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…