The dog days of summer seem to be bringing on even more dog days for OIL. From my perch, there now seems to be very hard caps on where oil can go from here for the time being - both on the upside and, most probably, on the downside as well.
On the downside, there is the fact that oil stocks are rebalancing. A continuing rebalancing of the global and U.S. oil supplies is what we've been waiting for the last 3 years and should stop any major drops in oil prices. We see that rebalancing in the domestic chart on oil stockpiles, now nearer to the outside limits of the 5-year average than it's been since the oil collapse began in 2014:
(Click to enlarge)
On the global side, despite the increasing production from Libya and Nigeria, we see that in Saudi Arabia domestic stockpiles are collapsing, as well as the Saudis holding back 600,000 barrels a day of their own production for domestic needs. That's a lot of oil that's getting used (albeit probably temporarily) by the Saudis that's not currently getting to the global marketplace.
So, the downside is likely very limited from here.
On the upside, the potential for recovery is limited as well, mostly by two physical ceilings - First, there's the huge continuing overhang of drilled but uncompleted wells (DUCs) that already have sunk costs attached and will definitely be put on line as soon as the crude price makes them profitable. You cannot possibly expect any oil company CEO to be responsible in…
The dog days of summer seem to be bringing on even more dog days for OIL. From my perch, there now seems to be very hard caps on where oil can go from here for the time being - both on the upside and, most probably, on the downside as well.
On the downside, there is the fact that oil stocks are rebalancing. A continuing rebalancing of the global and U.S. oil supplies is what we've been waiting for the last 3 years and should stop any major drops in oil prices. We see that rebalancing in the domestic chart on oil stockpiles, now nearer to the outside limits of the 5-year average than it's been since the oil collapse began in 2014:
(Click to enlarge)
On the global side, despite the increasing production from Libya and Nigeria, we see that in Saudi Arabia domestic stockpiles are collapsing, as well as the Saudis holding back 600,000 barrels a day of their own production for domestic needs. That's a lot of oil that's getting used (albeit probably temporarily) by the Saudis that's not currently getting to the global marketplace.
So, the downside is likely very limited from here.
On the upside, the potential for recovery is limited as well, mostly by two physical ceilings - First, there's the huge continuing overhang of drilled but uncompleted wells (DUCs) that already have sunk costs attached and will definitely be put on line as soon as the crude price makes them profitable. You cannot possibly expect any oil company CEO to be responsible in not helping to overload an already glutted crude oil market by reigniting production from DUCs - they've got to get those sunk costs back as soon and whenever they can. Second, there is the continued lack of financial hedging that's been done on projected U.S. 2018 production - well below where we were even at this point last year. That's selling that will also hit the market like a hammer, should oil reach much above $50.
So, the upside is limited as well.
As investors, there's little to be done right now, but I'll leave you with this link on profitable investing that includes this very important little matrix chart from super fund investor Howard Marks:
(Click to enlarge)
To analyze it simply, you can either invest with the crowd or be a contrarian, and in any investment, either be right and make money, or wrong and lose it. That makes four possible outcomes where only one really makes for a great investment - being right and contrarian at the same time.
It's the most important investment tidbit I've seen in years - completely true, and how I've been investing for decades. I'll let you know the next time I think we're at that Northeast corner of the matrix in oil stocks. I don't believe it's now.
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