Happy days are here again: The outpouring of joy at seeing gas prices marginally lower coming into Thanksgiving this year has the oil watchers all aglow – but I am less than convinced. The market is painting for me a far different story and we need to see the signs correctly to position our energy portfolios.
The dropping price of crude oil from the highs we saw during the late summer has most oil observers and the oil pundits excited – and the ideas behind that dropping price are universally repeated. We have an increasing supply profile from the newly developing plays in the Bakken, Eagle Ford and Permian shales. We have a deep supply surplus that continues to pour oil into the financial nexus at Cushing, Oklahoma, causing 6 straight weeks of stockpile builds. We have diplomacy breaking out in Iran, where the talks continue and where most observers see some sort of agreement coming in the next few weeks. That would open the floodgates on Iranian barrels, including 100m barrels of stored product and another 1.2m barrels a day of production potential that would immediately be unchained.
Holy croakers, Batman – there’s a perfect storm of lower prices for the long term brewing here, isn’t there?
Not so fast. The market is not being so quick to believe this long-term trend is coming, and neither do I.
Yes, there is undoubtedly a physical logjam of domestic crude going on in Cushing, putting pressure on front month prices. But what a deeper look into the curve is telling me is that the drop in prices at the front of the curve has been mostly a reaction to the deep discount that existed in prices at the back of the curve – that $8-10 discount in 12 month futures couldn’t last (and we made some decent money on that spread to prove that).
More important has been the Brent price, now running $14 over our domestic WTI price. It’s enough to say that the WTI at $94 is hardly cheap historically, but the GLOBAL price, represented by Brent at $108 is just damn expensive. If this is the market’s idea of a bear trend, it ain’t much to crow about.
In fact, the Brent market is telling me quite the opposite tale – this is an oil market that is not about to collapse and is clearly still far more risked to the upside than to the downside. It’s telling me that the prospect of an Iranian deal is tiny, if not just a Kabuki theatre for the benefit of the bleeding hearts on the side of diplomacy threading through a set of debilitating sanctions that are clearly working to help convince the Iranians to abandon their aspirations for a nuclear weapon.
It’s telling me about a new Libyan revolution that now has the oil resources in the East of the country in the hands of an entirely different government, with production virtually down to zero. It tells me of a very upset Saudi regime with their hands on all the swing barrels of global supply. It tells me of an Egyptian society still looking for stability to resume production and export. And it tells me about a continuing production shortfall in the North Sea that continues to put upwards pressure on the Brent benchmark.
I have continued to believe in the oil chart that has been drawn since 2008, delivering higher lows every year since. So far, 2013 has continued to adhere to that uptrend line and is holding it, even with all the supposedly bearish news breaking out.
And until that line is broken, I will continue to listen to the market. And the market is telling me that the idea of a new bear market in oil is just plain false. Don’t buy it. (Or, what I mean is, don’t SELL it).