By Dan Dicker, Oil & Energy Insider:
Forecasts from the IEA and Goldman Sachs this week are trying to say that crude barrels are still overpriced – but the market isn’t listening. I’ve been convinced that crude prices above $60 are counterproductive as Goldman said in their recent note – but other factors are continuing to help push prices higher.
Let’s take a closer look and see what’s going on – and what might go on in the near future.
Some short-term fundamentals continue to push traders into long positions in oil. I’ve been among the first to point out the large outflows of capital from just about every other asset class, save for energy stocks and commodities. This isn’t particularly smart analysis, but clearly money managers and institutional investors are looking for ‘value’ in a very hot market – and oil stocks and commodities look just too low to them. For these ‘value searchers’, it’s damn the fundamentals – full speed ahead, and oil catches a bid with every, even small bullish indication.
As appears to be the case with Chinese demand, which has incrementally picked up in recent months. But it’s not like Chinese imports aren’t being met for the most part – they are finding more oil now than ever before in their history. And imported oil is not being used. Several reports have Chinese oil stockpiles growing for the last 7 weeks – an obvious way for China to hoard oil that they think is going to get more expensive later.
US stockpiles have come slightly down in the last few EIA reports – a surprise for many who believed that storage would increase throughout the summer. Many are extrapolating that this drop in stockpiles is a harbinger of slower production from slashed numbers of rig counts, but this may be very premature. With the summer driving season scheduling underway, there is a seasonal drop in stockpiles this time every year, and even a disaster in overproduction couldn’t stop that historical trend this year.
On the other side of a range-bound market is Goldman’s correct call of ‘self-destructive’ prices – the whittling away of the ‘fracklog’ of idled rigs should prices again approach $70. The International Energy Agency IEA seems to agree. Add to that the several dozen oil companies who would love to financially hedge oil near $65 and there are tons of good reasons why we’re likely near the upper end of our ‘bust cycle’ range.
EOG Resources (EOG) and Whiting Petroleum (WLL) were quick to point out the opportunities that would emerge with oil that stabilizes above $65. Those two were the most vocal in the oil patch, but certainly not alone – Continental (CLR) and Hess (HES) have dozens of idled wells that would come back online as well at $65 oil, adding to an already historic glut.
Goldman Sachs and I agree that there needs to be a market clearing event, marked by far more consolidation, and outright destructive bankruptcy of smaller market participants before we can call this downturn in oil officially over. I do not believe that a meandering price above $60 a barrel will do that – it will ultimately cause a secondary drop in price and an even more dire response from the oil patch. Notice, for example, how badly the market has received the first two large restructuring events: the Shell (RDS) buy of BG Group (BG) and the Noble (NBL) buy of Rosetta Resources (ROSE). Both of these represented overpaying of assets in a market that had not yet been brought to heel – and both acquirers have been punished in share price because of it.
Exxon Mobil (XOM), in the best possible position to make a monster acquisition, is staying unnervingly quiet. They know prices here do not represent value – and they do not want to make the same mistake they made by buying an overpriced XTO Energy in 2010. I will watch for their move. They want to make one, and I believe they will, when the time is right. It isn’t, yet. By Dan Dicker, Oil & Energy Insider
Oil production in Saudi Arabia and Russia set records. US production isn’t backing off much either. Glut gets worse. Read… Saudi Arabia, Russia in No Mood to Cave to US Fracking Boom
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I’m sure that Goldman were long the market when they talked it up to $150 a barrel – and I am sure they are short the market now they are talking it down. This is simply Goldman talking their book. What else do they do?
I have a photo somewhere of a newspaper article clipping I took sometime around the dramatic rise to $140 of a prediction by GS it would go to $163. It never did. But yeah, they seemed to be talking their book. It was such BS I saved it for prosperity.
I suppose it might be the case the Goldman Sachs completely dominates the oil market and just tells it where to go. It seems much more plausible that they make predictions on what direction forces beyond their control will move the market.
And then they talk up their book. :D
Report from the front lines: The last time I bought gas was last week, less than 6 gals @ $2.56, which was $0.10 cheaper than neighboring stations. The station had cars waiting at the pumps while other gas stations where empty. That’s my indicator of demand for gas and in general. I saved less than $0.60 and still waited for the guy in front to gas up. People are watching every penny.
As far as the gas prices at the pumps go, from what I have heard around, the franchised gas stations get a call each day at midnight from the head office and they are told at what price to mark the gas at every day and when to change it. If they do not comply they lose the franchise. You can tell though because all the stations have the same price and always change it at the same times. Around where I live, you could get cheap gas in the mornings, but then they changed it and now you can get it cheap after 8pm at night.
What makes me laugh is the price of Airline tickets has actually fallen in the past 30 years. Yes they have tacked on a crap ton of fees, but it only costs 900 to fly from Canada to Europe which was much more expensive 30 years ago and most of that is Fees. I think that has a lot to do with there Globalization plans. I think they want people to travel because it forwards there plans that much faster.
And if that is true, then why is it they can keep flying cheap, but raise the price at the pump sky high. Has it to do with the amount of provincial/state and federal taxes that are being collected at the pumps? Is it a case of I scratch your back, you scratch mine between the gov’t, energy companies, UN, WTO and who knows what other organizations?
Some food for thought.
I was in the gas business in the mid-70s and even started my own station a couple of different times. That was called “price fixing” back then, it was illegal and everybody did it. As to Petunia’s comment about finding the cheapest gas is dead on, and it doesn’t take a ten cent spread to trigger it – a penny will do it. Since I only by gas once a month I do the opposite, I never even look at the price. Lately I’ve been buying my gas from the man I worked for back in the day, he’s holding on by the skin of his teeth living at the station. I bring him a CARE package of food once a month so he can at least eat, as the bills at the station take most of the little business he has left.