Why Oil Prices Will Breakout - The Demand Driver

Aug. 01, 2017 7:36 AM ETCOP, CVX, MRO, OIL-OLD, PXD, USO, XLE, XOM, XOP11 Comments
Markos Kaminis profile picture
Markos Kaminis
13.19K Followers

Summary

  • I see oil prices breaking out of their recent trading range.
  • The supply side question has been the focus of most investors, but I'm looking elsewhere for a surprising catalyst the market has mostly overlooked.
  • I expect robustly improving economies in the U.S., Europe and China to significantly raise demand for energy and to balance the energy market faster.

Despite oil's most recent gains, I still see plenty of upside for oil prices. In fact, I see oil breaking out of its recent trading range and marking new highs through its current run. Many are looking to supply side efforts to bring market balance, or not, but I see a different driver making an important difference. Demand for oil should improve markedly as global economies move into a higher growth phase.

For relevant reasons, the focus of oil market enthusiasts has been completely on the supply side of the equation. Increasing production in the U.S., Libya, Nigeria, Iraq and Iran has fed into a market stuck in a supply glut. OPEC and non-OPEC producers are attempting to address the supply side issue, effectively I believe too, but demand gains should help to set the market into balance faster than expected.

U.S. GDP growth was just reported at 2.6% for the second quarter. Moving forward, I expect even better growth to come. The labor market is operating now at full employment. The longer people are employed, the more spending we are likely to see, including for higher ticket items.

This week, Pending Home Sales showed a 1.5% increase in contract signings for existing homes. Later this week, the annual pace of auto sales is expected to increase. It's my opinion, that economic data will increasingly reflect a step-up for the U.S. economy, mostly due to the improved employment situation and resulting spending but also on other drivers.

Certain initiatives by the new Administration should help to make spending more fluid. The Trump Administration has been actively working to reduce regulation and red tape. Banks are being freed to lend, especially since overcoming the federal capital constraint burdens that followed the "too big to fail lesson" of our recent past. I strongly believe tax reform is coming to America, and that it will invigorate consumer spending as well.

The oil market is global in nature, but thankfully, economic gains are global as well. China just reported stronger than expected GDP growth of 6.9%, causing economists to raise their expectations for the emerging giant. Today, the Caixin China General Manufacturing PMI for July improved to a four-month high. New orders was at its highest level in five months, supported by export growth.

Eurozone PMI showed growth across all of the covered nations, including Greece. GDP data for various eurozone nations has been positive as well, and today eurozone GDP was reported accelerated to 2.1% year-on-year in Q2, up from 1.9% in Q1.

Global economic growth means upward adjustment to demand for energy, and OPEC just indicated it was seeing as much. OPEC adjusted its demand expectations upward in St. Petersburg, and indicated that improved demand would offset the increasing production of Libya and Nigeria. The International Energy Agency (IEA) also recently increased its global demand forecast via its monthly Oil Market Report. I expect these upward adjustments to demand to continue, and to serve to more quickly solve the oil market glut problem.

Security 07-31-17
United States Oil ((NYSEARCA:USO)) +1.1%
iPath S&P GSCI Oil (NYSE: OIL) +1.9%
Energy Select Sector SPDR (NYSE: XLE) +0.2%
SPDR S&P Oil & Gas E&P (NYSE: XOP) -1.0%
Exxon Mobil (NYSE: XOM) +0.6%
Chevron (NYSE: CVX) +1.0%
ConocoPhillips (NYSE: COP) +0.2%
Marathon Oil (NYSE: MRO) -1.1%
Pioneer Natural Resources (NYSE: PXD) +1.1%

In conclusion, one critical catalyst oil traders have not been adequately factoring into the supply/demand balance equation is improving demand. Economies are expanding more robustly globally now, and demand for oil must increase as a result. Oil prices will breakout, partly because of this factor. This report is part of a several part series. To receive the next part and all my regular work on energy and markets, readers are welcome to follow the column here at Seeking Alpha.

This article was written by

Markos Kaminis profile picture
13.19K Followers
Markos N. Kaminis generated a 23% average annual return on "Strong Buy" stock selections over 5 years while working as a Senior Equity Analyst on Wall Street. As an internal whistle-blower, I sacrificed absolutely everything to do the right thing. And despite being an eyewitness and victim of terrorism on 9-11, I am currently volunteering at a busy border crossing helping Middle Eastern & North African refugees, most displaced by war or other horrors, to land safely in Europe. Despite my life experiences, I still have hope, and believe that we must persevere with patience (forgiveness), tolerance and love. I have determined to struggle for the better good of my brethren rather than for myself, and you'll see that play out over the course of the rest of my life. But I worked far too long and hard to become an excellent stock-picker to not incorporate this work into the fold. Markos N. Kaminis generated a 23% average annual return on "Strong Buy" stock selections over 5 years and ranked 2nd among a group of 60 analysts in-house as a Senior Equity Analyst over a seven-year period at Standard & Poor's. After proving his value in-house, he was promoted into a special role as an idea generator, supporting the portfolios of institutional clients as well as driving performance within S&P's recommended lists and portfolios. At times, Markos was responsible for up to 10% of the firm's entire "Strong Buy" list and is due a great deal of credit for the group's outstanding performance during his tenure. Markos followed a group of 30-40 Small and Mid-Cap firms, and was charged with finding new buy and sell candidates across industry sectors. He generated a 23% average annual return over five years on his "Strong Buy" recommendations, and 26% over three years ended 2004. He was ranked 1st of 60 analysts in-house for his "Strong Buy" performance over 4 years (2nd over 5). Markos also authored IPO research and wrote for high-level newsletters, The Outlook, Equity Insights and Emerging Opportunities, as well as for BusinessWeek Online. He represented his firm as an analytical expert commentator for major media, including television, Internet and through quotes and interviews in reputable publications. Besides predicting the stock market correction of 2015 through a series of prescient reports here in August. (see proof here: http://seekingalpha.com/article/3482226-investor-who-predicted-the-stock-market-correction-offers-an-update ), Markos also advised investors to buy stocks at the bottom of the market in mid-February 2016 and again post-Brexit at the trough, and to buy gold in January 2016 before the commodity started its move higher. More recently, he called the pickup in the economy for 2018, the upward move for stocks in 2018, and the breakout in oil, starting in June of 2017. See: June 15, 2017 – Buy Oil Back Now; August 1, 2017 – Why Oil Prices Will Break Out – The Demand Driver; September 30, 2017 – Why Oil Prices Can Break Out Part II: Vulnerable Supply; and January 26, 2018 – Up 44% Since Our June Bullish Turn – Oil Still Supported Here. While not perfect, over the years, Markos has made countless correct market and security calls for his followers, including forecasting the demise of J.C. Penney on the heralded CEO hire's disruptive plans, the bankruptcies of Washington Mutual and Pilgrim's Pride in the $30 and $20s, respectively, as well as the purchase of Facebook in the mid-$20s when it was considered a pariah post its IPO (today it is a market darling). Markos also warned of the real estate market collapse and the financial crisis in the early days of his blogging. What I personally want you to know about my plans: After witnessing the worst of Wall Street firsthand and having the ideal vision of my childhood career choice corrupted by reality, I almost switched to full-time charity work at age 40 and still have plans for several non-profit endeavors. The future is somewhat unknown, and I am open to employment offers for portfolio management or other ideas. While continuing to publish regularly, I expect to begin work on several book ideas that I believe are important for business, for our nation and for society. I may put  my stock selection skills, earned through blood, sweat and tears, to better use, and to make my own way. I would like to give investors something rare, a dignified partner who can manage money with integrity and a clear conscience about the degree of due diligence behind investment decisions... someone who cares more about your money than your wife. I hope readers will become followers of my column here & at my blog, so that when our numbers are substantial, we might start an investment fund or two. Prior to his Wall Street career, Mr. Kaminis spent time in the back-office, as a mutual fund accountant, where he managed for a time the work of two men. Before this, from age 11 to age 25, he worked as a carpenter's apprentice and carpenter with his father, in both commercial and residential projects. Mr. Kaminis has an intimate knowledge of the real estate (undergraduate degree in Real Estate and Finance) and construction market, as well as the restaurant industry. However, as a generalist stock analyst, he showed the ability to learn any and the most complicated of industries in short time - and he gamed every challenge presented to him. Mr. Kaminis earned his MBA at the Katz Graduate School of Business at the University of Pittsburgh, and his BA at Temple University in Philadelphia. However, Markos has been studying the stock market since age 13, when he determined his career path. He made his first investment at age 16, and funded much of his undergraduate education with the proceeds of his investing success. Mr. Kaminis continues to keep busy forecasting the economic path and securities market activity. Markos is considering the eventual start-up a long/short capital appreciation hedge fund. Such a fund would limit risk through beta reduction, using a diversification strategy targeting sector & industry and long & short position inclusion. At the same time, Markos' theoretical fund would seek maximum capital appreciation through the exploitation of Mr. Kaminis' inherent economic & market discernment gift and proven stock selection skills. Mr. Kaminis also has a team of a select few analysts, technicians, strategists and economists that he has been impressed by over the years, which he expects to tap for the project when the time is right. Mr. Kaminis welcomes your interest in such a potential forward effort, and looks forward to discussing his plans with those appropriate and within legal constraints. Markos toys with very early stage entrepreneurial efforts in the testing of certain business models, all of which he intends to tie to a planned non-profit project serving the most helpless among us. The tie will be that the businesses will give employment opportunity to individuals who would otherwise have difficulty finding gainful employment. It will house and heal the homeless, ex-convicts, those completing rehabilitation efforts for drug and other addictions, and others in need of help. Markos is currently Directing the widely syndicated blog he founded, "Wall Street Greek," and is writing for other well-known publications besides advancing several big ideas. Markos' column is syndicated across sites like the Boston Globe, Kiplinger Magazine, UPI and other reputable newspaper and TV websites, as well as private networks, Amazon Kindle, iPhone and more. In the past, he has written for RealMoney.com, Motley Fool and others. Requests to research specific companies are welcome, as we serve our readers. You may contact us via this blog's contact info. Mr. Kaminis welcomes you to follow him here at Seeking Alpha, where he is proud to be a long-time contributor to this strong team of writers. He considers the Seeking Alpha team and management close friends, and for you, people worth knowing and following. Visit his site: Wall Street Greek (http://www.wallstreetgreek.blogspot.com/)
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Disclosure: I am/we are long USO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: My position is via options.

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