PARIS (ResourceInvestor.com) -- The oil and energy markets like to paint themselves as very scientific places. From the geology to the deep water technology, from the super tankers to the powerpoint presentations. But as we all know the truth is nothing of the sort.
For the regular reader of this column the idea of a herd mentality on the market is nothing new. We have looked at times when bullish signals spell bearishness and where bearish signals sell bullishness. You can make your mind up on what we have now.
The crude oil market has been parading around the corral for a while wondering which direction in which to break out. Finally it has decided to go a test the gate over at the high end of his range. Banging about around $60.50 has started everyone talking again.
But just one second. This is the week when the Energy Information Administration said U.S. crude oil inventories had risen not fallen. By a reasonable 3.7 million barrels to 327.6 million barrels. Somewhere around 200 billion cubic feet of gas were also withdrawn, it sounds a lot, but what is in reserve is still some way above the five year average at this time of the year.
What is overly worrying the markets is refining, namely for gasoline. In the downstream area we should be looking at creating some decent stockpiles for the summer, any time soon. Instead U.S. refining capacity was only at 85% of capacity, production of gasoline fell to 8.6 million barrels a day and nice distillates also fell by 3.8 million barrels a day.
But the reality is that there is enough capacity in the U.S. and Europe to sate demand. What may be exacerbating the problem is the relatively mild winter and some perceptions that refinery safety - and we are not even looking in BP’s direction now - is a bit on the shaky side. There have already been plenty of fires and spills at U.S. refineries in 2007 and it threatens to disrupt the traffic, but it won’t. The U.S. will get enough gasoline at a reasonable price.
Instead these minor problems are being mixed in with the daily news from Iraq and Iran and are really starting to gain some traction. We have also seen results from most of the major companies in the world: from Exxon [NYSE:XOM] to BP [NYSE:BP] to Shell [NYSE:RDS-B] to Chevron [NYSE:CVX] and everyone else. And they have not exactly been setting the world alight.
Throw in International Energy Agency forecasts for a fall in non-OPEC production, uncertainty in Russia, continued violence in Nigeria in the run up to what promises to be a wild election and there we have a lovely cocktail for the herd to sup on.
But remember, there is enough crude, enough refinery capacity and enough gas for everyone consuming it right now, the herd is just working itself into a lather.
Still the technical analysis points downwards rather than upwards. But it is looking increasingly likely the technicals are wrong. All sorts of commodity prices are flying at the moment, from soft commodities like wheat - in part due to ethanol demand - and shinier commodities you can give your girlfriend or boyfriend, like gold.
What could be interesting is if we get a moment like we had last August when the war in Lebanon started to peter out, where the expected hurricanes did not arrive and so on. An unperfect storm that gutted the market for eight weeks on the trot. Say if warm weather swept the U.S., the U.S. and Iran agreed to talks and one of the majors finally got a project in on time.
Because right now the market is rising on perception only. There are a few fundamentals that are tightening, if they are loosened again then the technical analysts may have it right after all. Now that would be interesting.
