Speculators Still Stuck in the Oil Patch
On Thanksgiving Day, the 166th OPEC meeting came and went in Vienna, Austria with abundant anticipation yet, little to alter the current bearish narrative. OPEC’s alleged apathy to current output levels led to a non-stop futures oil spill on Friday as West Texas Intermediate (WTI) closed lower 10.2%, at $66.15 per barrel – its lowest settlement since September 2009.
The weekend headlines nervously ensued – providing us with plentiful opportunities to be mesmerized, enchanted, and perhaps slightly visually inebriated. Ink was spilt fixated on falling crude prices and the dire ramifications on markets while topics including everything from: credit quality, disinflationary pressures, junk debt defaults, FOMC timing and linking the shale boom to the late 90’s dotcom bubble.
What news hasn’t yet been reprocessed is the methodical blame shifting regarding futures speculators - weren’t they the instigators of the run-up in gasoline prices in 2008 and 2011? Nor have any candlelight prayer vigils been reported – circa 2008 - when gas prices first climbed north of $3.50 per gallon and Americans were warned to sell their SUV’s as $10.00 per gallon gasoline was entering realistic conversation.
This year should go down as one of not what happened but, rather what didn’t happen.
We entered 2014 with supply risk as the over-arching theme as oil traders were panicky over Egypt and its battle for a basic governmental structure, Iran and the prospects of a nuclear resolution, Libya producing through civil war, Saudi Arabia with its aging fields and growing costs, newly minted leadership in Venezuela, and the U.S. will never be able to deliver that much crude to Cushing, Okla. The demand story was equally compelling and converted many oil bears to bulls as first-quarter reports told tales of uneven yet stabilizing demand support for jet fuel, kerosene and diesel. Demand clearly wasn’t rising, however it appeared to have stopped falling.
Spring turned to summer and traders sifted through recent news of the Arabian Gulf, Ceyhan pipeline, North Sea refinery maintenance, Ukraine, super-congestion in Oklahoma, and violence in Northern Iraq. Market participants pondered possibility, faces pressed up against the confectionary shop window of their monitoring boxes while WTI traded at its yearly apex of $102.50 per barrel. No doubt markets were rattled and looking back, it was extremely difficult to cut through the established petroleum market “doxa” – global supply disruption risk was not just larger than ever, it was broadly diversified amongst a well-diversified spectrum of countries and producers. Prices surely could only go up from here!
We are now in the midst of an unprecedented and fairly unfathomable five-month and $30 price slide which brings to mind a fitting line by W.B. Yeats, “A line will take us hours maybe; yet if it does not seem a moment’s thought, our stitching and unstitching has been naught.” Interpretation: Supply risks were very well documented and the demand picture was relatively stable yet, once again, consensus got it all wrong – there was so much analyzing and effort put forth for oil to hit new highs this year and yet, another grim realization of the imperfection inherent.
Currently, falling oil prices continue to dominate the discussion all the while, traders are dealing with a deck that has been shuffled and recut; coming to terms with a market that is arch, unexpected, with a penchant to be turned with a flick of the wrist. Much concern is paid to the idea that Saudi Arabia is using its low cost production franchise to stifle the U.S. shale industry along with other various and sundry political conspiracies. Perhaps, but imagine the offsetting opportunities of lower prices and the subsequent hastening of down-hole technological advances. It’s quite difficult to make trains of thought run on time however; Americans hold dear a lengthy history of arriving ahead of schedule when properly incentivized. The U.S. petroleum industry will find a way to respond to lower prices with even lower break-even points.
Filtering through the current oil price winners (U.S. consumers, China, India, Indonesia) and losers (Nigeria, Russia, Venezuela, U.S. exploration & producers), I regard cheaper gasoline as a net economic asset – a non-traditional, progressive tax cut. Yet, I realize that the cure for lower prices is indeed lower prices as seasonality and structural supply and demand reactions eventually normalize price swings. Whether the price action is eventually toxic to our markets remains to be seen. All I am sure of is that consensus has it all wrong.