Oil Price Recovery May Be Too Much Too Soon

Tyler Durden's picture

Submitted by Nick Cunningham via OiPrice.com,

Oil prices have hit their highest levels in 2015, with WTI surging above $60 per barrel. Crude oil inventories in the U.S. declined for the first time since December 2014, perhaps indicating that the glut could be easing.

The EIA reported that oil stockpiles fell by 3.9 million barrels for the week ending on May 1, a larger drop than expected. With rig counts falling by more than half since last year, this could be the beginning of a longer contraction. Both weekly production figures and the stock build appeared to have peaked, suggesting that supplies are adjusting lower and demand is rising.

USCrudeOilStocks

That has oil prices surging from their March lows, with WTI jumping over $15 per barrel, and Brent about $20 per barrel.

WTIPrices

But have the markets overreacted? The rise in oil prices over the last few weeks has been so rapid that few predicted it. Speculators have raised their bullish bets to the highest level in years. The optimism may not be justified. In the past, bets to such a degree have often been followed by a fallback in prices, the head of commodity strategy at Saxo Bank told Reuters in an interview. Similarly, the top commodities official at Commerzbank told CNBC that the price rise was “premature,” and oil prices could dip back below $50 per barrel once the markets come to their senses.

In other words, the markets may have overshot, rising beyond levels warranted by the underlying fundamentals. Oil inventories are still at 80 year highs. The 487 million barrels of oil sitting in storage will take quite a while to drawdown. Crucially, oil production is still exceeding demand, leaving oil markets well-supplied.

Another reason that oil prices have room to drop is due to geopolitics. The recent run up in prices could partly be attributed to unrest in Libya. Protests cut off oil flows to the Libyan port of Zueitina in early May, reducing exports below 500,000 barrels per day from the war-torn country. However, if we have learned anything from Libya over the last year, it is that its oil production and exports are highly volatile – exports could rise once again, adding to global supplies.

There is still the potential for a major deal with Iran over its nuclear program. The possibility that Iranian crude could return to the market was widely covered after the framework agreement in early April. And while Iran’s oil would not begin to flow until 2016, the expectation of higher future supplies would push down prices immediately after news breaks that a deal is in hand. The deadline for negotiations is in June.

Perhaps the biggest question is how efficient drillers can become. In their quarterly earnings reports, shale companies have emphasized their success in reducing drilling costs, ultimately lowering the breakeven price at which they can produce. That remains to be seen. Prominent hedge fund manager David Einhorn had a different take. On May 4 he said that the industry is overvalued and can’t drill profitably even when oil prices were higher. “A business that burns cash and doesn’t grow isn’t worth anything,” Einhorn said.

Still, if prices remain above $60 per barrel, it could incentivize drillers to get back to work. The rig count, which has fallen by more than 57 percent, could start to level off and even reverse. Oil prices above $60 could be the magic threshold when drilling resumes. Both EOG Resources and Pioneer Natural Resources are eyeing a return to the shale patch this summer, as long as prices stay in the $65 per barrel range. New drilling – and the completion of thousands of drilled but unfinished wells – will bring new production onto the market, potentially sending prices seesawing back down.

Oil supplies are adjusting downwards, but the dramatic rise in oil prices may be too much, too soon.

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BoPeople's picture
BoPeople (not verified) May 8, 2015 9:25 AM

Maybe they got cold feet regarding their planned assault on Saudi Arabia. Or maybe Saudi Arabia has more friends in low paces than the crooked banking empire.

VinceFostersGhost's picture

 

 

Come on man, I've got a $100/bl derivative contract I've got to pay off somehow.

 

I'm treading water, but I can't do this forever.

gcjohns1971's picture

We keep getting very assertive predictions of sharp oil price moves.

The problem is that these assertive predictions differ on the direction of the move.

It seems premature for the various players in the oil patch to capitulate on their price war.

No one of any size has fallen yet.  That makes the sacrifices of each during the price war amount to naught.

 

I would bet on sideways until a clear catalyst appears.

scubapro's picture

 

catalyst

 

does the price move first and then whatever coincident 'event'  is deemed the catalyst.....or is it really as you, and most others, conjecture that markets move on events.

 

one would think, if proposed 18 months ago that saudi would be actively fighting yemen/iran on its door step that that catalyst would cause oil prices to spike to $200.    the catalyst(s) are so large its hard to tell what they are exactly.

Dr. Engali's picture

"In other words, the markets may have overshot, rising beyond levels warranted by the underlying fundamentals."

 

 

Orrrrrr..... Oil overshot to the downside in the first place. Margin calls are a bitch.

NoDebt's picture

We should ban any articles that have the word "markets" in them.

Dr. Engali's picture

I think we should ban articles with words in them. More chart porn hold the charts please.

tarsubil's picture

Or just replace "market" with "circus". I think that would work.

scubapro's picture

 

or "recovery"   the semantics indicate healing or resolution....while the reality is that the show is just beginning

herman55's picture

My tiny little company that builds oil well drilling waste mud processing equipment,

www.solidifly.com, has dropped its daily rental rates by 30% and the operators want more. it's hardly worth hauling the equipment to the drill site. I really don't think you'll see an uptick in rig count for another 2 years.

Gohigher's picture

My first oil bust was in 82', Texas. Seen plenty but this one is as bad as 82'. You can bet we will NOW see rapid alternating swings in prices up and down in a band between 45 and 65 FRNs as ground contango works out of the inventory with both gas and oil. (unless somebody seriously bombs somebody, soon).

Then when the PTB hits the switch.... 4 dollar gasoline and 5 dollar natty gas. Markets ? Stability for the consumer-slaves ? 

It is always been the working joes and service providers who take it in the ass. Fuck the downvoters if they packup against producers, they are coming for you next in some way or fashion. Tables turn. Rome will burn.

The Shape's picture

LOL it fell $65 and no one said "too much too soon".

Enough of the entertainers masquerading as analysts.

No one knows shit.

MajorFall's picture

Welcome to Financialization..

tarsubil's picture

So the price plummets and inventory rises. You'd think the lower prices would mean things are flying off the shelves and inventories would go down. Either people are so tapped out they can't buy at lowered prices or those selling oil are holding high inventories hoping for a price increase? Is that possible?  Does anyone know in this financialized circus?

saints51's picture

Still confident we see $30's. This is the last pullback for the elite to dump their shale plays. After they are finished distributing time for markup. Same game. Only way they keep oil high is if Buffet keeps going around blowing his oil tankers ISIS style or we have major hurricanes in Gulf of Mexico this summer. And we can never leave out war between 2 little penis political leaders.

LawsofPhysics's picture

Sure, in the absence of true price discovery the "price" can be whatever you like.  However, when it come to actually having access or being able to take delivery, that another thing altogether.  The Soviet Union showed us that central planners can set "official" prices whereever they like...

remind us, how did that work out again?

 

saints51's picture

hehe I hear ya buddy. I just feel it is like any trading chart. Before something bad happens there is always a footprint. There is always a piece of evidence. Their greed allows them to flash their hand right before the end happens. If you are good at this game you can pick up on it. Most are not good at this game which is why they will always be pillaged yet continue to play believing in some dream.

LawsofPhysics's picture

Games are for children, I produce real products and understand real value.  I see a much bigger picture.  Like my father and his father before him I want the business to keep surviving and providing a high standard of living for my family and my children.  Play all the paper games you like I will keep doing what my family has done for generations.

In my opinon, the smart money left the game recently.  Even if you manage to pull off the "big short" now it will be impossible to collect those "winnings" as the government will put everything in lockdown.  Good luck and stay away from nail guns...

It would appear humanity has been devolving after all, time to cull the herd, again.

same as it ever was...

saints51's picture

I do agree with you about the big short. Whoever catches it will never get paid. As someone who invests, that is not how I roll. Most of my cash has been transferred to assets I define as "real". My love is gardening.

Humanity is in big trouble. They need to wake up.

JRobby's picture

You should author "the footprint" blog?

saints51's picture

I am sure someone did who probably charges 10k for some magic trading secret.

LawsofPhysics's picture

Question; What is the real value of reduced hydrocarbons or consumable calories?

Answer; If you want to actually do or manufacture anything, they are required, period.

 

Some people will have the resources to maintain a decent standard of living, most will not.

same as it ever was...

Iam Yue2's picture

Pipeline Geopolitics: From Syria To Russia via Ukraine.

 

http://www.countercurrents.org/eapen301114.htm