Oil prices are trying to balance record supply of oil and dwindling storage space versus what could be the biggest drop in energy capital spending cuts in history. Royal Dutch Shell said they would cut spending by $15 billion over the next three years and Royal Dutch Shell's chief Executive, Ben van Beurden, signaled that he may cut spending even more if he felt it was necessary. With more earnings coming and many more billions of capital spending cuts soon to be announced, is oil going to start to look ahead to the price spike that is almost certainly going to be in our future?
When prices plummet as fast as they have, there are always consequences and we are starting to see that. It also means that when prices finally bottom we should see prices spike back hard. According to data provided by Price Asset Management and soon to be available in a “Special Energy Report” by myself and Jim Nolan, history would suggest that prices of oil usually come back quicker than most people think. In fact usually the bigger the break in petroleum percentage wise, the bigger the rebound in just 12 months. In fact, in 12 data points when oil had a break of 40% or more within a year, the market rallied back 52.8% within 12 months. Even when the break was only 30% with 20 times the rebound, it was still a very impressive 45.5% within 12 months. This snap back comes usually as the market realizes that a period of low prices will stimulate demand and cut backs in production will take their toll.
Yet while the prices may spike back, talk of $200 barrel oil as predicted by OPEC Secretary El-Badri seems too far out there. The truth is that with the growing contango and massive supply the cost and availability of finding storage will add to cost, but buffer some upward pressure when demand reappears. More than likely oil will recover back to the $70 to $80 range within 12 months.
Still oil had to deal with the realities of the moment when the Energy Information Administration reported that crude supply increased to 406.7 million barrels, the highest level in 80 years. Still the 8.87 million barrel build was less than the American Petroleum Institute build and it came with a bigger than expected drawdown in distillate and gasoline inventories. The EIA said that distillate fuel inventories fell by 3.9 million barrels in the lower half of the average range for this time of year and gasoline inventories were down by 2.6 million barrels last week, but still well above the upper limit of the average range. While refiners get ready for maintence we may see products tighten. Refinery runs fell back to 88%.
This comes against a backdrop of a Federal Reserve statement where the Fed is showing more worries about the lack of inflation and more worries about how their actions on raising interest rates could impact the economy internationally. Oh sure the Fed said the U.S. recovery is ‘Solid,” but is that wishful thinking? The Fed is starting to worry about the companies that are feeling the pain of the strong dollar and how deflation in Europe could be inflamed if the Fed acts too soon.
Europe is seeing more pressure as a run on Greek banks is slowing. The Guardian reports that Daniele Nouy, who chairs the ECB’s Supervisory Board, declared that Greek banks are strong enough to survive the crisis, and hailed their progress in improving their balance sheets. They also say that Deputy PM Giannis Dragasakis told reporters last night that Athens will seek dialogue, not confrontation, with its lenders. He also said that “our concern is the proper functioning of banks”, suggesting the government wouldn’t let them collapse.
Now $44 barrel oil is under assault but is hanging from a thread. If we can hold and rebound it will look more solid. Bull spreads may be in order!
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