Self-Inflicted Wounds
Crude oil prices are falling even as the fundamentals start to get tighter and turmoil surrounding the Brexit vote is perhaps once again going to undo the green shoots of recovery. Even as both OPEC and the International Energy Agency talk about a tighter oil market, fear of the fallout from a UK exit from the Eurozone is throwing global markets into a tizzy. The risk off sentiment is gaining ground after more polls show Brexit is increasingly likely. Even the German bund went negative for the first time in history and risk aversion is the flavor of the day. The markets are preparing for what could be the beginning of the end of the Eurozone, whether or not you believe that is a possibility. Yet when you have the most influential paper, the Sun, calling to vote “Leave” because as they saw that, “We must set ourselves free from dictatorial Brussels" you have to take seriously the fallout from a Brexit.
Oil prices are for sure taking it seriously. That is why they are not responding to what should be a bullish outlook from OPEC and the International Energy Agency. Both groups are saying that the supply demand balance for oil will significantly tighten in the coming quarters. OPEC says that for the first time in three years demand for their oil will outpace production. OPEC says that its oil production actually fell last month by 100,000 barrels per day (bpd) to 32.36 million bpd in May. That is 160,000 bpd less than OPEC's forecast of the average demand for its crude in the second half of the year. OPEC said, "Shutdowns in Nigeria and Canada tightened the oil market markedly and brought supply and demand more closely into alignment earlier than many had expected, bolstering prices.’
The International Energy Agency (IEA) agrees. They say that outages in OPEC and non-OPEC countries cut global oil supply. The IEA, in its last report, said that the surplus of supply over demand in the first half of 2016 would be 1.5 million barrels a day, now that number is at a scant 800,000 barrel per day and will eventually fall into balance end of this year. The IEA said that global production fell by 590,000 bpd from a year ago to 95.4 million bpd in May. That they say is the first significant decline in global oil production since the start of 2013, as capital spending cuts, falling rig counts and supply outages cut non-OPEC production by a whopping 1.3 million bpd from a year ago. The IEA also revised upwards global oil demand growth in the first quarter to 1.6 million barrels of oil a day and increased its 2017 demand growth forecast by 1.3 million barrels a day for 2016.
Both agencies seem surprised that the market is close to being in balance and both seem surprised by the robust demand. Of course that may change if the Brexit puts the globe back into a recession. Both agencies also are not worried about a significant price rise because of the overhang of inventories. And that may change if we survive Brexit and we find that this global oil demand growth pace continues to defy both agencies predictions.
It will also make the Fed stand pat as they can’t raise rates if it looks like a Brexit may happen. The Fed statement will be watched and the Fed will stand pat. The Fed has taken heat for raising rates in December and that may have helped add to market turmoil in January and February. Watch the Fed statement for any reference to the Brexit vote.
Natural gas is hanging firm because the heat is on. The Western part of the nation has been running air conditioners and we should see more signs that U.S. natural gas production is falling. We continue to like buying breaks on this market and long term calls.
As for oil we know that demand is rising but that may be thwarted by the European Brexit mess. Last year in Europe the economy was just catching fire from stimulus and oil demand was soaring and that’s when Greece voted to leave the Euro-zone when they said it was really a vote to stay. If we look beyond the current turmoil the lack on investment in oil will cause ramifications for us for decades to come. Look to establish long term positions on the long side to take advantage of the Brexit turmoil.