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OPEC Is NOT Driving Crude Oil's "Sleigh"

There’s a very different explanation for the 10-month long, 50% strong crude oil rally

by Nico Isaac
Updated: December 12, 2016

There's a flying reindeer with a glowing red nose named Rudolph who pulls Santa's sleigh on his overnight gift-delivering trip around the world.

No one over the age of eight actually believes that story, right?

But what if we switched out the players:

  • Daily news events take Rudolph's place, and
  • Financial markets take the place of Santa's sleigh

In other words, news and events pull the price action of financial markets.

Would you believe that?

Well, it happens to be the story mainstream financial wisdom is built upon. Many investors and traders follow it as gospel, looking to the day's news -- i.e. weather patterns, political events, supply/demand reports, and on -- for clues as to where a market's prices will go next.

Take, for instance, the recent performance in crude oil. On Monday (December 12), crude oil prices sailed to their highest level in 17 months.

And, according to the mainstream experts, two main news events are responsible for lighting the fire under crude:

  • November 30 deal by OPEC to cut output, and
  • December 10 agreement by countries outside of OPEC to reduce output by 558,000 bpd -- the largest contribution by non-OPEC ever.

Signs off one news source:

"Oil hits highest since mid-2015 as OPEC and rivals agree to historic deal... to jointly reduce output to try and tackle global oversupply and boost prices." (CNBC)

But in our opinion, this is a dangerously limited point-of-view. We believe news and events can affect market trends in the short term (and commodities are more susceptible to that because of the supply interruptions, etc.). However, the news is not the whole story.

Let's go back to crude oil. The fact is, oil prices have soared 50% since bottoming at a 13-year low in February 2016. The market's uptrend began long before the recent show of OPEC solidarity.

In fact, at the time, the global oil market was said to be oversupplied by 1 million barrels a day, "roughly enough to fuel the needs of every driver in a state the size of Pennsylvania or Ohio." (Economic Times)

Multi-year long sanctions were just lifted from Iran, who expressed its immediate intent to rejoin the oil production pipeline, while OPEC stubbornly refused to cave to output freezing pressures.

The supply news was incontestably bearish. And the mainstream, news-following experts used it to project a bearish future for oil prices, as these January-February 2016 headlines show:

"Crude oil could soon fall to $20 per barrel." (Business Standard)

"Unless something changes, the oil market could drown in oversupply. So the answer to the question, can it go any lower, is an emphatic ‘yes.'" (CNBC)

"About the only price it can't go below is zero." (CNBC)

But from an Elliott wave perspective, oil's future looked quite different. In our March 2016 Global Market Perspective, we foresaw a "respite for oil" due to a bullish fourth wave set-up. Wrote GMP:

"The wave labels on the crude oil chart show a complete or nearly complete... five-wave decline from the August 2013 high, which means that Primary wave 4, a multi-month countertrend rally that retraces at least a third of the prior decline, is due now or soon. Weeks from now, crude oil prices should be higher.

"And, since wave 2 lasted nearly two full years, wave 4 could be a time-consuming affair. It's likely to be accompanied by a media focus on improving fundamental factors such as a decline in U.S. oil production."

From there, crude oil prices embarked on a 10-month long, 50% strong rally to their highest level since mid-2015. You can see the full extent of the market's 2016 comeback on the updated chart below:

The news of production cuts didn't lead crude oil's rising "sled"; it simply followed it. The recent production cut news fits well into market players' bullish psychology towards oil, which changed 10 months ago, not this past weekend.

Global Market Perspective is Your Roadmap to Global Investment Opportunity

Covering more than 40 markets on 50-plus pages each month, Global Market Perspective prepares subscribers for opportunities around the world. Get the latest forecasts for U.S., Asian-Pacific and European stocks and economies, global currencies, bonds, crude oil and more.

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