Two Reasons Oil Prices Are Headed Lower

The oil cartel kept its word...

The plan was to cut production by 1.2 million barrels of oil per day through 2018... And the cartel is keeping its promise so far.

That has been a major boost for oil prices over the past year.

Crude oil broke above $60 per barrel in December – for the first time since 2015.

But oil prices faltered in recent weeks. The fall broke double digits... And that could just be the start.

You see, two major red flags are occurring for oil today. And they point to much lower prices from here.

Let me explain...

Fourteen oil-producing countries make up the global oil cartel known as OPEC. Together, OPEC members account for nearly half of the world's crude oil production.

To increase the price of oil, OPEC and some other oil exporters agreed to production cuts back in 2016. They've worked...

The American benchmark for oil prices – West Texas Intermediate crude oil – has soared. Prices are up nearly 70% since the beginning of 2016.

Can these elevated prices last? Maybe not...

Oil prices are already breaking down. They dropped more than 10% in recent weeks. And those declines could easily continue – for two reasons...

First, while OPEC has been making cuts, U.S. production has been filling the gap.

The U.S. just produced its highest levels of oil in nearly a half-century. According to the latest report from the Energy Information Administration, daily production broke 10 million barrels a day in November – the highest production level since 1970.

The U.S. is picking up OPEC's slack. And that could put a strain on oil prices from here.

Next, oil sentiment is skyrocketing...

Futures traders are all betting on oil prices to continue higher. They're currently near record levels of bullishness.

We can see this euphoria through the Commitment of Traders (COT) report for oil. The COT report is a great tool for contrarian investors. It shows us in real time what futures traders are doing with their money. If futures traders are all betting in the same direction, the opposite tends to occur.

Today, futures traders are all betting on higher oil prices. Take a look...
 

Today's extreme optimism is above and beyond any level since the COT report began.

That's the opposite of what you want to see as a contrarian. Traders absolutely love oil today, and that means a short-term fall in oil prices is the smart bet.

When you put these two red flags together, it's hard to be bullish on oil.

Again, the U.S. is producing more oil per day than it has in nearly a half-century. That increased supply could be a strain on prices. And futures traders are all betting on higher oil prices today. That means a short-term pullback is likely.

I'm not saying to short oil today. But if you've profited in oil and energy investments in recent months, it's probably time to take gains off the table.

Much lower oil prices are likely from here.

Good investing,

Brett Eversole

Further Reading:

Steve recently shared a huge contrarian opportunity in the markets. Futures traders are crowding into a specific bet today – and that means it's likely time for bold investors to do the opposite... Learn more here: Are You Contrarian Enough for This Trade?

The picture looks grim for oil... But it's still looking rosy for stocks. "Today is more of a 'buy' than a 'sell' based on indicators like this," Steve writes. Read more here: 100% Chance of New Highs in the Next Six Months.

Market Notes
A LOOK AT THE 'TEMPERATURE' OF THE GLOBAL ECONOMY

Today, we’re checking on one of the world’s most reliable economic indicators…

Regular readers know we often gauge economic health by looking at consumer spending. When people are out buying swimming pools and big-screen TVs, it’s a sign they feel good about the economy. However, we can also look at how governments and big companies are spending – for example, on construction projects…

Founded in 1925, Caterpillar (CAT) has grown to be the world’s largest manufacturer of construction equipment. This $93 billion titan builds everything from asphalt pavers and backhoes to bulldozers and excavators. And these machines are being put to work today… Caterpillar’s latest quarterly sales and revenues jumped 35% from last year to $12.9 billion.

As you can see below, business has been good lately. Despite a recent pullback, shares are still up about 155% over the past two years. As long as the U.S. and the rest of the world keep building more “stuff”, this steady, long-term uptrend should continue…