The Great Divide
The great divide between the bulls and the bears in oil is growing, as it seems that major players are seeing diametrically opposed views of our oil price future. The bears seem to suggest that the recent increase in price was nothing but a short squeeze and nothing has really changed on the fundamentals of oil glut. The bulls, on the other hand, point to a historic cut back in capital spending and supply cuts that may have ramifications on the supply side for decades to come.
Merrill Lynch gave a notable bullish call yesterday. They pointed to falling U.S. production as they noted that, "U.S. oil production fell 30K bpd last week and is nearly 400,000 barrels per day less than it was a year ago. U.S. production peaked at 9.6 Million barrels a day in May 2015 and is now close to 600,000 barrels a day lower than the high." They also point to U.S. demand that has been surging and they predict any increase in demand that will help sop up excess supply. Merril also anticipates that OPEC production will fall as they say that the April 17th meeting will lead to production caps, therefore leading them to maintain their view that the bottom in oil is in.
Oil bulls also point to the fact that because of the lack of exploration and budget cuts, global production capacity is going to decrease. Yesterday’s article in the Wall Street Journal was an ominous example of that argument. They reported that in 2015 the seven biggest publicly traded Western energy companies, including Exxon Mobil Corp (NYSE:XOM). and Royal Dutch Shell (LON:RDSa), replaced just 75% of the oil and natural gas they pumped, on average. That number will actually become even larger this year, as we saw another round of capital spending cuts in the month of January, which is almost unprecedented in history.
Yet, yesterday Barclays (LON:BARC) warned that really nothing has changed. Despite the fact that commodities all of a sudden are the best performing asset class this year, according to Barclays the recent rise in oil and other commodities like copper and iron ore are not being backed by improvement in fundamentals. They worry that the whole complex could face a big collapse. Barclays said the recent rise is just about investors looking for a hedge against inflation.
Today will see if Janet Yellen, the Fed Chief, wants inflation. Recent Fed statements by Fed officials has given the market the sense that they are already turning more hawkish, and may regret signaling to the market that there will only be two interest rate increases this year. The Fed Chief has been known to be a dove, and the market will watch to see if she is going to stay that way. Will oil rebound from its overnight weakness? If not, we’ll be prepared for more selling.
Crude oil is also worried about another increase in inventory. We will see if that worry is real after the close when we get the American Petroleum Institute report.
Most readers know my take on the crude oil market. I believe that we are at a historic bottom in oil that may hold for a generation. The reasons are that every time in history that we have seen this type of retrenchment in spending and exploration, we always pay for it in higher prices down the road.
As far as OPEC is concerned, I believe they have to cut back production, mainly because the big cheese in the OPEC cartel - otherwise known as Saudi Arabia - is losing the production war they started. Not only do they have to go out and borrow billions of dollars and sell off part of their state=owned oil company, they are now losing market share. The FT reports that Saudi Arabia lost market share in more than half of the most important countries it sold crude to in the past three years, even as the kingdom increased output to record levels.
The FT says that, “The world’s biggest oil exporter lost ground to rivals in nine out of 15 top markets between 2013 and 2015, including China, South Africa and the US, according to an analysis of customs data." Saudi Arabia set itself a goal in late 2014 of maintaining its crude market share amid a glut that prompted a collapse in oil prices, but the imports data compiled by FGE, an energy consultancy, suggest the country’s strategy suffered setbacks in some of its key customer countries last year. Other data show that Saudi Arabia achieved a limited increase in global market share in 2015 compared to 2014, although last year’s figure was lower than that recorded in 2013.
Gas prices at the pump continue to rise, with record demand and refiner reluctance to produce more supply when margins are weak. AAA reports that the national average price of gas climbed above $2.00 per gallon last Thursday for the first time in 2016 and average prices have increased for 21 consecutive days. The average price of $2.04 per gallon is up six cents per gallon on the week and 30 cents per gallon for the month. Despite the recent increase, average gas prices remain 39 cents per gallon less than a year ago.