One way to tell that a bear market move has run its course, or is getting close at least, is when front page stories on major news outlets declare that all hope is lost, and none of the experts think things will get better for a long time, if ever.
Well, forever is a very long time, and even if it weren't, the bell has tolled, since Bloomberg, on Feb. 12, declared the following: The Oil Industry Got Together and Agreed Things May Never Get Better. "Thousands of industry participants gathered in London for their annual get-together, only to find a world awash in crude and hardly a life jacket in sight." The head of commodity research at mighty Goldman even said: "I wouldn't be surprised if this market goes into the teens."
(Click to enlarge) Related: Does This "Panic Index" Show A Major Crisis Coming In Oil And Gas?
Whether or not Jan. 20 was the bottom for Brent (an ominous day being exactly one year from the next Presidential inauguration), closing under $30, is yet to be determined. But if nothing else, the extreme pessimism on offer at the London gathering make it likely that a rally, if not a turning of the tide, is in order. And, if that is the case, now that the oil price seems to be a symptom rather than a cause of global growth, or lack thereof, there is reason to believe that the S&P is also due for a rally.
After all, even if China is spiraling down into deflation, the Shanghai index isn't going straight to zero, and predictions about economic activity in China, including how much oil they will burn from now on, are likely to be highly correlated to the direction of financial markets until the dust settles. The reasons for despair are in good supply and the Bloomberg article above does a fine job reiterating them. Recall that the oil market peaked in 2008 at $147 when Beijing amazed the world with its summer Olympic Games and its appetite for all commodities seemed insatiable, and everlasting.
What Could Go Right for Oil?
Plenty. We are still dealing with a Middle East that is on fire. Can you predict how much oil Iraq and Iran are going to pump this year or five years from now? It does seem clear that Russia and Saudi Arabia have no intention of cutting production, which means that higher cost producers, as in U.S. tight oil players, cannot all stay in business. The following dynamic Bloomberg graphic shows the utter collapse in U.S. drilling rigs. The most recent figure for rigs is getting close to the record low set in 1999, when Brent was trading in the teens.
Even Eagle Ford has seen a 70 percent reduction in its rig count during the last year, another solid reason why there doesn't seem to be much cause for hope in the Bull's camp, i.e., too much supply: "This week [Feb. 26], the U.S. had 507.6 million barrels of oil in storage, which is 'at historically high levels for this time of year,' according to the U.S. Energy Information Administration." Related: Oil Prices Seesaw On Declining U.S. Production, Increasing Stockpiles
(Click to enlarge)
Source: Morgan Stanley
At some point (place your bets), when enough rigs fall silent and enough companies go out of business, the supply will diminish and the price will get traction. By the time everyone can see it, the market will be well off the bottom. The rig count is not going to zero, even though the current trend would get us there by August. ". . . at WTI [West Texas Intermediate] of $30/bbl or below, E&Ps are likely to continue dropping rigs at a rapid pace. Using an average decline of 22 rigs per week witnessed YTD, we would theoretically reach zero rigs before August."
It still seems reasonable to keep your eyes on what is happening in China, where the demand for oil has not fallen, as it has for coal. The IEA predicts that China will need to import another 2.6 million barrels per day five years from now. To that end, China has loaned Brazil's giant, but ailing, Petrobras $10 billion. Brazil's total output is roughly equal to the extra imports China is expected to need by 2021.
So, the game is still afoot. U.S. tight oil cannot supply all the world's needs going forward, however it may be reasonable to assume that, for the foreseeable future, Saudi Arabia will decide where the floor is for the price of oil, and the U.S. will decide where the ceiling is. There is still rough sledding ahead as the variables that will determine how much oil China and the rest of us use have grown in both number and uncertainty. Related: Saudis Turn To Capital Markets For $10 Billion Loan
When will EVs start to take meaningful market share? The answer to that should be dependent upon the price per kWh for their batteries. When will the price drop to the point that a $30,000 EV can go 200 miles on a charge? Sooner than most think. What difference will autonomous cars make to the overall mix? Will their coming drive down the market for car ownership if and when millions of millennials are happy to share a common ride?
Warren Buffett acknowledges, in his recent letter to shareholders: "At some point in the future-though not, in my view, for a long time-GEICO's premium volume may shrink because of driverless cars. This development could hurt our auto dealerships as well." For him, that day is far enough away that he has yet to sell those positions. But at 85 years of age, his time horizon is not quite as long as most of his shareholders, or most of Oilprice's readers.
By Henry Hewitt of Oilprice.com
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Henry Hewitt is an investment strategist and portfolio manager with 36 years of experience in renewable energy. He is also a seasoned writer having published… More
Comments
History can teach us what happens to consumables, their name should teach anyone what happens to them, otherwise they'd be called producers of replicators or something similar.
Humans? Well we all have a fair idea of what they do, they consume.
At some ages and at some moments we all day dream of utopian scenarios such as us all getting along, rowing in the same direction and being able to share our food or our couch, house or car.
Then we go home to find that some lovely 'fellow traveller' has drank all the milk, another has made some mysterious mess on the couch, yet another has broken a window or not done their share of the housework and of course finally, someone has damaged or not returned the car when promised.
Cavemen lived in caves partly because they were defensible and helped protect their possessions.
Natural competition and therefore evolution is dependant on organisms not getting along and not being able to share resources to the detriment, ( real or perceived ), of oneself or one's protective grouping. After all- even ants and bees who live in high population situations will not tolerate a competing population even if it is the exact same specie or varient thereon.
We all know that very long term that EV's will take over from the our cherished animals living under our right foot and ready to growl when we require.
The question is in what decade.
The automobile industry has bought and shelved many energy efficient designs merely to keep the consumption of oil and liquids growing.
The EV will be no different.
If Google etc think that creating a new technology will magically destroy oil then they are frightfully mistaken. Oil will only be truly sidelined when enough nations can make profit from the energy storage materials sales or the production of the technology or vehicle.
I'm now just over 40yrs old and life has taught me that right is only made so when it tips the scale in its' favour, in other words more nations will have to see a profit before a new technology is taken up.
As for the more basic question of oil market direction from here on in?
Well it is the most elementary question of perceived supply and demand.
The perception is still somewhere closer to worrying about storage levels etc, but that is silly in my opinion because storage for a future consumable will always be created.
Demand? Well that is growing everyday that a person with no car gets to the age or economic ability required to procure one.
Age? Well demographics show that the planet is having less children but that they are surviving to a much higher extent than ever before so that is still on the upside, the most educated guess being until we hit around 9 billion of us.
Economic ability? That is growing and will not diminish, ( let us all pray it doesn't because only some incredible disaster will knock it backwards ), until more of us can than can't.
Why do I say until more than can't? Because the rich always can, the average always manage and that only leaves the below or well below average to make up the number who can't.
Don't forget that the rich need the bulk of us to consume, just to maintain their emotional and self dictated feeling of superiority- basically no matter how well the rest of us do, they need to feel that they are doing better.
I'd argue that we will from now on, until the next production boom, see a building of momentum on the upside, and so dummies like me should be able to trade at a profit, as long as we keep our nerve.
Thanks oil price.com for providing this great forum for all of us fish in the school.
This being more of an opinion piece than a comment, I would be delighted if it could have the chance of being an article on this site. My age is stated above and I have lived much of my life between Sydney and Osaka in Japan and have had a wide variety of friends from Mitsubishi steel to Sydney's 'magic mile' car dealers to hydraulic engineers responsible for designing small city size projects.