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Fear And Speculation Rule As Oil Markets Ignore Reality

By Ellen R. Wald, Ph.D.CommoditiesOct 04, 2018 05:30AM ET
www.investing.com/analysis/oil-is-fear-200346892
Fear And Speculation Rule As Oil Markets Ignore Reality
By Ellen R. Wald, Ph.D.   |  Oct 04, 2018 05:30AM ET
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Right now, the two most important factors affecting oil markets are fear and speculation based on that fear. The fear is that at some point over the next several months there will not be enough oil available on the global market to fully satisfy customer demand. The speculation is that this fear will push oil prices into the triple digits. But are these concerns in line with reality?

Brent Oil Chart: September 5-October 4
Brent Oil Chart: September 5-October 4

Hedge funds and major oil trading houses are all betting that the United States, Saudi Arabia, the UAE, Iraq, Kuwait and Russia will not be able to produce and export enough barrels of oil to offset the decline in oil production and exports from Venezuela and Iran over the next few months. These positions have caused the Brent benchmark to gain 4.82% and WTI to jump by 5% over the past 7 days.

The fear of this hypothetical supply and demand imbalance is overriding fundamental indications that the oil market is well balanced at present and that there will be enough supply to accommodate demand. Platts reported that Saudi oil minister Khalid al Falih told attendees at the Russia Energy Week Forum this week that, “there is not a single customer who has requested a barrel since June that hasn’t been supplied.” This may be true, but the price of Brent has risen 10% since the beginning of July, indicating that the market is largely controlled by speculation and fear, not supply and demand.

U.S. President Donald Trump’s recent remarks directed towards OPEC and Saudi Arabia reflects his frustration with the recent increase in oil prices. Average gasoline prices in the United States are nearing the $3 per gallon mark and there is still more room to rise between now and the midterm elections.

When it comes to supply, the truth is that Saudi Arabia and Russia are delivering, both in messaging and in oil, but the market seems to be ignoring it. OPEC and its non-OPEC partners may not have formally indicated that an increase in oil production is warranted at the group’s most recent meeting in September, but in reality, the big producers are singing a different tune.

Khalid al Falih announced on Wednesday morning that Saudi Arabia’s October production has already increased to 10.7 million barrels per day. This reflects an increase of 200,000 to 300,000 barrels per day from September.

Likewise, Russia announced that its production rose 150,000 barrels per day in September and Vladimir Putin said that Russia could increase production by another 300,000 barrels per day.

There are also indications that Saudi Arabia, Kuwait and Chevron (NYSE:CVX) are coming to an agreement that would restart oil production in the neutral zone area between Saudi Arabia and Kuwait. Reports are conflicted on whether oil production would come online immediately following an agreement or whether it would take at least 6 months to get the area up and running again.

Market speculators seem to be ignoring this information, as oil prices continued to rise as this news was being reported.

There are also bearish indications for oil on the demand side, but the market is ignoring them as well. The EIA’s weekly data showed a build in oil stockpiles in the U.S. This kind of information would typically result in a decline in prices, but it did not. Gasoline inventories in the United States are also at record highs for this time of year, which indicates that refineries may soon decrease their crude oil purchases until the inventory is used up. Europe is entering its refinery maintenance season and crude oil draws should reflect a drop in demand, but the market is ignoring this information.

Fear and speculation regarding the Iran sanctions can only buoy the oil market so far. At a certain point, the supply situation will be clear and the fear factor will dissipate. We are left with two questions.

How high can prices be pushed? And when will this bubble pop?

Fear And Speculation Rule As Oil Markets Ignore Reality
 

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Fear And Speculation Rule As Oil Markets Ignore Reality

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Comments (15)
Gary Offill
Gary Offill Oct 08, 2018 8:56PM ET
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Jail the oil traders! This wasn't an issue until the futures and securities modernization act of 2000.
Srikant Tippa
Srikant Tippa Oct 07, 2018 5:32AM ET
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Itu0027s very good analysis..Trump has to take initiative now to sit and control this fear as there is no issue with extraction of oil..due to midterm election in US, he has to do sth to stop high in price
Peter LaChina
Peter LaChina Oct 04, 2018 7:39PM ET
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I think it's already started to pop. maybe
Timochin Khan
Timochin Khan Oct 04, 2018 6:22PM ET
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Excellent report..
Shiva Shankar
Shiva Shankar Oct 04, 2018 12:09PM ET
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good research..
Richard Safko
Richard Safko Oct 04, 2018 11:16AM ET
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reread your opening sentence. It doesn't make any sense. Fear of what? Fear of speculation?
Do Deikins
DoRight Oct 04, 2018 11:16AM ET
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Reread Dr. Wald's opening paragraph: "The fear is that at some point over the next several months there will not be enough oil available on the global market to fully satisfy customer demand. The speculation is that this fear will push oil prices into the triple digits."
Jay Epp
Jay Epp Oct 04, 2018 11:14AM ET
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The price will oscillate around $70.  The people that control the price never care about reality.  The price is rigged as every other financial instrument.
partha dey
partha dey Oct 04, 2018 11:13AM ET
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great said what I think is very much trye
inderjeet virk
inderjeet virk Oct 04, 2018 10:51AM ET
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any output increase by opec and Russia is really bullish because that leaves the oil market with less spare capacity
Ro Ni
Ro Ni Oct 04, 2018 9:15AM ET
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I wouldn't comment, but the author used Ph.D. credentials while providing very weak analysis. To mention a few drawbacks. . . No comments on how much extra output needed to offset decline in Iran and Venezuela. As a result no supply-demand analysis.. . Output growth projections from OPEC+ are based on hearsay from vested interests, not double-checked.. . Seasonal world oil demand growth in Q3-Q4 according to IEA ignored.. . Misinterpretation of US oil inventory growth. Lack of transportation ignored.. . Always double check. Authors here earn money on per article basis, not providing good research.
May Not
May Not Oct 04, 2018 9:15AM ET
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Agree with you. Up until now theres no clear analysis. All analysis article writers are only reposting back the news. They got the facts but shows no figures to convince the reader
follow trade
follow trade Oct 04, 2018 9:15AM ET
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She is big bear since brent was 50, its her fear that she will miss the big drop analysis before it happens
Geoffrey Learmonth
Geoffrey Learmonth Oct 04, 2018 8:32AM ET
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Ellen, thank you for your analysis. I always find it helpful in understanding the supply and demand of oil which, as you point out, should be driving prices. I too was surprised at the price increase after the EIA numbers this week. However, I would like your opinion on how the lack of investment over several years of low oil prices factors into your analysis. Perhaps investors are beginning to turn away from following and reacting to weekly data releases and are instead focusing on this "bigger picture" idea which I would sum up simply as "at some point, the lack of investment has to catch up to supply".
Alan Yeo
Alan Yeo Oct 04, 2018 8:32AM ET
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Oil prices are always specilative
Vinoda Mukar
Vinoda Mukar Oct 04, 2018 8:29AM ET
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Bubble in oil? Oh come on. A real commodity that would vanish in 50 years. How about stock market?
Martin Trader
Martin Trader Oct 04, 2018 8:21AM ET
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Nice article. Loved your book!
Tamás Kuzsner
Tamás Kuzsner Oct 04, 2018 6:21AM ET
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Thanks. Your articles always help me to understand the big picture and make decision. Please keep it up!
abol plus
abolplus500 Oct 04, 2018 4:49AM ET
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nice article and point of view!. but who's got the answer for your last line? magic 8 ;)
 
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