Fear by Definition
Oil prices are selling off on fear, dread, fright, alarm, panic, terror, trepidation and painful agitation in the presence or anticipation of danger that turmoil in the global economy may crush demand just as there are some signs that U.S. oil rigs may continue to rise. The main culprit is concern over the Brexit vote that is too close for comfort. Yet we also have the Federal Reserve Open Market Committee that heads into its next meeting with its credibility tarnished as it tried to tell the traders that a June rate hike was on the table just as the U.S. jobs market seemed to lose momentum. On top of that, the terror attack in Orlando is shattering confidence stemming from the evil, inhuman acts committed on U.S. soil over the weekend. Fear has taken over and we may be susceptible to fear until we get a better handle on where the world is going.
Europe always has to mess with the summer markets. Last year it was the Greek exit that set off a recession in Europe and helped start the Chinese stock market problems that led to our markets having the worst start to a trading year in history. Now this year it is Brexit and polls that show that an exit of the UK from the Eurozone is too close to call and that is forcing traders to run to safe haven assets and cower in fear. Even though there is a good chance that the UK will stay, the fear is that if they vote to leave and then the Euro Zone experiment may be doomed to failure. That may be overstating it but when the market is consumed with fright, alarm and panic it is hard to make a rational argument.
Oil markets also saw another uptick in oil rigs raising hope that perhaps the worst is over for U.S. crude producers. Of course with the recent drop in oil prices, I can’t help but wonder if some of those producers are starting to have second thoughts. The oil rig count had its first back to back gain since August, rising by 3 rigs last week. Rigs targeting natural gas increased by 3 to 85 which is just off the historic low they posted last week. Overall rigs are still down by a whopping 445 rigs and unless we see sharper increases, it may have little impact on supply.
Natural gas rigs in particular suggest it will be very difficult to meet strong demand. Andrew Weissman says that the overall picture for natural gas remains strongly bullish. Every indication is that production has been falling significantly. Declines could start to accelerate soon. Additionally, at least so far, hotter-than-normal weather appears likely for the remainder of summer. If these trends validate, mid-summer injections could startle the market and make it rapidly red.
Another shake up in an OPEC producing country! First it was Saudi Arabia and now Iran. The Wall Street Journal is reporting that,
“Iran replaced the head of its state-oil company on Sunday amid tension within the government over how to handle the return of foreign investment after Western sanctions lifted in January. Ali Kardor, who as National Iranian Oil Co.’s investment chief played a key role in bringing foreign companies back to the country, will succeed Rokneddin Javadi, managing director since 2013, NIOC said on its website. Mr. Javadi, who resigned, has been appointed deputy minister in charge of supervising hydrocarbon resources, the company said. The changes by Oil Minister Bijan Zanganeh come after government officials expressed disagreement over how to handle foreign investment and what kind of terms should be offered to foreign companies. Those differences of opinion have contributed to delays in tendering new oil-development contracts, two people familiar with the process said.”
Prayers for all those hurt or killed in the terrorist rampage in Orlando on Saturday. We must meet the evil head on and defeat our enemy. Together we can and must.