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Welcome to "Real Vision's Trade Ideas."
Today we're sitting down with Adam Kobeissi of the "Kobeissi Letter."
Great to have you here.
Thanks, Justine, thanks for having me.
So this is your first time on "Real Vision."
Can you give us a little bit of background as to who you are and what you do?
Yeah, sure.
So my name's Adam Kobeissi, as you mentioned.
I'm the founder and editor in chief of the "Kobeissi Letter."
The "Kobeissi Letter" was founded in 2015, where we really wanted to employ our unique
investment strategy that we developed, which involves a combination of both fundamental
and technical analysis to ultimately lead our subscribers to outperform market benchmarks.
We cover a few key sections in each letter, ranging from S&P 500, crude oil, natural gas,
gold, bonds, some currency work, and options market trade each week.
So pretty wide range of assets that we cover.
And from there it's ultimately our goal to lead our subscribers to successful trades.
And that's what we want to kind of do today in this interview.
Great.
So what trade are you looking at today?
Yeah, so we're looking at crude oil.
We're always watching crude oil prices.
But recently, we've been starting to establish a short position.
A couple of weeks ago, we really started telling subscribers that a top was forming.
And the reason being, is that it's simply just there's too much crude oil on the market.
And that sounds very simple, but that's what the issue is.
And we're going to kind, I'm going to kind of break down why these issues exist and why
there's so much supply.
All right, so let's start there.
What are you seeing on the supply side?
The biggest issue right now is that non-OPEC production, specifically United States production,
is really rising pretty quickly, and it's starting to outweigh these OPEC cuts that
we saw back in December, on December 7 of last year.
They cut production by 1.2 million barrels per day.
And then from there, prices started to rally.
We were at the lows and that was great.
Supply came off the market.
However, since that date, we've actually seen US production rise from 11.6 million barrels
per day to 12.2 million barrels per day.
And that is literally half the cut from OPEC, not to mention the rest of non-OPEC production.
And we think US production's going to continue to rise to 12.5 million barrels per day this
year, and 13 million barrels per day in 2020.
So that's only going to worsen the situation and kind of offset these OPEC cuts.
And also from a political point of view, Trump has actually said that he's wanted lower oil
prices.
Do you see that figuring in here?
Yeah, for sure.
That's something that we've been talking about a lot.
The last time we saw Trump push for low oil prices was in September of last year on September
24.
And the chart actually topped out literally a week after that.
And that's actually what we saw last week.
We saw top in the commodity.
And Trump continues to push for lower prices.
He did this when it was in the $50s.
He's going to continue to do this now.
And he has actual backing now too, kind of get OPEC to comply with his orders.
Because last week we saw Trump not renew these oil waivers that Iran had, and this was huge.
It was kind of shocked the market.
Nobody saw this coming.
But these waivers actually took off a million barrels per day of production from the market.
They kind of allowed Iran to trade with their key kind of allies, I guess you could call
them, or trade partners.
And that was something that everyone didn't see coming.
And now President Trump has a reason to get them to raise production.
Additionally, OPEC's production levels right now are at about 30.4 million barrels per
day, which is a lot lower than what we saw in 2017 and 2018 at this time, where it was
about 32 million barrels per day.
So effectively, there's about 2.5 million barrels per day less of oil, which at first
sight is bullish, right?
And that's certainly what the reaction was to the news last week.
But now a lot of people are realizing that President Trump is using this as a reason
to get OPEC to push oil prices lower.
He called Saudi Arabia last week.
He told them we need you guys to make up for this drop in supply and more.
Hmm.
And he's going to continue to pressure them to do that.
So you see more production coming from OPEC, more production coming from the US.
At what point is there so much production that it sort of levels out?
Yeah, that's a great question.
And that's kind of the technology aspect of the crude oil market that we're looking at.
That the production levels start to rise quickly, especially when oil's at a high level like
it's at right now.
And they drop quickly when they're low.
So what we've seen is, when oil prices fall to the low $40s, for example, high $30s, low
$40s, a lot of oil companies start to shut down production.
Like mid-cap oil, shale production, because for example, big companies like Chevron and
Exxon, they don't, they make a profit with oil above $35 to $40.
Shell makes a profit with above $45 to $50.
And OPEC is actually, like Saudi Arabia is producing for less than $10 per barrel.
So this need for high prices in there.
So we see prices fall.
And then they rise to the top of this range at about the $60, $70 range, everybody is
making a ton of money.
A lot of production is coming on the market, which is where we're at now.
And we think that we're going to see some more production starts to hit the market quickly,
and that's when it's going to top out, and ultimately lead to that lower end of the range
and lead to that very cyclical process.
Yeah, so this is just a cycle that just keeps on going.
Literally, yep.
All right, so we've been talking about this from a fundamental perspective.
Can you give us a little bit of the technical side of this as well?
Yeah, at the "Kobeissi Letter," we love when the technical picture lines up with the fundamental
picture.
And that's definitely the case that we saw here.
On the daily chart for the one-year graph, we see this upward trending channel that kind
of held ever since the bottom in December.
December 24 at 42:36, we saw a support line lead oil all the way up to last week's move
at $66.50, which happen to hit that top end of that channel.
And immediately it reversed lower.
That was also the top Bollinger Band.
So there was a lot of resistance.
There is a triple top in the RSI.
The RSI is a Relative Strength Indicator, which really gives you a relative indication
of how strong crude oil prices are.
Any assets' prices relative to its historic price action.
So all those factors combined led to a push lower.
It led to that support line, which did not break one since that December 24th low.
And then actually at the end of last week, we saw the first move below that level, that
support level.
And now, we don't see any more support till $60, so it should be a relatively quick drop
lower.
And from there, we see this big directional shift kind of undermining the support that
we see at $60 and leading to the low $50s pretty quickly.
So it's going to be a relatively quick decline that we see here.
Likely over the next four to five months.
OK.
And then would you put a stop loss on that trade?
Yeah, so as with any commodity, it could start, it could run.
And when these commodities run, they kind of lose sight of the fundamental picture and
they just ride the momentum higher.
And the case then we'd see that is about 10% to 15% higher than current price at about
$70 to $72.
And a break of that level could be to the high $70s.
Though we think it's unlikely, that would be the point that we'd put a stop loss, just
to be sure that we're not letting this run all the way up to the $80s if that happens.
What's your outlook right now for oil from both the supply and demand side?
Yeah, so we have seen a huge abundance of oil in the market, as we've mentioned before.
Supply levels have been above demand levels for the last couple of years now, for the
most part.
Sometimes it flip-flops.
But for the most part, it has been.
And we're looking at, for example, the outlook by EIA, which is Energy Institute of America,
has suggested that oil demand is going to remain below supply for the next two years
at least.
And we really think that that spread between supply and demand is actually going to be
a lot more severe than they are forecasting, because of the fact that the economy is slowing
down.
There are some signs of global economic growth slowing.
And that certainly will hit crude oil demand.
And as soon as demand falls and that spread worsens, supply rises and demand is falling,
it's only making for an even worse situation than what we may have right now.
I mean, we already have a supply abundance, a supply glut.
And that worsening of the spread will just make things even worse.
What do you see as the biggest risk to this short trade?
I think the biggest risk could be if OPEC just doesn't comply with President Trump's
orders.
Because of the fact that they don't have to, right?
I mean, they could continue to resist.
Although we didn't see them resist last time.
And I think OPEC, with the oligopolistic structure of their organization, meaning that there's
only a few key firms that dominate all the market power, all it takes is one person to
start, one country to start raising oil production.
And everyone else is going to follow.
And it will kind of be this dramatic rising production thing that we see, that we saw
last time in September.
And then they're going to meet again probably in another year and say, we need to cut production.
So that's a risk.
How do you see the dollar right now affecting oil prices?
Yeah, that's another one of our catalysts that we see for lower oil prices here.
The dollar has been soaring to new highs.
It's actually at its highest level since May 2017 right now.
The dollar index, which is the most commonly watched indicator of strength in the US dollar,
is now at about $98.
And that has been pressuring oil prices a lot, because when the dollar gets more expensive,
a lot of non US-based investment is deterred from the commodity, because it's just more
expensive to convert your currency to US dollars than by WTI.
Or even gold, or any commodity that's based in US dollars.
And we think that the dollar is going to continue to rise.
We think the index is going to go over $100 by the end of this year.
And that's certainly going to be a huge catalyst.
It's going to pressure prices lower and really start to take its effect on the commodity.
Why exactly do you think the dollar is going to go higher?
It's actually pretty strange what we've been seeing going on in the dollar.
It's, a lot of it's stemming from actual geopolitical tensions, uncertainty trade, which is not
what we saw historically.
Historically we saw gold and bonds soar on these kind of uncertainties in the market.
But now, for example with the trade deal issue, that this whole trade war that was going on
between the US and China, a lot of investors were buying the dollar.
And that's pretty surprising.
I mean, it was viewed as the most safe asset.
And I think that continues to be the theme going forward.
Just not even about the trade war in general, just in general, when there's uncertainty,
buy the dollar, because it's just the most stable currency out there, and seems to be
the safe haven trade at present.
A lot of different factors going on here.
Would you be able to summarize this trade in 30 seconds?
Sure.
So in summary, we see a ton of fundamental issues here.
A lot of them stem back to supply.
From better technology in the market that's really making the need for high oil prices
not as important anymore, because companies are producing a profit with oil in the $40
to $50 range.
And that's leading to a lot of production hitting the market.
We're also seeing economic outlook very uncertain.
Demand is uncertain.
The US dollar is strengthening and pushing prices lower, all while the technical picture
is pointing towards lower prices, which is what we love to see.
This is the optimal setup for us, when the technicals and the fundamentals align for
lower prices, we love to get short, or get long, depending on the direction it's looking.
And this direction, it's looking like it's going short, and looking for a great trade
opportunity in the next few months here.
Great.
Adam, thank you so much.
Thank you, thanks for having me.
So Adam is bearish on oil.
Specifically, he likes going short at current levels, with a stop loss at $72 and a target
price of $50 over the next four to five months.
That was Adam Kobeissi of the "Kobeissi Letter" for "Real Vision."
I'm Justine Underhill.
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