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
More Top Reads From Oilprice.com:
- Demand For Oil Slows As Globalization Reaches Limits
- Genel’s Stock Takes A Hit As It Slashes Reserves In Half
- Anadarko Slashes 80% Of Onshore Rigs, To Lay Off 95% Of Contractors