Trying to Find a Bottom
Crude oil futures are still reeling from last week’s massive crude oil build and another jump in U.S. rig counts. It was a double eight as oil rigs increased by eight and the eighth week in a row that the rig count has risen. What is interesting though is that there we were no rigs added in Texas and New Mexico and the biggest increase in rigs last week was in Louisiana which makes one wonder if we may see a slowdown in adding rigs. Still the number of rigs put us back to September, 2015 levels but still way down from historical highs.
Regardless, there are real concerns whether OPEC can keep it together. Saudi Arabia has said they can’t carry the load forever and is looking at OPEC and non-OPEC nations to carry some weight. Yet in the meantime, with demand rising, the current supply glut may dissipate as we start to see refiners come out of maintenance and as we see the delayed impact of OPEC production cuts.
If oil is going to recover, it may need some help from the Fed and inventory. The Fed is widely expected to raise interest rates this week and the deciding factor for the oil market may be what they signal for the future. The Fed statement after the rate increase, will be key to see just how fast the Fed believes they must raise rates before the economy overheats. What is the plot or the timing that the Fed will get rates back to normal will be key because of its impact on the dollar.
But it is not just the Fed but Europe as well. ECB chair Mario Draghi will also be talking and perhaps laying out a plan for the European Central Bank to start tapering off its quantitative easing measures. How that impacts the euro versus the dollar will be key because a major headwind for oil has been the dollar, not to mention record U.S. crude oil supply.
From a long-term perspective, we still believe oil prices are headed higher but in the short term, we are still signaling technically a larger break. And $44.00 may be that target even as we are getting oversold indicators on our chart. To negate the downside breakout, oil needs to close above $50.00 or there may be more selling after a relief rally.
We agree with the International Energy Agency (IEA) that says cuts in Capex spending makes an upward spike in oil prices inevitable. The IEA says that global oil and gas investment dropped by a quarter in 2015 and by an additional 26 percent last year. Many large oil projects were canceled. The IEA says that demand will continue to grow and will overtake supply as global spare production capacity starts to evaporate. The IEA projects global demand to reach 104 million barrels per day (mbd) by 2020, with the OPEC demand reaching 35.8 mbd, up from 32.2 mbd last year.
Natural gas is finding new life as winter makes a guest appearance in March. Snow storms are to blanket from the midwest to the east coast. The streets are covered and temperatures should help drive natural gas demand. The market had a small gap up overnight and it looks like we are in a "buy the breaks" mode. In the northern Chicago suburbs, it is a winter wonderland with everything covered in glimmering sparkling snow.
Ethanol prices saw support from strong demand from blenders. DTN reported that despite additional pressure in corn and energy markets on Friday, strong buying returned to the ethanol complex. The derailment of an ethanol train in Iowa created additional futures support based on overall market uncertainty and how this will affect short-term supplies in some areas as well as the overall industry in the future when it comes to transportation safety issues.