Russia gets a downgrade to junk and UK growth misses expectations as the Obama administration once again moves against the U.S. energy revival while continuing to take credit for the oil revolution that it opposes. Still with rig counts plunging and a lot of bad news out of the way, oil is attempted to build a base with a near double bottom just above $44 a barrel. Talk of more stimuli in China is adding some support. The market is also starting to worry about the cutback in oil investment which even has the President of OPEC talking crazy numbers like $200 a barrel in crude. On top of that you have the biggest hedge fund short position in 4 years making it very possible that with the right headline we could see a big short covering rally.
Let’s start with Russia. Not only did S&P downgrade their credit to junk status, it appears the recent adventures in the Ukraine will bring swift sanctions on the oil shocked Russian economy. It seems that all 28 members of the EU are telling Russia that it faces further sanctions because it has clear proof that Russia is backing separatists that stepped up attacks against the Ukraine military as well as innocent civilians. Obviously the economic outlook for Russia is not that rosy. The Russian banks have stopped withdrawals and the ruble is getting ravaged. On top of that more signs that growth in Europe is not that strong. The UK number slowed 0.5 percent in the fourth quarter, missing expectations. We don’t expect to see more demand out of Europe but we could make the case for extended QE.
President Obama once again is trying to thwart the U.S. energy renaissance. While the President wants to try to take credit for the historic achievements made by the energy industry, everyone knows that it has happened in spite of him. Whether it is commercials for the Alaska National Wildlife Refuge and its residents to allow public lands for fracking it is clear that President Obama is the most anti-petroleum president in history. The latest shot at the oil industry is the Obama administration on one hand will be opening up new areas of the nation’s federally owned waters to oil and natural gas drilling, but at the same time is trying to block others. The plan apparently will open some federal areas along the Atlantic Coast but will block areas in Alaska. The Wall Street Journal writes that the “the plan is expected to include leases off states in the mid- and south-Atlantic coasts, including Virginia and both South and North Carolina, whose governors support offshore drilling." It isn’t expected to include offshore Florida, whose policy makers have generally opposed such a move. The plan is also expected to block parts of the Beaufort and Chukchi seas off the coast of Alaska for future oil and gas development, according to Robert Dillon, a spokesman for Sen. Lisa Murkowski.
This comes after the Energy Information Administration is predicting that the number of operating oil rigs could fall by 24% by next October. The EIA says that the sharp decline in oil prices over the last quarter of 2014, which has continued in January, is already having a significant effect on drilling activity in the United States, as shown by the 16% decline in the number of active onshore drilling rigs in the lower 48 states between the weeks ending on October 31, 2014 and January 23, 2015, according to data from Baker-Hughes.
Whole oil is looking stronger, heating oil is looking weak. It seems that even with the big blizzard on the East Coast the temperatures are not really stoking a lot of demand. On top of that, with thousands of flights canceled and many folks taking a snow day gas demand won’t be that good either.
OPEC’s secretary-general Abdalla El-Badri is saying that while the market is currently oversupplied by about 1.5 million barrels per day, because of the lack of investment oil prices eventually will hit $200 a barrel. He seems to suggest that the only way we can avoid that fate is if the U.S. shale producers relent. Maybe that is why President Obama wants to curtail U.S. production! He wants to save us from $200 barrel oil. So that is the master plan.
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