Crude at a Crossroads

With the next meeting of the FOMC schedule for next week, let's take some time this week to consider crude oil prices, which stand at a crossroads. 

That next FOMC meeting, where Jerry Powell will decide whether to cut the fed funds rate by 25 or 50 basis points, will be the biggest newsmaker of the month, and it will drive precious metal prices into October and beyond. As such, there will be plenty of time to analyze charts and discuss gold and silver. For this week, however, let's look at crude oil prices.

Watching the energy markets will always be important. Not only is the crude oil market the largest commodity market in the world (I don't count gold here, as gold is money, not a "commodity"), but the overall price of energy is also  a big determinant in the earnings of gold and silver mining companies. Falling energy prices can help widen their miner margins and produce larger earnings per share. So mining investors should always monitor trends in energy prices.

At present, crude oil prices are at their lowest levels since early 2023. On the chart below, you can see that the weekly close on Friday, Sept. 6, was the lowest since Friday, March 9, 2023.

Crude Oil Price Support: $65-$70 Range                     

So, that's bad, right? Well...maybe. Look again at the chart above and count how many times price has dipped into the $65-$70 region over the past four years. By my eye, I see about 18 weekly candles that reach down into that area. That's a lot. Note, too, that while not every dip was met with an immediate bounce, this $65-$70 has provided pretty consistent price support.

Now, this can cut both ways. If you're long crude oil, you might see $65-$70 as a springboard for the next move higher. However, everyone trading crude oil can see those lows too. If crude breaks down from here— for whatever reason—we could see all sorts of liquidations and new selling. A trip to $50 or even $40 might follow.

Contrarian Signals in the Crude Oil Market

But let's consider one other factor today, and within commodities, this next factor can sometimes be the most important. What's that? It can pay to be a contrarian. What does that mean? Simply put, when a market is positioned with seemingly everyone on the same side of the trade, that market usually moves in the opposite direction.

We see this all the time in COMEX gold and silver. When no one loves the precious metals and when prices and sentiment are low, you almost see an "unexpected" rally. Conversely, when everyone is jubilant and excited because gold and silver prices seem to be charging endlessly higher, watch out! I think we all know by now what usually happens next.

With that in mind, consider this post below from commodity expert Ole Hansen. If I were short crude oil and hoping that prices were heading even lower, this kind of information would make me quite uncomfortable.

Crude Oil Supply and Demand Dynamics

Next consider this: When you see low prices in a commodity, it's often assumed that this is a signal of excess supply. But you know what they say about the word "assume", and in this case, the physical delivery terminals in Cushing, Oklahoma are reported to be at some of their lowest levels in years. This leads me to think that we may have a case where speculators are short the paper contracts in New York while the actual physical commodity is in shorter supply than what's assumed.

The Ultimate Contrarian Signal: Investment Banks

Finally, do you want the ultimate contrarian signal? The sell side investment banks are practically begging their clients to get on the short side of the trade. The old metaphor of sheep being led into the slaughterhouse would seem to apply here...

Now look, I could be dead wrong here and maybe crude is headed to $50. Perhaps the logic for being short truly is "very balanced". But experience has taught me over the years that when everyone is on the same side of the boat, it's best to move over to the other side. Or put it this way: Once everyone has sold, you're only left with buyers, and when does the price of anything move when there are only buyers in the market?

So let's keep an eye on crude oil prices and see where they head from here. Yes, higher energy prices might provide a drag for poorly-managed mining companies that fail to effectively control their costs. However, higher crude oil prices might breathe some life into the commodity sector, and to use one more maritime-themed metaphor, a rising tide lifts all boats.

Explore the crossroads of crude oil prices and their impact on mining companies, with insights on energy market trends, price support levels, and contrarian signals. Ready to protect your wealth? Buy bullion today and safeguard your assets against market volatility!