Billionaire's Portfolio

November 6, 2017, 5:00pm EST

Oil is up over 3% today, trading up to the highest levels since June of 2015.

We were already at new highs for the year as of Friday’s close, and then we get news over the weekend of the political shakeup and arrests in Saudi Arabia.

We’ve talked about the fundamental case for much higher oil prices throughout the recovery last year, and again this summer. You never know what catalyst may come in to accelerate the move in price. We may have had it with this Saudi news.

Among the reasons to expect a potential violent move in oil prices: OPEC has been cutting production into a (ex OPEC, ex U.S.) world that’s not producing (i.e. there’s negative production growth). Given the scars of last year’s oil price bust, oil producers haven’t been spending on new production.

Meanwhile, there’s U.S. supply that is supposed to fill that void, but U.S. supply has been in consistent draw down, 26 of the past 31 weeks, to the tune of 8% lower supply.

Add to this, we have a global economy that’s improving, and with that, demand is increasing. And we have U.S. fiscal stimulus entering to stoke those flames.

We looked at this chart last month.

Source: Billionaire’s Portfolio

We had this this inverse head and shoulders (in the chart above) that projected a move back to the low $80s. And as part of that technical picture, we were setting up for a break of a big two-year trendline that would open the doors to a move back into the $70+ oil area.

That line broke at around $51.50, confirming that head and shoulders pattern, and the move has been aggressive since. We now have this chart …

Source: Billionaire’s Portfolio

This is beginning to play out according to script for the star commodity investors we talked about this summer, Leigh Goehring and Adam Rozencwajg. They’ve been wildly bullish oil calling for $75 to $110 oil. Earlier in the summer, they said “when inventory gets this low we run the risk of triple digit oil prices.” And they suspected a supply disruption could give us a sharp move higher.

Do the events in Saudi Arabia present a potential supply disruption? Earlier this year, Stratus Advisors, an energy research and consulting shop, projected potential oil-supply disruption scenarios. Among the scenarios, was “internal instability in Saudi Arabia.”

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