Big Oil Bust
Big oil is not as big as it used to be. Big oil gets ready to report earnings later this week and it's looking like it'll be ugly. The historic first quarter energy bust will cut revenues and profits as it forced big oil to slash exploration budgets and proven reserves. The backlash from investors may cause some in the sector to cut back even more spending and cancel more energy projects at a time when it appears global demand is rising. The backlash from the big oil retrenchment will be felt in the near future and the lasting impact for maybe a decade. We will see tighter supplies in the future and ultimately higher prices down the road.
But it is not just big oil feeling the pain. The AP reports that, "The International Monetary Fund says oil exporting countries in the Middle East lost $390 billion in revenue due to lower oil prices last year, and should brace for losses of more than $500 billion this year."
The AP says the economic outlook released Monday estimates that for 2016, oil exporting countries in the region will see revenues from these exports drop between $490 billion to $540 billion compared to 2014, when oil prices were higher. IMF director for Middle East and Central Asia, Masood Ahmed, says this translates into budget deficits and slower economic growth, particularly for countries like Saudi Arabia that are still heavily dependent on oil to finance their spending. The IMF has encouraged reforms such as lifting subsidies and tightening public sector wage bills to offset the impact.
On Friday there were more signs that U.S. oil production in the will continue to fall. We saw the U.S. oil rig count fall for the fifth week in a row, dropping by 8 to 343 this last week. Natural gas rigs dropped by one to 88, taking the total down 9 to 431; a new low.
This comes as U.S. gasoline demand is surging to a record high and demand in China is exceeding expectations. Gas demand increased 0.4% year on year to an average 19.3 million barrels for its highest level for the month in eight years and the highest level since record-keeping began according to the American Petroleum Institute last week. The Energy Information Administration said that U.S. gasoline demand increased by 0.9% from a year earlier to 9.39 million barrels a day through April 15. This summer they expect demand will increase by 1.4%.
The AP is reporting that demand is increasing prices. Trilby Lundberg, the Petro Princess, said that the average price of gasoline has jumped by 8¢ over the past three weeks to $2.18 a gallon for regular grade. She says that the price at the pump has gone up 41¢ over the past nine weeks and will likely continue as refiners make higher-cost summer blend gasoline in compliance with federal regulations. Lundberg says that gas prices in the lower 48 states show the highest average price of regular gasoline at $2.79 per gallon in San Francisco. The lowest was $1.82 in Baton Rouge, Louisiana. Still as bad as it is prices are, we are still close to 15% below where there was last year at this time.
We still look to position for a long term bull move. We are seeing sighs that production will fall and prices will rise. Worries about near Middle East production might be offset with the fact that most of those countries are feeling deep financial pain. In the meantime, it’s time to let Big Oil pain be your gain. We are recommending long-term positions with a combination of futures and options.