Sometimes when you are in the process of setting a long-term bottom in crude oil it gets ugly before you hit the bottom of the barrel.
Yesterday oil prices suffered as global growth fears and a falling U.S. stock-market overshadowed signs of more U.S. oil production destruction. Commodity giant Glencore's stock fell 29%, and when a stock collapses it raises fears about the entire commodity space, which does not help oil sentiment.
The Wall Street Journal wrote that Glencore is less susceptible to commodity price downturns, but the large debts needed to run a trading house have alarmed investors as the company's earnings and share price have fallen. Glencore has about $30 billion in net debt, which it says it is trying to reduce by a third to around $20 billion by the end of 2016. The company has scrapped its dividend, issued $2.5 billion equity and is trying to sell $2 billion worth of assets. Glencore's stock is rising on talk that the firm may be taken private after the precipitous price fall.
Yet, there are more signs that U.S. oil output is continuing to fall much faster than many of the bears said was possible. The latest evidence comes from private forecaster Genscape that reported that oil stocks in Cushing, Okla.--the CME Group's delivery point--fell by more than 1 million barrels last week. We were one of the first to predict that U.S. oil output would peak in April and we are also correct in predicting that U.S. oil output should fall over a million barrels a day from its peak to 8.6 million barrels before the end of the year.
India also cut interest rates, which is always a net positive for oil prices. The Reserve Bank of India (RBI) cut its repo rate to commercial banks to 6.75% from 7.25%, more than the 7% that was expected. They are worried about a slowing global economy caused the commodity consumer to juice up its demand expectations.
Even OPEC is taking notice of the U.S. output drop, and they realize that if demand picks up they may have to find a way to raise production, assuming they have any spare capacity to speak of. Iran, of course, is expected to come back on line so a cutback is going to be a bit complicated.
The Associated Press is reporting that, "Republican presidential candidate Jeb Bush says that ending the ban on U.S. oil exports and easing restrictions on natural gas exports will unleash the nation's economy. The former Florida governor is calling for ending the 1970s-era law prohibiting the U.S. from exporting crude oil at a time when domestic petroleum production has grown rapidly over the past decade. Calling it a 'once-in-a-generation opportunity,'"
Bush said in a piece posted today on the website Medium that reversing the export ban and widening U.S. natural gas markets would benefit U.S. consumers with lower energy costs, create a new manufacturing sector and generally fuel more rapid growth in the nation's economy.
The Market looks its worst at the bottom of the barrel. Use market weakness to buy long dated calls!