Crude oil and commodities explode, but Goldman Sachs (NYSE:GS) is warning that it may be too much, too soon. Are they right, or is the market looking beyond current oil oversupply?
Commodities did pause after a record 19% jump in iron ore and surging oil, grain and copper prices after China reported a shocking 25% month over month drop in exports. That is the worst reading since the depth of the great recession. Yet with China talking more stimulus and signs that producers are pulling back, is it time to go long or go short?
For crude oil, Goldman Sachs says that prices will stay in a range between $20.00 and $40.00 a barrel. They say the recent price spike will only throw a lifeline to cash-strapped producers, so it will slow the drop in oil production. While that may be partially true, the reality is that this price spike is probably too little, too late for many cash-strapped producers. In fact, even the well capitalized producers have already committed to major cap x cuts and have already committed to lowering production, and it may not change their plans even with the recent sharp jump in prices. The bottom line is the supply side is going to get tighter this year.
On top of that, there are more reports that OPEC and non-OPEC members have an agreement to freeze global output. Russia, Saudi Arabia, Qatar and Venezuela agreed last month to cap output at January levels, the first deal between OPEC and non-OPEC producers in 15 years. Iran, of course, is a special case, so they have to get Iran to pick a production level that they can live with.
Yet Reuters is reporting that Kuwait's oil minister said on Tuesday that his country's participation in an output freeze would require all major oil producers, including Iran, to be on board. "I'll go full power if there's no agreement. Every barrel I produce I'll sell," Anas al-Saleh told reporters in Kuwait City. OPEC member Kuwait is currently producing 3 million barrels of oil per day, he added.
On Monday, the Ecuadorean government said that Latin American oil producers would meet on Friday to coordinate a strategy to halt the crude price rout.
Even China is cutting back on oil output. China’s National Petroleum Corp. said it will cut capital spending this year by more than 20 percent, lowering China oil output by 3%.
Bloomberg reports that in China the CNPC aims to produce 108 million metric tons of crude domestically this year, a decline from a year ago of about 3.2 million tons, or 2.9 percent, according to an interview with Su Jun, general manager of the production and operation department of the state oil company. It has decided to cut capital spending this year by about 23 percent, Su said, without providing a total amount.
AAA's in their Daily Fuel Gauge Report reported that,"'Gas Prices Make Largest Weekly Increase of the Year!" They reported yesterday that the national average price jumped six cents on the week, the largest one-week increase since the beginning of the year. The national average price jumped six cents on the week, the largest one-week increase since the beginning of the year. Today’s average price is $1.81 per gallon, and the national average is likely to continue to move higher due to spring turnaround activity and reductions in supply in select regional markets. Drivers are paying six cents more per gallon to refuel their vehicles versus one month ago; however, significant yearly discounts remain and pump prices are down 65 cents on the year.
Think long term! Look for breaks to establish a position for the long term.