Crude oil prices surged again as U.S. oil production fell for the seventh week in a row and global central bankers seem a little more upbeat. With the Federal Reserve changing the wording and removing “risks" from their statement and Japan’s central bank holding fire, the demand expectations have changed dramatically from just a few months ago when many thought that global oil demand would grind to a halt.
On the production side, the crashing price of oil created a financial crisis in oil, which in turn has led to the biggest retrenchment in energy investing in modern history as the impact is just beginning to make itself felt.
The Federal Reserve may be signaling the possibility of a rate increase in June. This was not a surprise even as they signaled that we could still see some weakness from the unexpected downturn we saw in the beginning of this year. Overnight it was Japan’s central bank that gave oil more support. By not adding more stimulus, the yen surged against the U.S. dollar giving oil some dollar strength. Maybe low oil prices are giving a lifeline to Japan in the form of stimulus.
Oil shook off a larger than expected increase in crude supply and a drop in gas demand and refinery runs as they realized that the floods in Texas may have had an impact and the fact that we continue to see U.S. oil production fall.
Crude oil’s big rebound in a larger perspective is a correction of the heinous price collapse in January. Now we could be seeing the inverse of that move as the trade may shake off slightly bearish news. When prices spike too low, they set off a chain of events that will soon make the market go too high. We are starting that process in both the short- and long-term. While the front end of the oil market looks poised to test $50.00 in the near term, the longer term outlook is even more bullish. The crash in energy investment is planting the seed of the next super spike.
I am not the only one who sees it this way. Wood Mackenzie is warning that we could see oil shortages by 2035. The impact from the lack of investment in exploration will cause what I call production destruction and cause a global oil shortfall of 4.5 million barrels of oil a day. Wood Mackenzie says that from 2008 to 2011 the industry discovered 19 billion new barrels a year. That fell to 8 billion a year in 2012-2014 and to just 2.9 billion barrels in 2015.
In fact, I think that the big deficit may even happen sooner because this year we saw even deeper cuts in exploration budgets/research and development and that will cause us to discover less barrels. We will see banks not lend to energy concerns and over a period of time that will add to the shortfall.
We still believe that this is the time to position for a long term move for what will be the bottom for perhaps a generation. Look out for the natural gas report today! Look for a 67bcf injection.