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Oil Prices Will Stay Low Despite "Misguided Retail Investors", Goldman Says
Last week we outlined how the economics of the floating storage play can help determine the future course for oil prices. We said that the main takeaway from SocGen’s analysis is that storage availability and contango should be taken into account when thinking about where crude prices may be headed. We followed that up by showing that the US is set to run out of on-land storage capacity in June (a theme everyone is now picking up on):
Come June, when all available on-land storage is exhausted, each incremental barrel will have to be dumped on the market forcing prices lower and inflicting further pain on the entire US shale complex (just as Q1 results are released which will invariably show huge writedowns as companies will no longer be able to hide behind the SEC-mandated accounting trick that made Q4 results appear respectable).
We also noted that retail investors hoping to play for a rebound have piled into oil ETFs at just about the worst time imaginable, with contango widening the most in 4 years:
Don’t look now, but the sharp slide in crude prices may be leading the proverbial sheep to slaughter. Investors have piled into the market’s largest crude ETF over the last several months sending the number of shares outstanding to the highest level since 2009. We suspect many of these “investors” might be unaware that they’re currently staring down the most severe decoupling between second- and first- month contracts in four years.
Right on cue, Goldman is out today with a note which discusses all of these issues at length. Their conclusion: “Despite inflows to oil ETFs the trough is yet to come.”
From Goldman:
We believe that the key force pushing commodity markets higher has been retail investor inflows into oil ETFs. Importantly, these strong inflows have emerged despite weak commodity fundamentals, and with arguably a more bullish outlook for equities than for commodities…
We believe that these inflows are generating selling opportunities in oil and copper precisely because they are at odds with commodity market fundamentals. As we have previously outlined, even with the rapid fall in the US rig count over recent weeks, rising rig productivity, the backlog of wells and the possibility of high-grading in the near future, means that US production growth has not yet slowed enough to balance the oil market. The record US oil inventory builds seen over the last few weeks support this view, with US Gulf Cost (PADD 3) stocks now at 220 mil bbl, the highest level on record. Furthermore, we expect inventory builds to both continue over 2015H1 and to spread globally (OECD ex. US inventories have been drawing recently), as China’s oil import demand remains weak…
...and on home gamers’ “misunderstanding” of how the world actually works...
Apart from the obvious disconnect between recent price trends and physical fundamentals, the rationale of going long oil on an expected normalization or “mean reversion” also suffers from an incomplete view of how commodity returns are generated. Commodity returns incorporate both price returns and roll yields. And with roll yields currently around –9% for oil (–2.4% for the overall S&P GSCI), any upside to price returns is being significantly eroded by losses on roll yields. We expect this situation to continue for at least the next 6 months, with the roll yield on the S&P GSCI continuing to weigh on total returns.
...and a bit on storage capacity...
Given the physical nature of commodities, these near-term supply-demand misalignments lead to a build in inventories. While the capacity to store these new stocks exists, spot and near-dated futures prices will decline, but the sell-off remains orderly. However, if storage approaches capacity limits, the market must adjust by incentivizing an even more rapid rise in consumption through more forceful price declines. In both cases futures curves are pushed into contango, generating negative roll yields over the sell-off period. Importantly, falling spot prices, negative roll yields and rising inventories are all symptoms of the same fundamental market weaknesses.
* * *
There you have it. Short term rebounds in crude prices are likely driven by misguided retail inflows into oil ETFs and aren't to be trusted because fundamentals (trivial things like production and storage capacity) point to further weakness going forward.
We'll leave the last word for the IEA which, in their monthly oil report (out today), had the following to say about prices:
On the face of it, the oil price appears to be stabilising. What a precarious balance it is, however.
Behind the façade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly.
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Storage simply to manipulate the mkt price higher is a known sin.
OIL.....
https://aadivaahan.wordpress.com/2011/02/14/oil-crisis-in-a-thousand-words/
Reality: Oil prices will remain low till all the pre-work for WWIII has been done on the cheap. After that, it's every man, woman and country for themselves, SPR and all.
Come Spetember....
So RETAIL investors are moving the oil market? Oh, boy, do I have my doubts about that statement.
Yeah, this is GS speaking, a business TD has trashed since ZH opened. Now, they're suddenly a font of perspicacity...
+1 for using perspicacity in a sentnece. I'm forwarding that to the NKor Dept. of Propaganda for use in Kim's next speech.
Thank you--I might also add that GS' dire note of caution can't possibly have anything to do with the fact that option expiry is Tuesday...After all, Lloyd himself has categorically forbidden his traders from fucking with the furures markets!
Well, that's what he told me...
Misguided retail investors...
Don't they call them Muppets anymore?
you need to check the oil ETF's. HUGE inflows into them lately. which means those ETF's are buying contracts. in other words, GS was able to convince all the peasants $50 oil is cheap. and they want to "invest" in it by buying leveraged, decaying pieces of shit like UCO and USO. go to any yahoo MB and all you'll see is everyone wanting to buy cheap oil. its comical.
I just took out a second on my home to buy USO.
No, retail investors are catching the falling knife.
They must know war is coming soon and are loading up on longs.
Regards,
Cooter
I can't even believe it, but oil at $0 could in fact happen.
What if its the counterparies on the oil hedges taking delivery and storing rather than
cash settling the whole hedge ?
$22 tn in oil derivatives are ticking nicely.
Isn't that SOP for oil and the reason a lot of that storage exists (it is leased out to those who wish to store - regardless if they are a refinery or a speculator)?
Regards,
Cooter
Tyler keeps saying its specs playing the contango.
2220tn $ in dollar derivatives are ticking nicely
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Why can't the Shale Producers drive a bunch of tanker trucks up the the steps of Capitol Hill and dump out a ton of Oil?
The farmers do that shit all the time in Europe and it seems to work.
They could, but it's more likely they'll drive those trucks up the steps of Capitol Hill and dump out a ton of debt.
Because bail-out.
"The farmers do that shit all the time in Europe and it seems to work."
If European farmers were dumping crude on the streets everyone would hate them. There's a world of difference between tomatoes, potatoes, cabbages and crude.
DC is like Disney Land for the power hungry narcissist and plebes aren't allowed past the gate.
Regards,
Cooter
Wheat and milk aren't toxic substances, do you want the EPA Gestapo coming after you? "Here meet your new cellmate JoJo, he seems to like you"
If they did that with trucks of money, this whole mess might just go away.
Maybe that's what this is, a giant protracted shake-down on the Frackers.
Of course they will stay low, the pentagram needs a major war.
Long an Oil ETF is a very bad [stupid] idea in heavy futures contango.
Oil prices could remain unchanged and you could lose your ass.
Caveat Emptor.
Not if you buy on a plan.
Trading vs. investing.
Oil doesn't grow on trees....and entries and exits still rule
Don't try to catch a falling knife.
Buy low, sell high.
Shouldn't "professional" traders know about these two axioms?
If you invest in any oil ETF you will lose your ass. USO started off tracking WTI prices in 2006 at $70 and is now at $17 while WTI is at $45.
Now what is Goldman trying to sell?
yep...the retail investor is the problem... WOW
Unlike the stock market to the moon on alwful fundmentals....which is due to what?
No, the retail investor is the sucker
Some heavy defense of the $46 handle. Wonder if Nanex can see this shit.
if the glut continues into the fall that would be bad for oil prices. until then don't trust anything goldman says. even with a recession oil consumption goes up in the (northern hemi) summer months.
The US is still importing oil from Canada and Mexico primarily. If storage fills up the marginal barrels will just displace imports. Sure there could be WTI price impacts but I would expect it to more impact Brent and foreign oil prices more than WTI prices (ie narrowing the spread) as that oil gets shipped elsewhere.
I am no energy trader though, so what do I know? Not enough to enter that casino with my own money.
An excellent point! What we should be seeing is a big drop in oil imports, especially since anything we bring in from oil tankers would be at world oil prices rather than 'cheap' WTI prices.
I agree that oil ETFs are poor choices, but I think oil majors and oil services are cheap if you can hold them for a year or more. Remember - Goldman will never look out for the little guys, and the fastest way to wealth is to do the opposite of what Goldman releases for public consumption.
thank gs that terrorist never attack oil infrastructure- yemen fell and not a ripple in the pond of oil-libya the same - mosul the same-just who is guiding these terrorist in ME again?
a giant sitting duck of oil supply in ME-and war all around it..but no worries
some say saudi pays off the terrorists to keep them away- but I doubt that - the cia does not take bribes.
wrong, the worst possible time to buy into the OIL ETFs was last year when the black stuff was in the 90s. the price will stay low while all the little drillers go bankrupt and then the olig's will do like they've always done and swoop in and pickup the remnants for pennies on the dollar.
it's all fertilizer, the only play in Oil is learn like W.O.P.R. did and to not play the game at all.
Went to a Giants preseason game in Scottsdale the other day - and I can assure you that there is plenty of gasoline consumption on the roads in and around Phoenix.
How does that compare to gasoline consumption in Phoenix last year? How about in Asia and Europe this year vs last year?
WLL came out a week ago saying they are for sale. No one is going to buy that shit. JPM came out today and said the same thing, no one will buy that shit. WLL popped to $39 yesterday which was a gift. Down 8% today as oil continues its crash. WLL to zero.
If recent history is any judge, the S&P isn't far behind after this nasty drop in crude: www.macrotrends.net/chart/1453/crude-oil-vs-the-s-p-500
HEY WALL STREET!
A COMPUTER DOES NOT KNOW HOW TO COUNT!
(But this is not true of Mr. Market....
So once again its Gold in Sacks trying to get everyone to sell at he bottom why they are buying. May the lying bastards rot in HELL! Bakken production will decline by 600,000 barrels by end of June. Should take care of alot of the "supposed" overflow. Then the worm turns.... so the Goldmen Gang only has a couple of months to scare the crap out of all the longs. If you are buying now good thing as long as you don't need the $$$ for awhile. Peak oil is real and the longterm loss of the shale oil will be a major supply issue for a very long time.
http://srsroccoreport.com/shale-oil-production-will-fall-600000-barrels-per-day-by-june/shale-oil-production-will-fall-600000-barrels-per-day-by-june/
The part of the equation that you and so many other zeroes keep leaving out is the slowing US and global economy. All these capex cuts result in mass layoffs. People wirthout jobs don't drive or buy much. When they don't buy much, others are laid off. Then those people don't drive or buy much. China, Japan, and Europe are collapsing along with their economies. The oil is "cheap" in USD, but no so cheap in their currencies, which have collapsed. OPEC and the EIA are still predicting increases in oil consumption in 2015. When the reality comes out that consumption is decreasing, that will only further collapse the price of oil. Where's the blood in the streets? Only two little shale companies have gone bankrupt.
“Despite inflows to oil ETFs the trough is yet to come.”
Of course it is. Not a surprise when one can lever the price in any direction to suit the maximum lord's work bonus potential.