Crude oil prices just had their strongest week since October, and one strategist thinks they are primed to jump even higher – much higher – in the weeks and months to come. The Brent international index price rose significantly over the last five trading days, and stood at $72.70 at Friday’s close. That’s still ~6% below the recent July 1 high of $77.16 but represents a rise of 11% from the August 20 bottom.
So, where do we go from here? Matt Maley, strategist at Miller Tabak, said during an appearance on CNBC’s “Trading Nation” Wednesday that one rare market indicator agitates in favor of an additional big rise in crude prices over the final third of the year.
Maley made his remarks during a panel discussion on the topic of how investors might protect themselves against downside pressure on the stock markets as we enter the September/October time frame. “The one thing I’m really looking at right now, actually, is one group that’s already come down a little bit, so should protect us [investors] if it [the market] goes down, Maley said. “But also I think it will continue to look good if the market continues to rally, and that’s the energy sector.”
“Early last October I turned bullish on the group, and since then, even with the pullback we saw since June, the energy sector has out-performed by a wide margin the overall market. It’s come down over the last couple of months and I think has become oversold, so on a technical basis, I like the fact that it’s starting to bounce back.
“But I also like the fact that crude oil has seen what’s called a ‘golden cross’ on its weekly chart.” A ‘golden cross’ is a phenomenon that takes place when a commodity or stock’s short-term moving average moves above its longer-term moving average. As CNBC reports, the market sees it as an indicator that the asset has further room to grow.
Maley believes this is especially true where crude oil is concerned. “That’s only happened three times since the beginning of this century,” he pointed out, “and each of those three times that’s followed by a very strong further rally in crude oil. Anywhere from 20 to 50 percent.”
Given other factors at play that are impacting crude prices right now – including the spread of the COVID Delta Variant and efforts by the U.S. and other governments to slow the industry via taxes and regulations – a leap of such magnitude in the near term might seem unlikely. Then again, many people have gone completely broke over the years expecting oil markets to behave rationally.
One thing is for sure: If such a jump in crude prices should come about, the pain at the gasoline pump for U.S. consumers has only just begun.
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Of course, the Biden Administration and congressional Democrats are planning to take a bigger cut of whatever additional profits the oil and gas industry might generate in the coming years.
Here are a couple of big ways they plan to go about it:
Intangible Drilling Costs – The Hill reports that Oregon Sen. Ron Wyden, who chairs the Senate Finance Committee, is considering acting on Biden’s advice and adding a provision into the Democrats’ $3.5 trillion spending bill that would repeal the ability for independent producers to deduct their intangible drilling costs.
This is a tax treatment that has existed in the U.S. tax code for 105 years, one that was denied years ago for use by the major, integrated oil companies. It impacts the little guys the hardest, but you can be sure that Wyden, Biden and other supporters of the repeal will continue to inaccurately frame it as a tax on “big oil.”
Doubling of the GILTI Tax Rate – As I wrote back in July, the Biden administration is also proposing to double the rate of the Global Intangible Low-Taxed Income (GILTI) tax on income derived from international business activities from 10.5% to 21%. This is a tax that was intended to tax intangible business income derived overseas, but has been applied to all income by the Biden administration, hitting the oil industry and its tangible income derived from its operations especially hard.
A new ASU Seidman Research Institute-EY Quest Study released this month indicates that this tax increase could reduce economic activity in that state alone by $5.1 billion and place 47,000 jobs at risk during the first year it goes into effect. Applied across the country, this gets into some dramatically large numbers.
And it’s not just big, international companies that would be impacted. The study also projects negative hits to small business via the operations of local vendor/supply chains, reduce employee incomes and ultimately consumer expenditures.
It’s a bad idea to apply this tax beyond its intended purpose when it was passed by congress; doubling down on its rate of taxation is an even worse idea and is one that should be abandoned.
The “infrastructure” and spending bills contain several other new fees and taxes on the industry, but these are two of the very worst ideas among them. Whether they will be enough to stop or even slow the steady boom that has taken place in the U.S. oil and gas business throughout 2021 is anyone’s guess.
My own guess is ‘no.’