Oil’s version of a pump and dump scheme ends with a spectacular oil price spike

Today’s Exponential Investor verges on conspiracy theory. It’s all about a seemingly unlikely and extraordinary event which could take place in 2021.

Not that unlikely and controversial puts me off…

In 2012 I claimed that Aussie lenders commit large-scale systemic mortgage fraud. People laughed at me. Six years later a Royal Commission established the practices I warned about were common. Although they carefully avoided finding out just how common…

About the same time, I warned about manipulated gold prices – another conspiracy theory. Last year, JP Morgan traders were officially accused of manipulating gold prices for eight years in the ways I’d warned about. One pleaded guilty.

Today we look into something less inconceivable. But something I haven’t read about elsewhere. It implies that a sudden spike in the oil price could be on the cards. We’re talking a major surge in oil prices and oil stocks.

Let’s rewind and begin at the beginning – a very good place to start. Back before Covid-19, an oil glut hit. That’s what caused the oil price to experience its initial crash.

The glut was politically motivated. OPEC and Russia tried to undermine high-cost US oil production. It’s a pump and dump scheme, if you like…

By pumping oil and dumping it on to the market, the oil price would crash. This’d make the US’s higher cost oil production unprofitable.

But there’s only one reason to engineer an oil glut like that. And it’s to benefit from the higher prices it’ll create in the future. After all, Russia and OPEC suffered too. They’re not cutting off their nose to spite their own faces.

The idea is that the oil price goes so low it causes much of US productive capacity to collapse into bankruptcy. Then, when the oil production is cut, you reverse the glut and trigger an oil price spike instead. Because it takes time and money to get US oil production back up, the net effect should benefit Russia and OPEC. Especially if investment in high cost oil becomes wary of such raids happening again.

Perhaps I should call it a pump, dump, cut, spike, pump and profit scheme?

Whatever you want to call it, the implications are clear. An oil spike was supposed to happen. Eventually, when US production had been sufficiently hammered.

Then Covid-19 came out of the blue. And a demand shock dumped oil far more than the supply glut ever could have.

Oil prices went deeply negative, if only because of a futures expiry drama.

Specifically the biggest source of oil demand got hit worst by Covid-19 lockdowns – transport.

The stockmarket damage was impressive and it’s still unfolding. On Thursday, Exxon reported its first quarterly loss in 32 years. Shell cut its dividend for the first time since World War II.

BP’s US dollar share price got smacked back to levels seen in 1980! I couldn’t fit the line on to one chart, but here’s the share price between 1977 and 2001. The share price went below $20 in March 2020…

Source: Yahoo Finance

Thanks to a long-term bear market in the pound, the UK share price has performed better. It’s only back to the mid-90s…

But what does Covid-19 pulling the rug out from under the oil price mean for the initial pump, dump, cut, spike, pump and profit scheme?

That’s the big unknown.

It could trigger far more defaults of far more companies which OPEC and Russia wanted to undermine. The damage to the oil industry could be far greater, leading to an even bigger spike in the future as supply gets cut.

Or the world’s demand for oil could falter for much longer than expected, leaving the oil price in the dumps.

Another possibility is that the oil price is now so low that it puts OPEC and Russia’s own finances at risk. They cut off their head instead of just their noses.

I’ll ask our energy expert James Allen about all this. Whether he sees an oil spike playing out as intended by the glut’s initial creators.

If he does, then owning the oil stocks that will survive the current crash could be a spectacular trade.

By the way, today is your last chance to tune into James Allen’s keynote speech from the Beyond Oil Summit. It identifies the power sources (and investments) that’ll make oil obsolete in the end anyway. With the help of six of the world’s renewable energy experts, James makes the case in a far more detailed and thorough way than you’ll ever have seen before.

Watch what they have to say here.

Nick Hubble
Editor, Southbank Investment Research

Category: Energy

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