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Oil Markets Can’t Ignore The Fundamentals Forever

Tyler Durden's picture




 

Submitted by Arthur Berman via OilPrice.com,

Storage withdrawals and falling rig count have been the main sources of hope that U.S. tight oil production will fall and that oil prices will rebound. That hope is fading as it is now clear that recent withdrawals from U.S. crude oil storage are because of price, not falling supply, and that the drop in rig count has stalled.

Figure 1 below shows the relationship between U.S. crude oil storage inventory and WTI price. The thinking around recent withdrawals from storage is that this reflects depleting supply. The data, however, reflects that traders were storing crude oil during the price collapse in order to realize higher prices later. With rising prices over the last month, traders are selling their stored volumes. The recent inventory build correlates almost perfectly with the fall in oil prices and the withdrawals from storage over that last 3 weeks correlate with the 35% increase in oil prices since late March.

art1

Figure 1. Monthly change in U.S. crude oil inventory and WTI oil price (3-month moving average of inventory volumes). Source: EIA and Labyrinth Consulting Services, Inc.

(click to enlarge image)

Previous builds and withdrawals from inventory also correlate with price but generally price followed changes in inventory. In the recent case, price led inventory changes.

The other important point about Figure 1 is that inventory additions and withdrawals are seasonal. A Spring and Summer “de-stocking” is normal. In that sense also, the recent withdrawals from storage say less about oil supply than they do about northern hemisphere summer driving demand and the end of regularly scheduled refinery maintenance in the U.S.

Falling U.S. rig counts have been the main hope for a drop in U.S. oil production that might help balance the global market. This appears to have ended as shown in Figure 2 below.

Art2

Figure 2. Tight oil horizontal rig counts for key tight oil plays. Source: Baker Hughes and Labyrinth Consulting Services, Inc.

(click to enlarge image)

The Bakken rig count has stabilized between 78 and 80 rigs over the last month. Decreases in the Niobrara rig count ended at 28 in mid-April and it has been steady at 30 rigs for the last 3 weeks. The Eagle Ford play reached its low in early May at 102 and has been at 104 rigs for the last two weeks. The Permian trend remains lower although one rig was added last week for a total of 172 horizontal rigs. In many ways, these rig count trends reflect the economic attractiveness of the plays.

It is true that these rig counts remain substantially below 2014 highs and the lag from spud date to first production is about 5 months in the Bakken and 3 months in the other plays. In other words, the effects of lower rig counts have not yet been reflected in current production data which lags about 3 months itself. Published EIA production for February and April is an estimate.

The third pillar of hope for decreased U.S. oil supply has been growth in demand because of low price. That support remains strong as March vehicle miles traveled data indicates the highest gasoline demand since 2007, just before the Financial Crisis began.

The recent 35% increase in WTI and 40% increase in Brent prices is based more on sentiment than real evidence and I expect that prices will fall unless tangible data appears to support present prices. A geopolitical risk premium or an OPEC production cut in early June would constitute a “hard” reason for higher prices.

Present data, however, suggests that the global over-supply has gotten worse, not better, that overall demand for liquids remains weak, and the world economic outlook is discouraging. At the same time, market movements are not always based on fundamentals. In the long run, however, fundamentals rule so I maintain my view that the current price surge is at best premature.

 

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Tue, 05/26/2015 - 08:17 | 6132090 Millivanilli
Millivanilli's picture

Dunno about that.  They jacked oil up to  147 bucks a barrel at one point.   

 

Libor trial: Tom Hayes accused of doing "everything in his power" to manipulate rates First day of trial of former UBS and Citigroup trader hears claims he acted in "thoroughly dishonest and manipulative manner"

 

 

Tue, 05/26/2015 - 08:32 | 6132119 Pinto Currency
Pinto Currency's picture

 

 

Oil price fundamentals include M1 and M2:

http://www.zerohedge.com/news/2015-05-22/it-mathematically-impossible-pa...

Tue, 05/26/2015 - 09:17 | 6132196 VinceFostersGhost
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And what caused the huge spike in oil prices? Take a wild guess. Obviously Goldman had help — there were other players in the physical-commodities market — but the root cause had almost everything to do with the behavior of a few powerful actors determined to turn the once-solid market into a speculative casino. Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures — agreeing to buy oil at a certain price on a fixed date. The push transformed oil from a physical commodity, rigidly subject to supply and demand, into something to bet on, like a stock. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.

 

http://trueslant.com/justingardner/2009/07/03/matt-taibbi-blows-the-lid-off-oilgas-speculation-by-goldman-sachs/

Tue, 05/26/2015 - 10:27 | 6132370 JRobby
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Thanks! $147 oil was driven by the traders pushing it.

Tue, 05/26/2015 - 12:26 | 6132751 sun tzu
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There are 5000 drilled but uncompleted wells waiting to pump out oil at the right price - around $65-70. That represents 500,000bpd. 

Tue, 05/26/2015 - 08:37 | 6132130 Quinvarius
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Bush was filling the SPR the whole way up to $140.  Then he dumped from it under $40.  Don't forget the scam that was really happening back then. 

Tue, 05/26/2015 - 08:15 | 6132091 unrulian
unrulian's picture

Nor can gold

Tue, 05/26/2015 - 08:17 | 6132093 Oldwood
Oldwood's picture

Drill wells for Hopium. Demand has never been greater.

Tue, 05/26/2015 - 08:23 | 6132104 This is it
This is it's picture

It's 8.30!

Smackdown time! Yeahhhh

Tue, 05/26/2015 - 08:34 | 6132123 Millivanilli
Millivanilli's picture

LOL  Yes indeed.

 

 

Tue, 05/26/2015 - 08:24 | 6132107 Ghordius
Ghordius's picture

I prefer to watch what they do, not what they say

in the case of Iran, Saudi Arabia and the other Gulf States, what are they doing?: they are building nuclear facilities

in the case of the US Secretary of Agriculture, what is he saying?: he is asking the EU to use double the consumption of oil for moar industrialized agriculture, of course with GMO

watching deeds is way simpler then asking question like "WTF are you talking about?"

Tue, 05/26/2015 - 08:26 | 6132108 Bangin7GramRocks
Bangin7GramRocks's picture

No difference for 99.999% of Americans who don't shuffle paper. Gas is still $4.00 a gallon. Why does my asshole hurt?

Tue, 05/26/2015 - 08:34 | 6132124 Quinvarius
Quinvarius's picture

Paper oil markets can ignore fundamentals forever.  Trust me.

Tue, 05/26/2015 - 12:28 | 6132762 sun tzu
sun tzu's picture

They can ignore it for a few years at most. Oil isn't like bonds or equities. It has to be stored somewhere besides a hard drive. Storing oil a much more expensive than storing stock certificates.

Tue, 05/26/2015 - 08:37 | 6132128 NoWayJose
NoWayJose's picture

The time to 'buy' oil has passed - you know it is time to buy when oil stabilized in the low 40's and Goldman and JPM started to call for $20. When the big boys make their wild estimates they are flipping positions ( in this case from short to long). Oil is at best a 'neutral' right now. Price is up, and there is a tug of war between 'oil goes higher when the shooting starts' crowd versus the 'oil fundamentals suck' crowd. In light of a possible (probable?) market correction, a likelihood that OPEC maintains production, and at least temporary strength in the dollar, I don't think the oil upside balances the risk to the downside. Any oil strength will come out by July 4th - and I think oil will trend lower into the fall.

Tue, 05/26/2015 - 08:39 | 6132129 NoWayJose
NoWayJose's picture

Easier to get to oil in North Dakota in the summer!

Tue, 05/26/2015 - 08:52 | 6132145 Eeyores Enigma
Eeyores Enigma's picture

Ten years ago if you said you hope for increasing prices you would be called a crack-pot.

Thats all you need to know about peak oil.

Tue, 05/26/2015 - 08:52 | 6132146 VW Nerd
VW Nerd's picture

When oil was at $104/barrel last year, I was paying $4.08/gallon at the pump.  Recently, at $59-60/barrel, I filled up at $4.03/gallon, up from $2.25/gallon a couple months ago???  Price did drop last weekend, leading me to believe the recent rapid run up in price might be partially attributable to the Summer driving season which ususally kicks off Memorial Day weekend.  But an 81 percent gas price increase over less than 2 months when oil increased 33 percent??

Tue, 05/26/2015 - 09:06 | 6132174 Oldwood
Oldwood's picture

We seem to pay whatever the pump asks for, so where is price discovery? Laws of supply and demand are murky at best. As in dealing with our government, our chance of having real input has passed and now are just thankful for what we get.

Tue, 05/26/2015 - 09:25 | 6132215 Bangin7GramRocks
Bangin7GramRocks's picture

I always hated that bullshit about seasonal price increases. Why doesn't Amazon increase the price on beach chairs in May? Water noodles were a few dollars in December and the same price now. Fuck that shit George! Fuck that shit!

Tue, 05/26/2015 - 10:42 | 6132419 A is A
A is A's picture

LOL. $4.00? What facist state do you live in? California, NY? I think most places in the country are paying nowhere near that.

Tue, 05/26/2015 - 12:30 | 6132769 sun tzu
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It's around $2.60 in most places

Tue, 05/26/2015 - 09:08 | 6132178 SheepDog-One
SheepDog-One's picture

Price of oil is largely irrelevant.....you pay about the same for gas whether the price is $50 or $100.

Tue, 05/26/2015 - 09:26 | 6132218 Bangin7GramRocks
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Sure seemed to matter in 2007 when gas went from $2 to $4.50.

Tue, 05/26/2015 - 09:24 | 6132212 shortonoil
shortonoil's picture

 

At $60 WTI about a third of the world's producers are operating below their full life cycle production cost. The salvage business is going to have hell of a good future.

Tue, 05/26/2015 - 09:48 | 6132264 donupstream
donupstream's picture

Art just say you were wrong.

Tue, 05/26/2015 - 12:31 | 6132774 sun tzu
sun tzu's picture

$40 WTI sounds good to me. Keep it there for a few years

Tue, 05/26/2015 - 13:14 | 6132899 1033eruth
1033eruth's picture

Oil markets can't ignore the fundamentals forever?  Why not?  Equities have.  Bonds have.  Why should commodities be any different ESPECIALLY Oil because everyone is dependent on it.  

Sidebar:  Oil keeps getting jacked everytime there is 1 less drilling rig in the count but what about consumption figures?  Consumption is going to continue to slide as the economy continues its slow decline.  Trucking is in a HUGE decline and that is where the bulk of oil is going.  Next Christmas is going to be a DISASTER!!  Oh and they'll blame it all on the port strike.  

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