To me, commodity pricing today is so distorted that it is almost startling. The media continues its post Goldman Sachs’ bearish calls to pound away on OPEC supply with little attention paid to rising demand. Admittedly, as we end the summer driving season, such demand will wane, adding pressure for supplies to draw down as we head into the fall. Even the EIA seems to think this trend will likely begin in July.
The focus this week in the media is Saudi supply, as it negotiates with India for more supply without mentioning a reason: demand is up. This, even after reiteration upon reiteration from the Saudis that demand is exceeding expectations. Even the EIA has finally admitted it, although as expected, they upped their U.S. supply estimates to over 700,000 barrels per day in 2015 to offset the euphoria. I have my doubts on this call of higher supply as I’ve written before. Related: Oil Prices Responding Positively To Bad News, But Why?
I have emphasized the point of waning supply, tied to depletion, for months now, which, like demand has gone unspoken in the media with the overriding narrative focused on efficiency gains or well productivity instead. The bias is very clear at this point and so is the media agenda.
In the near term, shorting in highly leveraged names ahead of the fall credit redetermination has caused equities to decouple from oil prices. Energy prices are at or near highs and even natural gas has recovered some while E&P equity prices for leveraged names are at lows. Look for a substantial pick up in M&A soon which, more than prices, will act as a catalyst on equity prices in my view. Related: New Silk Road Could Open Up Massive Investment Opportunities
On that note, with egg prices nearing $3 a dozen and milk at over $4 a gallon, one has to wonder if the outcry from media will shift there instead of oil. And milk prices are subsidized by the government while gasoline is taxed substantially, no less. After all, unleaded gasoline, which is refined and transported after being explored, drilled for and transported again, is selling less than either of those two other commodities. This is pure absurdity especially given that both eggs and milk have ready substitutes while gasoline doesn’t. Consumers can always eat other things. So when one hears the cries that oil should go even lower, you as the consumer should note the relative value of things and ask yourself if any of this makes sense. Maybe oil producers should use their land for cows and chickens instead to see better prices? Then what will the media do?
By Leonard Brecken of Oilprice.com
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