Crude market finds support and reason to buy

November 24, 2015 12:35 PM

Oil prices still haven’t closed below $40 since the Chinese stock market crash. After a vicious early hour sell-off, oil prices rebounded after filling the gap left from the expiration of the December futures contract and yet another promise by Saudi Arabia to cooperate with other OPEC and non-OPEC producers to stabilize oil prices. Now we have reports that a Russian warplane was shot down and the possible death of one of the ejecting pilots and we have a new dynamic that may come into play. Today oil prices will have to assess rising geopolitical risk and the upcoming Thanksgiving holiday gas demand surge.

Remember it was the Thanksgiving 2014 OPEC meeting that set the current bear market in gear.

The AP is reporting that, “Turkey shot down a Russian warplane Tuesday, claiming it had violated Turkish airspace and ignored repeated warnings. Russia denied that the plane crossed the Syrian border into Turkish skies. "We are looking into the circumstances of the crash of the Russian jet," Russia's Defense Ministry said. "The Ministry of Defense would like to stress that the plane was over the Syrian territory throughout the flight."

Russia said the Su-24 was downed by artillery fire, but Turkey claimed that its F-16s fired on the Russian plane after it ignored several warnings. The ministry said the pilots parachuted but now there are reports that at least one of them may be dead.

AP is reporting that NATO will hold an emergency meeting so Turkey a NATO member, can inform allies about the downing of a Russian airplane.

Obviously for oil the potential for escalation of this conflict is raising fears that it could spread. It raises the risk of oil transportation and increases demand as armies use a lot of oil. Still the market is not trying to make too much of this incident because of the global glut of supply and the fact that this is not posing an immediate risk to crude oil supply.

This comes as AAA is predicting approximately 42 million Americans are expected to take a road trip this Thanksgiving and drivers should pay the lowest pump prices for this Thanksgiving holiday since 2008. Retail averages have fallen for 17 consecutive days for a total savings of 15¢ per gallon and the national average remains poised to fall below the $2 per gallon benchmark by the Christmas holiday. Already, more than half of U.S. stations are selling gas for less than $2 per gallon. Today’s national average price of $2.07 per gallon represents a savings of 9¢per gallon vs. one week ago and 14¢ per gallon for the month. Significant yearly savings persist and pump prices are down 75¢ per gallon compared to this same date last year.

Oil bounced off $40 and makes it look like a great place to start a rally. A report from the Energy Information Administration (IEA) proved oil and natural gas reserves rose in 2014 and they warn that a cut back in exploration dollars may mean U.S. reserves might not rise because no one will be looking for them. Still the IEA says that natural gas proven reserves rose 10% in 2014, setting a new U.S. record of 388.8 trillion cubic feet. Oil proven reserves rose 9% in 2014, exceeding a U.S. total of 39 billion barrels for the first time since 1972 but they warn that sustained lower prices for crude oil and natural gas in 2015 have curtailed oil and natural gas drilling and have reduced operating economics; this is anticipated to reduce end-of-year 2015 oil and natural gas reserves!

U.S. crude oil proven reserves increased in 2014 for the sixth year in a row with a net addition of 3.4 billion barrels of proved oil reserves (a 9% increase), according to U.S. Crude Oil and Natural Gas Proved Reserves, 2014, released today by the U.S. Energy Information Administration (EIA). U.S. natural gas proved reserves increased 10% in 2014, raising the U.S. total to a record 388.8 trillion cubic feet (Tcf).

Demand is rising and supply will be falling so if you can look beyond current market weakness, this is the time to look at a future price surge. We have been talking about a long-term historic bottom and we are using market weakness to put on long-term positions.

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.