It appears the Kurds are kicking some Islamic State butt over there in the oil regions of the world, specifically Iraq. And I guess Libya’s militias have figured out that shutting down their oil production is not really good for their country. And Iran seems to understand the only way they get back into the oil business is to let IAEA inspectors in to their plutonium business. Russia seems to be acquiescing to the reality that the rebels it backs in Ukraine might soon be out of business. Did I miss anything about the geopolitical oil issues?
- The average price of crude sold by OPEC dropped below $100 a barrel, a price level favored by the group, for the first time since June 26, 2013.
So, then, oil prices, which were already coming down because of oversupply and lessening demand, could be coming down further, which could prompt a supply cut from the big kid on the oil block.
- There is unlikely to be any immediate supply cut from Saudi Arabia or other OPEC members while prices remain above $90 a barrel.
Well, maybe not, at least not yet, as the price of crude is running about $96 a barrel. My guess, though, even when it does drop below $90 and OPEC does reduce production, it won’t really affect the price much, as the oversupply is getting so huge and demand is dropping.
- Brent crude futures have signaled for the past six weeks that immediate supplies are exceeding demand, with the front-month contract trading at a discount, or contango, to later deliveries. This price structure erases the return traders could earn when successive monthly contracts are cheaper, undermining demand among financial investors,
Even futures demand among traders is falling off, which means speculation is having less of an effect on the price of oil. Heck, light-sweet crude is down a $1.75 today closing in on $93.50. What is happening here on the futures side is that speculators are catching a drift that the bad geopolitics of the world are not enough to threaten supplies.
- Speculative bets that prices will rise, in futures and options combined, outnumbered wagers that prices will fall by 72,079 contracts in the week ended Aug. 12, the weekly Commitments of Traders report from the London-based exchange showed. That’s 26 percent less than the previous week, and reduces net-long positions to the least since July 10, 2012.
Yes, it appears traders have sniffed the wind and they believe prices are coming down even further.
- Short positions among money managers at 119,199 contracts are at their highest level since the start of ICE’s data, which extends back to 2011.
True, if for some reason the price of oil begins to recover quickly, covering the short positions will drive the price up again, and that will bring back the bulls, driving the price up higher, but the likely hood of any near-term recovery on the fundamentals is low. If the world does not catch on fire, supply and demand will drive the price down further.
- The International Energy Agency, a Paris-based adviser on energy policy to 29 developed nations, said on Aug. 12 that a supply “glut” is shielding prices against inflamed tensions in the Middle East and North Africa. Global demand growth sagged to its weakest in two years in the second quarter, the agency said.
I have two points to make about my synoptic view of oil prices, but first let me also add to my conclusion about supply and demand the US is now pumping more oil than it has in over 20 years and it is opening up new fields right and left.
Point one is that today’s market reflects the positions traders are taking in the oil market. It is bouncing back because it too sees the current bad geopolitics as not affecting the stability of the world, thus the price of the price of oil.
Point two is that today’s market sees what I see and have seen – US consumers are having more money in their pocket and as gasoline prices drop relative to the price of oil, that reality will get even better, resulting in a better second half of the year for the US economy. RBOB, the futures price of gasoline, is down again today to $2.64.
So, there it is – a Monday for me that is not a weak start to my week.
Trade in the day; invest in your life …
