A good story is compelling. The market day in and day out is a compelling story, as it is fraught with never-ending drama, conflict, and colorful characters. True, sometimes the narrative is boring, but then something will happen and the breathless media (a colorful character) recreates the drama in its relentless push to sell. In today’s market chapter, one character is capturing the attention of the readers, and, apparently, I am compelled to follow along.
- Oil prices rose on Friday, helped by a drop in U.S. inventories and a weaker dollar, ahead of next week’s OPEC meeting.
Along with the Fed, oil is one of the more interesting characters in the market story, and since 2008, oil and the Fed have dominated the storyline, but it is oil this day that makes us want to know more, to find out what happens next. It is the price of oil that is conflicted.
- So much oil is sloshing around the world that the daily leasing rate for supertankers is up 24% since May 6, to about $65,700 a day, the highest since 2008.
The primary reason “so much oil is sloshing around the world” is the Saudis and their complicit fellow OPEC members declared war on US oil producers. Their tactic is to destroy the US producers with low oil prices and the way they do that is to pump so much oil the price remains low, thus pushing many operators with slim margins out of business.
- It’s true that the number of oil rigs drilling on the US patch has fallen for 24 straight weeks, plunging by 59% from their peak last October. But, in a May 22 note to clients, Goldman Sachs noted that only one rig stopped work last week, and that the number of ultra-crucial horizontal rigs—those that make shale drilling work—rose by four.
Given the above, one would naturally suspect that traders would push through the headline news and oil prices would drop. Since oil prices are pushing back up, one has to ask: is the OPEC war on US producers working?
- In a report yesterday, the US Energy Information Administration said that US oil production surged last week to 9.56 million barrels a day, up from about 9.2 million the prior week. It was the highest US production in 44 years.
Now, both the realities above are dramatic, given all the news recently about US oil rigs declining, and the funny thing is, traders in the oil market seem to have glossed over both realities because of the headline about a drop in US inventories.
- Oil prices are rising anyway because hopeful traders latched onto other details in the report—namely that crude oil inventories dropped by an unexpectedly high amount (by 2.8 million barrels rather than the 857,000 barrels forecast by analysts). Traders apparently clung onto this supply draw as a signal of higher oil demand and a tightening market.
As well, “hopeful” oil traders seem to be ignoring one of the preeminent analysts out there for oil – Goldman Sachs (GS).
- Goldman forecasts that, despite OPEC’s tough-minded action, determined US shale oil production will rise by 170,000 barrels a day this year and by 225,000 barrels in 2016.
As characters in the market story, analysts are right up there with oil and the Fed, and as a particular character, GS is quite colorful. Given the generally poor predictive capabilities of analysts (the thing that makes them so colorful), the market still listens to them with great earnest. For example, back in 2008, at the as the oil mania took on steam (from $120 to $147 per barrel), GS said with great aplomb and authority, oil was going to $200, so folks bought and bought and bought. Oops!
Nevertheless, GS can count, and what it is counting is straight up oil production numbers, so, in this case anyway, I give credence to its forecast. In any case, as a character GS adds plenty of stimulation to the story.
There are other players as well that add to the market story conflict regarding oil prices. Russia, Iran, and Nigeria for example, and now you can add Iraq to the list.
- Iraq has embarked on an unexpected surge of new supply—its exports seem likely to rise from 3 million barrels a day to 3.75 million as soon as next month.
I think I know how this particular chapter in the market story will go, but, if the complexity of the story continues at this level, there will be plenty of twists and turns before we know what will truly happen with oil prices.
In the meantime, we can surely expect the price to be volatile, as oil traders (hopeful characters) will speculate about the future, but, in the end, the fundamentals will reflect the true price of oil.
And so the story goes …
Trade in the day; invest in your life …
