"Assuming no unforeseen changes in markets (like a serious Middle East “event”), the glut in global markets will keep a lid on prices well into 2017, but volatility will reign because there’s no other way to make a quick buck when interest rates are zero and heading negative. “Smart” investors--those who think they can time markets—will jump back in at the slightest indication of “good news.” For example, if central banks announce another attempt to save the markets or a group of producers attempt to curtail production, there will be a quick jump back up in prices, only to be brought down by the reality of “pork oil”—the glut in global inventory and supply."
The price of WTI crude has increased by about 15% since then, currently sitting near $35/barrel. There was an interesting piece by Liam Denning on Bloomberg.com yesterday which puts numbers and data to my view: The Spring Oil Rally Redux
The important takeaways:
- Despite the rise in price, the inventory build (in oil and gasoline) continues in the US and Europe.
- While demand is rising somewhat, it is still insufficient to draw down inventories.
- The key point: there has been a spike in the bets on higher prices by hedge funds and other investors in the futures markets (last graph).
On the Yin side, noted investor Jim Rogers has stated there is a 100% chance of a recession within the next year. While Rogers doesn't state what will cause the recession, certainly the oil sector is one of the keys, and the pain continues build. Bloomberg.com posted a great graphic of the rise and fall of oil rigs over the past five years HERE. And the pain will continue because, as Leonard Brecken at Oil.com shows, imports continue to grow as domestic production falls--the Saudis want to kill the shale competition.
On the Yang side, the most recent jobs report was positive, and much of the growth came from services related to consumer spending. The savings at the pump are helping, BUT consumer confidence just registered its lowest level for the year. Oops! This was supposed to be the positive paragraph...
So, my view hasn't changed. I believe the Yin wins out, and the debt-deflationary forces overwhelm the boost on consumer spending from lower gas prices. Stay tuned....
There was certainly a lot of "speculation" about that when prices started to tumble last year, and while I would't discount it, I also wouldn't attribute it as the main reason prices have dropped like they have. The fact that Russia and the Saudis recently came to an agreement to freeze output levels, suggests they have mutual interests at stake here, and suggests the US is losing its political influence over the Saudis as well.
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