways... and more nearby. Here's a graphic they shared...

Brian and Bill explained the dangers of these "chokepoints," along with the (recent) history of conflict in the Red Sea with the Iranian-backed Houthis, Saudi Arabia, etc. And they noted...

Cutting off even one of these chokepoints would potentially knock off more oil from the world market than has ever been done since the Arab oil embargo in 1973. That crisis sent oil prices quadrupling in less than a year.

We're not quite there (yet), but oil prices are rising.

The recent price action is notable...

Again, the prices of WTI and Brent crude are up roughly 20% since mid-December. That's when the Houthi attacks against tankers in the Red Sea ramped up, major shipping companies announced re-routing, and the U.S. and a few other nations started patrolling these international waterways for protection.

At the same time, expectations for interest-rate cuts have given investors thoughts of accelerating economic growth, which should lead to more demand for oil and other energy sources... Yet global supply questions persist as OPEC, led by Saudi Arabia, keeps suggesting "voluntary" supply cuts to its members.

Here we're getting higher prices. Of course, higher oil prices mean higher inflation...

First of all, that's tough for consumers.

But secondly, higher prices could throw a curveball into market expectations for things like Federal Reserve policy, which will be a big point of discussion this week with the central bank's next meeting on Tuesday and Wednesday.

Perhaps Fed Chair Jerome Powell will say that "volatile" food and energy prices aren't as important for the Fed's policy calculus – and that the central bank will stay the course with its ideas for cutting rates later this year.

But I suspect there's a chance Powell might clarify, or edit, what he said earlier this month during congressional testimony when he said the Fed "can and will" cut rates in 2024. That's a big promise.

A stance of "higher for longer" when it comes to interest rates – or even the consideration of it – could surprise a lot of people when a dominant market narrative since December has been about when the Fed's going to cut. At the same time, a shift to "tighter" policy thinking could weigh on expectations for economic growth, and oil demand, ahead.

Stay tuned.

A 'golden cross' sighting...

Here's some better news. As Sean wrote in DailyWealth today, higher oil prices are also good news for energy investors and businesses, given the opportunity for higher margins. Recently, the sector has been soaring.

In fact, one indicator suggests the rally is just getting started. That's because energy stocks just completed what's called a "golden cross." That's technical-speak for when an asset's 50-day moving average (50-DMA) rises above its longer-term 200-day moving average (200-DMA).

It's not a guarantee of higher prices ahead, but it's usually a bullish signal when it happens. (It's the opposite of the bearish "death cross" signal – when an asset's 50-DMA drops below its 200-DMA.) As Sean wrote this morning, using Friday's closing data...

We can see this move beginning in the Energy Select Sector SPDR Fund (XLE) today. This exchange-traded fund holds a wide range of oil companies, so we can use it to track the performance of the broader energy sector.

XLE's new golden cross is just starting to form. Take a look...

After a brief dip to start the year, XLE's short-term average is now climbing back above its long-term average.

Now, today, energy stocks were slightly down after three straight strong days to end last week, so this "golden cross" didn't hold. XLE's 200-DMA is above its 50-DMA as of today's close. Still, that could easily flip again this week if the bullish trend for energy stocks since the middle of January continues. (This is why they're called moving averages.) As Sean continued...

Again, that's a big signal for higher prices – especially when the long-term trend is up. Check out XLE's history of golden crosses...

As you can see, when the 50-DMA overtakes the 200-DMA, it tends to signal a jump in energy stocks... particularly when the 200-DMA is in an uptrend. And that's exactly the pattern we're seeing in XLE today.

Energy expectations are shifting from oversupply to undersupply. And now that we have a golden cross in XLE, this new rally should get underway in earnest.

So, keep an eye on energy stocks... to see if they continue higher and the short-term trend overtakes the longer-term one for good.

We said this before back in late 2020 and 2021 – when it appeared to us that higher inflation for longer was going to be a big issue that most in the mainstream weren't talking about... And we'll say it again now: Owning stocks in this sector can provide inflation protection – plus the potential for lucrative gains in the right companies.

A few buy recommendations right now...

Our colleagues recommend energy stocks across many of our publications, including our flagship Stansberry's Investment Advisory...

In fact, the team behind the Investment Advisory just published a series of special reports for subscribers last week recommending a few such companies, even before the latest report from the IEA... That's because of the bullish trends they see for the sector over the long run.

One company has a huge stake in the energy sector and is one of editor Whitney Tilson's favorites. (Maybe you can guess it.)

And as Stansberry Research senior analyst Alan Gula wrote, a few others have a business model that is the best way to profit from the energy bull market...

Almost all energy stocks rise during booms. A rising tide lifts all boats, as they say.

However, most investors are unaware of how to maximize their gains during energy booms. You shouldn't indiscriminately buy oil and gas stocks. Nor should you automatically buy the biggest, best-known energy companies.

He shared three lesser-known companies to buy instead.

Alan also published a separate report about a leader in a revolution currently unfolding in the oil and gas industry that generates tons of cash, and whose sales "are only heading higher," Alan wrote, given that energy prices are likely headed in the same direction.

Existing Investment Advisory subscribers and Stansberry Alliance members can find all the details here. And if you don't subscribe to our flagship publication already, you really should. Click here for more information on how to get started today for just $49.

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In today's mailbag, feedback on Dave Lashmet's Friday Digest... and more feedback for Dr. David "Doc" Eifrig, who crossed the milestone of 200 consecutive winning trades in his Retirement Trader advisory on Friday... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

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All the best,

Corey McLaughlin
Baltimore, Maryland
March 18, 2024