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Leonard Brecken

Leonard Brecken

Leonard is a former portfolio manager and principal at Brecken Capital LLC, a hedge fund focused on domestic equities. You can reach Leonard on Twitter.

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Forget Media Hype. Oil Set To Rebound

Forget Media Hype. Oil Set To Rebound

Despite oil prices being somewhat depressed by the hype surrounding the Iran deal (which has repeatedly been debunked as not affecting supply until, at the earliest, the first quarter of next year) expect another large oil inventory draw to come, starting off with the API inventory figures published on Tuesday followed by Wednesday’s EIA report, which I expect to not only show an inventory draw of over 4 million barrels again but continued declines in production. This is, in part, tied to growing demand in the U.S., but there are several other reasons we should discuss.

With the Iran deal, the consensus seems to believe that 600,000 to 1,000,000 barrels per day could be added to the market next year. The exact figures are uncertain, but that range seems realistic.

But what the media is missing is the fact that demand will grow by over 1 million barrels per day over that timeframe. China, by opening up its refining markets to non-state run companies, will boost its demand by some 600,000 bpd alone. Further, natural production declines eat away at 4 to 5 percent of production each year. That means that the current 95 million barrels per day of supply could see the erosion of 3-4 million barrels in the next year. Related: The Emerging Megatrend Coming To Oil & Gas

Rising demand and natural decline more than offset the supply risks on Iran, yet the media misses that story. Between objectives pursued by the central bank and the warped media coverage, the investor class is ignoring underlying fundamentals and trading on hype.

One of the reasons I am sticking my neck out here is, I have studied how the media, as well as the puppeteers who pull the strings that shape our society, act in concert. The media is famous for spin, deception and distraction, creating what I have referred to as “selective perception.” They are in the process of diverting attention to Iran now to create the aura of overhang to depress oil prices.

At the same time, just as we saw last week, it creates a risk so that any positive news – such as the 4 million plus draw last week along with a 66,000 barrel per day drop in production – gets largely ignored. Related: Big News For Uranium Miners Could See A Price Rebound Soon

And it seems as if traders do not even realize what is going on. Investors are being tricked into following media hype and central bank decisions instead of fundamentals. Case in point: technology and biotechnology have reached record highs in the face of deteriorating earnings and slowing economy, as geopolitical risks mount.

The second reason why I believe both production and inventory will continue to decline is the fact that virtually all shale producers remain free cash flow (FCF) negative and Wall Street’s lifeline to support such a model is being cut. Swift Energy (NYSE:SFY), in failing to raise funds through a bond deal, is a perfect example of what’s to come as we head into fall. I recently confirmed through an industry contact that the amount of assets available for sale has increased dramatically from just 4-6 weeks ago. That is yet another sign of distress. I have maintained that, regardless of oil prices, this will mark the bottom in valuations for the E&P group in the near term as M&A accelerates from here on out.

Despite all these musings, where oil prices go will be highly dependent on how disciplined E&P companies are. If they fuel the concern of oil oversupply like Pioneer Resources (NYSE:PXD) did recently, by saying it will add 2 rigs per month when oil was back at $60, then prices won’t do anything. The industry needs remove media hype or every negative issue will be amplified into falling prices. Further, if the Federal Reserve, in all its wisdom, decides to raise interest rates despite wide spread economic weakness and wage stagnation, that too will pressure oil further as the dollar remains strong. If, like many expect, the Fed stops the nonsense and moves toward another QE then oil will soar again. Related: This Is Why Californians Pay More For Their Gasoline?

The third reason why I believe the U.S. supply and demand picture is about to turn brighter, despite attention now being put on distillate stocks, is the EIA itself. In the past, I have been critical of their forecasts (which I will admit isn’t easy), given that mistakes can literally cost trillions. And I still maintain that this entire oil crisis has been engineered through incorrect assumptions by both the EIA and IEA, willfully or not.

But recently the EIA has stated that, within a quarter or two, it will improve its sample size of producers and start receiving producer data directly on a timelier basis. If this isn’t a precursor to a restatement of prior assumptions and forecasts, I don’t know what is. It’s coming for sure, especially when all eyes are on Iran now.


By Leonard Brecken of Oilprice.com

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  • Amerigo on July 21 2015 said:
    There has been much talk of 35 million barrels of Iranian oil in tankers. Two-thirds of it is condensate, and never subject to the sanctions. The rest of it is low-quality, high-sulfur content that was passed over by refiners. Iran has been ostensibly legally permitted to sell 1 million barrels per day of crude, but unlimited condensate.

    The real question is, why is there only 35 million barrels in tanker storage? Iranian production only decreased 1 million barrels since 2012, and Iran is producing 3.3 million barrels per day. That means more than a billion barrels (2b?) of Iranian oil has been sold illegally (not stored) since the sanctions of 2012.

    Iranian oil is chemically identical to Iraqi and Kuwaiti. Iraqi oil production has "increased" 1m barrels per day since 2012. Syria has recieved thousands of barrels per day free of charge. The rest perhaps is "missing".

    The current effect of lifting sanctions on Iran should result in rising price, as over 2 million barrels a day of black market oil can now fetch market price.
  • Dan on July 21 2015 said:
    amerigo, there are reportedly 51mln bbls in floating storage according to a new company that is tracking this stuff.


    With yesterday's appearance what seems like the first Iran oil tanker to set sail post-nuke-deal, Haaretz reports that Iran has been hiding millions of barrels of oil it never reported to the United States or in the world oil market, according to a company that has developed sophisticated maritime tracking technology. With the world’s fourth-largest oil reserves, Iran denies it’s storing oil at sea, despite reports that surfaced in The New York Times as early as 2012; but Ami Daniel, Windward founder and cochairman, shows "the Iranians are taking huge, 280-meter-long ships and filling them with oil, to sit at sea and wait. Because the sanctions allow for production of only three million barrels a day, they began storing the remainder... oil tankers have been sitting in the Gulf for anywhere between three and six months, just waiting for orders."
  • Dan on July 21 2015 said:
    question to the author...

    Leonard, what do you make of today's API figures showing an increase in crude inventory and increase at Cushing in view of your above article? I must say I tend to agree with what you have written, however the data being issued contradicts the expected news...higher US demand in general, add to that the driving season and lower production from the main oil plays in the US...so the rise can only be as a result of there being increased imports which should not affect the markets as imports can be switched off at any time.
  • Stavros Hadjiyiannis on July 21 2015 said:
    Dear Leonard,

    There are two reasons why the MSM and Wall Street permanently spin the "Oil Glut Narrative":

    a) It hurts Russia. I think I need not elaborate much more on this point. If something is seen to hurt Russia, then the businessmen and workers in the American/Canadian/North Sea oil patch are more or less fair game/expendable.

    b) Wall Street and the post-modern media and ruling elites, hate oil/industry/rednecks or whatever they see as old-fashioned. They have this obscene fantasy in which production/hydrocarbons etc are all replaced by the IT paradigm and some miraculous "new technologies".

    In the end though, since the current oil price renders US shale, Canadian heavy sands, deep offshore (in several parts of the world) largely unprofitable at some stage we are bound to be facing serious crude shortages and subsequently the oil price will skyrocket. You also correctly note that the Fed may in fact have to resort to a new round of QE (since the US is experiencing extremely weak growth, which can easily turn into outright recession if rates are hiked) and that will boost the oil price even further.
  • Zorro6204 on July 21 2015 said:
    Oil prices are cut in half based on the media? There is no glut? Bosh. Markets react based on demand and supply over time, if there wasn't an over-supply then the market would have been tight and prices bid up. Clearly that's not been the case, $50 buys all the oil anyone wants, so there must be enough supply, and then some. Oil prices can higher than the market needs to pay based on perceived political risk, but they can hardly be too low or there wouldn't be sellers, and there are. The day that someone bids $50 and there are no takers, then we'll know the market us balanced. Looks to me oil could test $40 again, with apparently more than enough willing sellers.
  • Mike Dedmonton on July 22 2015 said:
    Oil prices will rebound from the thirties. Any shortfall from US producers can be easily made up by Saudi Arabia. In another few months, Iran can help keep the glut going.
  • randall bramstedt on September 05 2015 said:
    This article, written in July, turned out to be so incorrect.
    The fundamentals of oil demand globally have been deteriorating
    for over a decade. The problem isn't supply as much as the demand
    for this dying fuel.

    This article was nothing but a groundless cheerleading effort for oil.
    Soon afterward, WTI oil dipped to around $37.00 per barrel. Investors
    who think oil will rebound to prior levels or that oil is a good long term
    investment, will be crushed. Oil fundamentals are horrible.

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