Going For a Record
Ultra Bears missed out on the biggest string of gains in the history of the oil market, or at least since 1983 when they began keeping records. The reason they missed out was failing to understand the gravity that the last November oil price crash had on the fundamentals of this market. That price crash led to a series events that have set the stage for the next oil price rally. Rig count cuts have fallen a record 23 weeks in a row and the historic drop in oil capital spending will have effects on the future prospects for global oil production.
Now more analysts are turning bullish as it is clear that oil has put in a bottom. I thought what was telling was the fact that hardly anyone predicted the magnitude of the oil price crash, but once it did crash, many expected the crash would continue. Yet if you look at oil history this rebound should not be surprising. In fact The Energy Report and Price Asset Management documented how since 1980 when oil prices fell by more than 50% in less than 6 months, there has always been a significant rebound. The bigger the break the bigger the rebound.
And almost every time that the price of oil broke that hard there were always people thinking prices would continue to go lower. They would say despite the historical facts, that this time is different. Oil bears are saying that again. They tried to tell us for example that rig count cuts won’t matter. Yet it seems that they do. If you consider that fact that the number of oil rigs operating in the US fell by 660, a drop of 59% from October’s rig peak. We are already seeing signs that US output is falling and demand is exceeding expectations.
They told us that Storage would be overflowing, yet for the last two weeks supply is falling. This week the Energy Information Administration reported that crude inventories fell by 2.7 million barrels last week, the longest run of losses since September and that oil production dropped by 1.2 percent to 9.3 million barrels a day, the biggest drop since last July. Just yesterday the private forecaster Genscape reported that crude stocks in delivery hub Cushing, Oklahoma, fell by almost 740,000 barrels between Friday and Tuesday. That was not supposed to happen according to the Ultra Bears.
At the same time U.S. refiners are taking advantage of all of this cheap crude. The EIA says that refiners are producing a record amount of gasoline, not only for domestic production but for export. With governments juicing up their economies with QE, this brings increasing demand expectations.
The EIA also reported on the Natural Gas side U.S. net imports of natural gas decreased 9% in 2014, continuing an eight-year decline. As U.S. dry natural gas production has reached record highs, lower domestic prices have helped to displace natural gas imports. Net natural gas imports totaled 1,171 billion cubic feet (BCF) in 2014, the lowest since 1987.
On top of that we have rising geopolitical risk as ISIS continues to make advances on cities in Iraq and Syria.
Remember our fallen heroes who have given their lives so we can live in freedom. We all owe them our prayers and our everlasting gratitude. Have a safe Memorial Day.