Crude Oil Markets Smell a Rat

“It will be hard to find investors that are willing to go long.”

“The worst is over.” That has been the meme in the oil business in the second quarter. Folks in Houston’s and Calgary’s office sector, companies that supply the oil patch, and everyone else associated with the industry, including hundreds of thousands of employees, are counting on it. But markets are deteriorating at breath-taking speed, with the recovery hype leeching out of it, in face of the enormous obstacles of oversupply and flagging demand.

Oil dropped again today, with WTI skidding 2.4%, settling at $43.13 a barrel on the Nymex, the lowest close since April. It is now down 16% from its oil-bust recovery peak of $51.23 on June 8.

In the US, the bloodletting continues. Today, Standard & Poor’s reported that another four US companies that it rates defaulted on their debt payments last week – including two oil and gas companies, Atlas Resource Partners and Forbes Energy services. It brought the total defaults on debt rated by S&P to 71 so far this year, over twice the 34 defaults at the same time last year. The default rate in the oil & gas sector has spiked to higher levels than even during the Financial Crisis, while it has been ticking up at a more leisurely pace in other sectors.

And the layoffs continue.

ConocoPhillips, still desperately trying to whittle down costs, announced Thursday that it would slash another 1,000 jobs in 2016, many of them in Texas and up to 300 in Calgary. That’s on top of the 3,400 jobs it has already cut since September 2014. In total, announced layoffs now amount to about a quarter of its former workforce.

Schlumberger, the world’s largest oil field services company, reported a quarterly net loss of $2.16 billion last week, and said it laid off another 8,000 people in the quarter, bringing the first-half total to 16,000 and this oil-bust total to about 50,000. Nevertheless, the-worst-is-over meme continues, according to CEO Paal Kibsgaard:

“In the second quarter market conditions worsened further in most parts of our global operations, but in spite of the continuing headwinds we now appear to have reached the bottom of the cycle.”

Yet Barclays came out with a report on Monday lamenting that global demand for oil in the third quarter was growing at less than a third of the rate than during the third quarter last year, as Reuters put it, “weighed down by anemic economic growth.” The report blamed developed countries along with slowing growth in China and India.

Morgan Stanley pointed to the supply glut of refined products, including gasoline in the US, along with falling demand for transportation fuels. So, “As a result, crude oil demand from refineries is underperforming product demand by a wide margin.”

Last week, the EIA reported that US gasoline stocks had increased again, and are at the highest level for this time of the year in its data series going back to 1990. Even driving season hasn’t been able to trim down the stockpiles nearly enough, and driving season ends with Labor Day:


“The global crude-oil glut seems to have turned into a product glut,” Tamas Varga, an analyst at PVM Oil Associates in London, observed in a report.

Refiners – with shutdowns due to scheduled maintenance already looming this fall – are going to react to what is a global gasoline glut by pulling the rug out from under crude oil demand. So….

“It will be hard to find investors that are willing to go long,” Michael Cohen, an analyst at Barclays in New York, told Bloomberg.

And supply isn’t backing off. In June, OPEC raised production to 32.9 million barrels a day, according to Bloomberg estimates. Russia is set to raise production by 590,000 barrels a day over the next three years, according to Goldman Sachs last week. In the US, the weekly rig count has been increasing since May as drillers are getting active again.

Then there’s the fracklog. As of April, there were 4,230 drilled but uncompleted wells (DUCs) in the US shale patch, according to Bloomberg Intelligence. Completing these wells would be the cheapest and fastest way to unleash another tsunami of production.

And markets smell a rat.

“People are looking ahead to the fall and are worried,” Michael Lynch, president of Strategic Energy & Economic Research, told Bloomberg. “There’s more and more talk of prices going south of $40 and as a result people are going short.”

And they did go short. Bloomberg:

Money managers added the most bets in a year on falling West Texas Intermediate crude prices during the week ended July 19, according to Commodity Futures Trading Commission data. That pulled their net-long position to the lowest since March.

Shorts surged 24%, while longs, or bets on rising prices, increased 1.4%.

In other markets, net-bullish bets on Nymex gasoline dropped 18% to 1,020 contracts, the lowest since November.

Reuters added this:

Data from the InterContinental Exchange on Monday showed investors cut their net long positions in Brent for a sixth consecutive week by 5,763 contracts to 297,608 contracts in the week to July 19, their lowest since Feb. 22.

The oil bust has been mauling other sectors of the economy, particularly in Houston and Calgary, the two epicenters of the oil bust in North America. Both cities are now under intense pressure. Commercial real estate in Calgary is collapsing [read… How the Oil Bust is Crushing a Downtown of Office Towers]. And Houston experienced a nasty quarter. Read… It Starts: First Mega-Foreclosure Hits Houston Office Market

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  20 comments for “Crude Oil Markets Smell a Rat

  1. OutLookingIn says:

    Shipping News July 25, 2016

    Very large crude carriers (VLCC’s) drop as tankers touch 21 month lows.

    Ships swarm cargoes, pushing TCE rates for large tankers down by 9% in one day.

    Numbers of tankers, bulkers and general cargo ships put on medium to long term hiatus escalate. (Anchored with skeleton maintenance crews.)

    All shipping indicators eg: Baltic Dry, VLCC’s, containers, RORO, general cargo, have been leaking lower and some are now in historic lows.

    The global depression is deepening.

    • MC says:

      That’s weird: the last decade has seen that when oil prices dip (dip), VLCC rates stay put or increase as they are hired to store crude near POE’s and wait for oil prices to rebound.
      This time had been no different, with dozens of VLCC’s moored off Singapore, Ningbo and Amsterdam patiently waiting for oil prices to take off again to unload. Have all these tankers unloaded and are now available again? Or are they caught in the deadly combination of our modern economy, meaning oversupply and slowly contracting demand?

      In “The Sun Also Rises” Hemingway wrote:

      How did you go bankrupt?
      Two ways. First slowly, then suddenly.

      It perfectly describes how troubles built up over the past seven years and are now starting to come to the surface.

  2. r cohn says:

    Demand for gasoline in the US has been robust so why is gasoline in storage increasing and not decreasing.The answer lies in a combination of US refineries taking advantage of high crack spreads(profit) and our friend China .Recently gasoline from Chinese “Teapot” refineries reached the US.They were turned away from the East Coast because of lack of storage facilities.The question arises” why would these refineries ship gasoline to the US “.
    The answer seems obvious,i.e China demand has been over estimated

    This fall and winter oil demand for crude oil could face a perfect storm trifecta
    a. Refineries closing down for longer periods of time than normal for their seasonal retooling to produce more heating oil and less gasoline .This means less demand for their feedstock,crude oil
    2. Last winter and fall Chinese crude oil demand to build up their strategic reserves was robust..During this fall and winter this specific demand probably is going to be reduced
    3.Chinese refiners keep on shipping refined products to the US ,adding to supplies of gasoline and discouraging US refineries from bidding up the price of crude

    Last year the argument was that excess production from US frackers and Saudi Arabian production was the primary cause behind the price decline.This year it looks like Iranian production has almost made up for the decrease in supply from US frackers.And that leaves the question of what is the real Chinese demand.If it decreases ,WATCH OUT
    Currently storage supplies of crude oil and gasoline are at all time highs for this time of year.If Chinese demand is cut by 1m barrel day,world wide storage facilities will be for all practical purposes completely filled by next summer.That presents some very interesting problems for the oil industry.If storage(including floating storage) is full what price will it take to clear the market.All I can say is to use your imagination.
    If crude oil really tubes what are the implications for world wide finances are huge.First oil industry junk bonds will experience huge selling pressure.Second banks with overexposure to the oil industry will be in trouble.Third funds from Saudi Arabia and Norway will have to liquidate securities in order to fund their social programs.Fourth finances at even the largest oil companies will come under pressure.Dividend cuts will be inevitable.Last but not least is the effect on Russia..Further declines in the price of oil does not bode well for the Russian economy


    • Mick says:

      “The demand for gasoline has been robust.”
      Media propaganda designed to suck bulls into last rally. Reality is now playing out.

      • VegasBob says:

        I suspect the rally off the February lows has been nothing more than a hoax engineered by Wall Street.

        It’s been a desperate attempt to stave off some defaults in the energy sector and the associated distress that would have been seen in bank stocks and junk bonds.

    • George says:


      Great post r Cohn, well done. When storage is chock full and demand anemic, something has to give. If we aren’t using energy it means we aren’t producing/trading much stuff – re: the mothballed rail fleet of locos and cars. It also means a looming bond and banking crisis. This is about where you left off your excellent post, ‘r’.

      The next step is a geo-economic RESET.

      Followed by, and this is the “biggy”, a geo political reset.

      Whomever is the most indebted nation is OutLookingIn (pun intended).

      Guess who that is.

    • DV says:

      In fact the stocks are decreasing, if not so fast in the US, but certainly in Saudi Arabia, which reduced its crude stocks by over 100 mln barrels. So whatever increases in gasoline stocks are there, they mostly come from that reduction in crude stocks in SA.

      The prices are likely to be driven lower again, but the US oil patch still does not get it – stop drilling, get out of business and never get back.

  3. dave says:

    is it safe to say that the draw downs in oil stocks went into the gasoline glut?

  4. NotSoSure says:

    Best way to bet against oil: short the Saudi currency. You can manipulate the stock market, but emerging market currencies sooner or later have to reflect the real value.

    • Nicko says:

      Hey genius, the Saudi currency is pegged to the USD. Now, if you’re serious, Saudi is opening up their stock market to foreign investment – which does have good prospects for growth.

      • Robin says:

        Hey Genius,

        Check out the names that have been made betting short pegged currencies when they break.

  5. Lee says:

    Par for the course: we idiots in Australia have just seen another huge jump in the price of gasoline.

    Yes, we have price cycles, but ours are ridiculous,.

    Last week some places were selling gasoline at 98.9 cents a litre.

    Yep, then we have our price jump the next day.

    The price went from 98.9 cents to $1.289 a litre.

    Now we’ll just have to wait and see how long it takes to fall to around a buck a litre………….four weeks? six weeks?

  6. Jonathan says:

    Really, what’s so surprising about lack of energy demand? Global birth rates are dropping like a rock and the population is rapidly ageing, while for stuff like computing users have moved from PCs that burns 100W+ of power to smartphone/tablets that consumes only like 2W at most, and LED lighting is rapidly taking over.

    It’s obvious to anybody who has the mental capacity to play a simple connect-the-dots.

  7. Yoshua says:

    The oil price is gravitating towards zero.

  8. Uncle Frank says:

    Forget The Glut – This Is Why Oil Prices Will Rise

    From Core Lab’s Q2 press release:

    The Company continues to anticipate a “V-shaped” worldwide commodity recovery beginning in the second half of 2016. One indication is that several U.S.-based operators have recently announced rig additions. Further, global demand for hydrocarbon-based energy continues to increase, while worldwide crude oil supply peaked in the second half of 2015 and began a decline that Core believes will continue through all of 2016 and 2017.

    In my opinion, the only reason for the recent pull back in oil prices is the FEAR that has been created by the Brexit vote.
    – Daniel Steffens for

  9. Pakilolo says:

    Oil glut…lower prices…. everyone pumping fossil fuels…short oil…go long…here comes labor day…

    Here comes Climate Change! The hottest 15 straight months in recorded history. Flooding! California fires! Arctic melting! Drought in the tropical rain forests! When we talk about Oil investments, climate change is treated as irrelevant. Next year will be worse than this year. How long can we ignore the 700lb gorilla in the room?

  10. @Yoshua sez:

    The oil price is gravitating towards zero.

    No doubt about it. Oil price in the past reflected the general availability of credit. As credit deteriorates, fuel prices are reflecting actual return on the use of the oil. Credit is necessary because 90%+ of oil is simply wasted which offers no return to the end users

    Absence of return for end users is what has undone the oil industry. It has taken a long time to get to the current state of desperation because we were able to gain a lot of cheap oil (+1.3 trillion barrels) and cheap credit.

    The process undermines credit because loans made to drillers cannot be retired leaving both drillers and their lenders insolvent.

    $10 oil and there is no oil industry b/c there is no $5 – 7.50 oil left, it was burned up for nothing back in the 1990s.

Comments are closed.