First things first, and then I have two things to talk about. I am going out on a limb here, but it seems the market is back to that place where it wants to go up. Once again, we are that place where new record highs are happening, or they are about to happen, such as in the SPX, the RUT, and the NDX. The $DJI is just about 170 points away. Just saying …
Now, I am not an alarmist by any stretch of the word, but I am also not stupid. Just like almost everyone else, I got socked hard back in 2008 because I missed the problems underneath the overheated US real estate market, you know, the issues with mortgage bundling, commercial paper, and credit-default swaps. Hopefully I learned one thing – always dig deeper when something seems not right.
Two days ago, an article appeared on TraderPlanet that has me looking deeper. It should have you looking deeper as well.
Is The US Economy On The Verge Of A Credit Crunch?
Check it out. Alex Manzara does a good job explaining the issue and what it could mean. I am not alarmed by the question or the facts in the article, but it is something worth keeping on the radar, checking regularly to see if the facts change …
My second point of interest today is the price of oil. Heck, it is such a good story, as a writer I have to follow it. Today, the price is up again, ostensibly because of the Saudis’ renewed bombing in Yemen. Just two days ago, the Saudis called off their bombers, and then, suddenly, they are back. Problems in paradise, no doubt.
In any case, I suspect unless the Middle East totally catches fire, this recent uptick in prices is short lived.
- Drillers in oil and gas fields from Texas to Pennsylvania have yet to turn on the spigots at 4,731 wells they’ve drilled, keeping 322,000 barrels a day underground, a Bloomberg Intelligence analysis shows. That’s almost as much as OPEC member Libya has been pumping this year.
The above is quite interesting, as it points to the fact that there is a whole lot more oil ready to go when the price goes up or storage capacity is relieved. The supposed price target to get these wells a pumpin’ is $60-$65 a barrel for crude. This suggests a cap on the price of oil, as that much oil cannot come to the market and not affect prices to the downside.
- Oil production in the lower 48 states would rise 322,000 barrels a day to an average 7.485 million in the fourth quarter of 2016 if drillers start shrinking their fracklogs by 125 wells a month in October, Bloomberg Intelligence models show.
A “fracklog” is the oil that is not being pumped now, but will be in the future. The above is one way this all can go. The other is, as I said, prices rise a bit more and then …
- A second scenario, in which crude prices rebound to $60 to $65 a barrel for an extended period and drillers put rigs back to work, increases supply by 500,000 barrels a day to 7.67 million.
Now, this gets a bit more interesting, as the companies that have this fracklog are not small guys. They are big companies that can pick and choose, more or less, when they drill and when they sell.
- Large independent producers such as ConocoPhillips, Occidental Petroleum Corp., Marathon Oil Corp., Hess Corp. and EOG Resources Inc. hold a significant portion of the backlog of drilled but uncompleted wells.
Even with that ability, though, public corporations are beholden to their shareholders, so when they can make a profit, they will, and it might just be that now, or soon near to now, they will take the sure thing, which is pump and sell.
- Those companies are already seeing more incentive to start eating into their backlog as crude prices have risen by a third since mid-March. After-tax returns would be 5 percent to 10 percent higher than they were just two months ago when oil was at $45.
Here is another scenario, one that seems plausible, as no one really knows where all of this is going. Here is the context.
- The U.S. fracklog has ballooned as drillers wait for prices to recover, with oil wells making up more than 80 percent of the total.
What if the price of crude does not recover, meaning, it cannot break, hold, and climb above the $60 ceiling? What if the big guys decide this is the “best it can be” and they begin pumping and selling, say, around $55, which is where it could get to quickly if the Yemen situation settles down, and it might, as Iran has a say in it.
Iran could be playing a card to get a better deal in negotiations, but that could backfire, if the coalition that has emerged actually goes in with soldiers and takes back the country.
All in all, oil prices are unstable at the moment and what will happen is unknown, but two things we know for sure – Iran has boatloads of the stuff waiting to get to the market and the US has lots of holes ready to pump lots of oil. Interesting indeed …
Trade in the day; invest in your life …
