It's been a horrible run for oil and oil stocks. But, dare I say it; there are finally some tangible signals of a workable long-term bottom forming in oil - and a further longer-term bull market in oil that's brewing with it.
Look, there's no one left who is ready to believe that oil can ever rally substantially again. But I know it must - we cannot get oil from all of the newest, most important sources of oil in the deep oceans and oil sands, as well as from most shale resources here in the U.S. for $30 a barrel.
We've been waiting for this over supplied market to 'clear' and waiting for oil companies to stop producing full-scale. But that has been a much longer process than just about anyone imagined it could be, including me.
Basic economics are unassailable, however and must assert themselves to destroy production and lift oil prices back to a reasonable, and sustainable level.
The question, for the past year, has been: When?
Here are some signs that we're further along than even the market is ready to admit:
Fundamentally, oil production in the U.S. is beginning to drop, with quarterly oil company reports pointing to a much deeper slackening of barrels later in the year - Shell, for example, reported on Thursday a very deep drop in profits, which wasn't surprising. What surprised was their admission of drying up reserves, a consequence of slashed capex that will reverberate for years with Shell and every other major experiencing the…
It's been a horrible run for oil and oil stocks. But, dare I say it; there are finally some tangible signals of a workable long-term bottom forming in oil - and a further longer-term bull market in oil that's brewing with it.
Look, there's no one left who is ready to believe that oil can ever rally substantially again. But I know it must - we cannot get oil from all of the newest, most important sources of oil in the deep oceans and oil sands, as well as from most shale resources here in the U.S. for $30 a barrel.
We've been waiting for this over supplied market to 'clear' and waiting for oil companies to stop producing full-scale. But that has been a much longer process than just about anyone imagined it could be, including me.
Basic economics are unassailable, however and must assert themselves to destroy production and lift oil prices back to a reasonable, and sustainable level.
The question, for the past year, has been: When?
Here are some signs that we're further along than even the market is ready to admit:
Fundamentally, oil production in the U.S. is beginning to drop, with quarterly oil company reports pointing to a much deeper slackening of barrels later in the year - Shell, for example, reported on Thursday a very deep drop in profits, which wasn't surprising. What surprised was their admission of drying up reserves, a consequence of slashed capex that will reverberate for years with Shell and every other major experiencing the same thing.
In the U.S., an even stronger capex decline of shale assets will make itself felt even more quickly: Shale wells are fast to produce and fast to empty, making spending for new drilling even more critical than with conventional assets. While the Energy Information Agency sees a 500,000-barrel a day drop in U.S. oil production in 2016, I think they are wrong by a factor of three, and we'll see a 1.5million-barrel a day drop.
Overseas, the scenario doesn't seem better, despite initially stronger production from OPEC members. Worry over a quick influx of new production from the Iranians got a cold bucket of water this week as the Iranians canceled a London convention assigning new Iranian projects to Western oil companies. Iranian hardliners are said to have stopped the meeting, afraid of giving away too much to the likes of Total (TOT), Eni (E) and BP (BP). But I think there was an equal reticence of Western oil companies to re-embark on new production deals with Iran in this very unsettled oil environment. I would be shocked if we see an additional 500,000 barrels a day from Iran in the next three years.
Libya is now overrun with ISIS rebels and unlikely to unravel itself to resume significant exports any time soon.
And then there are still hints of a Russian/OPEC deal on a 5 percent production cut. Don't even bother to consider whether Iran would go along with any kind of deal, or even if an emergency meeting can even be called, according to OPEC guidelines. All that matters is whether the Russians and the Saudis are willing to talk about it. They're the only two participants that count.
Financially, some interesting changes are taking place as well:
Speculative short positions have been slowly getting covered over the last three weeks, even though they still remain at historically high levels. The curve of crude oil futures has also begun to flatten, despite a market that remains weak. This flattening of the curve signifies that storage is finally reaching its limit and will force production to roll off more quickly. That end to the 'carry trade' in oil is necessary for oil to finally find a bottom point.
All of this does not make me particularly bullish on oil in the short term, but it does strongly support that a new low won't likely be made. I believe we'll see a very slow consolidation of prices beneath $50 for the remainder of this quarter and the next one, before we see more constructive drops in production, storage levels and a truly constructive crude market that can be confidently bought.
But we're getting closer. A lot closer. The horror show of ridiculously low oil prices is seeing its last acts.
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