There’s been some agreement inside the analyst community on oil -- $70 a barrel is not sustainable, in that several producers don’t have the prime acreage or debt positions to survive. The number of requests for rig permits is already dropping, capital expenditures are being slashed and production growth will significantly slow, if not reverse in the next six months. Knowing all this, why can’t crude oil rally?
This is where I come in and try to explain the vagaries of financial oil markets. Again and again, I try to show how the financial aspects of oil overwhelm the fundamentals and play havoc with them, delivering counter intuitive price action. Charting the money flows into oil will show why the oil market is destined to stay low for an extended period of time, even perhaps after the glut begins to clear and US oil production starts to drop.
All of these reasons have nothing to do with supply or demand and are entirely financial – but describe why oil will continue to be weak for the next six months.
1 – E+P panic: Oil companies trying to avoid default risk are more apt to hedge oil futures at $65 than they are at $75 – even though these hedges are below breakeven prices for many of them, they mitigate the immediate risk of bankruptcy should oil go down to $50 a barrel. This is a market that breeds selling as it goes lower.
2 – Investment Bank marketing arms gone: One of the results of IB marketing of alternative…