Slippery Oil Prices Plunge Over Cliff into Bear Market

Knave Dave's picture

This article by David Haggith was first published on The Great Recession Blog.

By fernost (Self-photographed) [Public domain], via Wikimedia Commons

Oil today plunged unrestrained below $40 per barrel, taking oil prices down more than 20% from their high a little over a month ago. That officially defines a bear market in oil. As of today, oil has also moved below its 50-day, 100-day and 200-day moving averages. July has again turned out to be a huge disappointment for oil producers who mistakenly thought price recovery had come to stay.

In addition to the dark clouds I presented last week, here is a list of newly developing reasons and ways that oil prices are continuing to slide toward $30 per barrel … as I’ve predicted all along:

 

  • Saudi Arabia today lowered its price of oil to Asia in order to compete more fiercely for market share, offering its biggest discount in almost a year … because the kingdom is now backed up with oversupply in its own tanks that it has to move. After raising prices to Asia not long ago, Saudi Arabia’s optimism about increased Asian demand proved short-lived.
  • Asian refineries are lowering their production. According to Bloomberg, some are cutting refinery production by as much as 50%.
  • Short positions for West Texas Intermediate crude (WTI) increased last week by their largest volume on record. Likewise with short positions on gasoline. Hedge funds in particular are betting on a gasoline glut. Summarized Newsmax, “Money managers have never been more certain that oil prices will drop.”
  • The global economy is simply exhausted. Growth in global demand for oil continues slowing, and many nations and people simply cannot afford high oil prices any longer.
  • Thanks in part to Brexit, the global petrodollar continues to rise in value, meaning it takes fewer dollars to buy a barrel of oil.
  • Iran is expected to approve new oil contracts this week that will substantially open the doors to foreign investors in its oilfields, which will improve its supply capacity in years to come.
  • OPEC’s production is expected to reach its highest output in recent history. Throughout 2016, the experts talked about how Saudi Arabia and Russia would reach a deal, how OPEC would soon start tapering back its supply. All along, I said “baloney! There will be no such agreement and no cutback by OPEC.”
  • Libya is now back in the oil business.
  • Gasoline inventories increased yet another week, now five out of six weeks during the busy summer season when gasoline inventories should decline. Soon seasonal driving will start to fall off, increasing the rate at which gasoline inventories build. As a result, US refiners are already dialing back gasoline production, which reduces demand for already oversupplied crude. Some reports have said refiners are beginning their autumn maintenance season early because they have more gasoline than they need for the remaining summer. Normally summer output is not curbed until the end of August.

 

“Coming out of the summer, these tanks will still be full,” Mark Benigno, co-director of energy trading at INTL FCStone Inc. (Oilprice.com)

 

Here’s what gasoline stockpiles did this year compared to what stockpiles did last year:

 

 

US gasoline stockpiles for July 2016.

Growth in oversupply in US gasoline stockpiles for 2016 compared against 2015.

 

 

Stockpiles of crude and gasoline are now at their highest summer level in two decades.

 

“The rise in supplies will add more downward pressure,” said Michael Corcelli, chief investment officer at Alexander Alternative Capital LLC, a Miami-based hedge fund. “It will be a long time before we can drain the excess.” (Bloomberg)

 

The downward oil price trend continues its impact on the global oil industry

 

There is a lot of price support — both psychological and on the charts — at $40, so that’s tough resistance to break. I wouldn’t be surprised, then, if oil prices bounce back upward as people buy the dip; but that speculative reaction is not likely to overcome the greater forces outlined above. If oil prices crash easily through the $40 floor, as just happened today, and they sustain that breakthrough, the trip down should accelerate. Below $36 per barrel there is no support all the way down to $26.

 

 

Oil price support

Points of major price support based on recent history of oil prices.

 

 

“The bottom line is the street has gotten it wrong as far as the oil markets achieving supply-demand balance this year…. We will likely break through the $40 levels in days and weeks to come,” said Tariq Zahir, crude trader and portfolio manager at Tyche Capital Advisors in New York. (Reuters)

 

That was last Wednesday. Now we can say, “been there, done that, on our way to thirty.” When I stated $30, prices were at $43, and $40 oil just seemed like too easy of a bar to clear in spite of its price support on the charts.

But the importance of all of this is its extreme impact:

Exxon, Chevron, Valero, BP, Royal Dutch Shell have all reported falling profits or even losses that disappointed the expectations of economists. (Chevron reported its largest quarterly loss in fifteen years. Exxon reported a 59% drop from last year. Shell, a 72% plunge, missing the estimates of the experts by over a billion dollars.) And this was the good quarter when oil prices were recovering.

 

“This is a very big surprise from Shell,” Brendan Warn, a managing director at BMO Capital Markets, told Bloomberg in an interview. “Things are not looking up in the third quarter either, with weakness in the industry’s refining environment and Shell’s oil production still under pressure.” (Oilprice.com)

 

All the big economists and oil analysts were predicting that a rebalancing of the oil market would be firmly in place by the second half of 2016. Now they are all revising their predictions to align with those that I continuously stated against the odds when prices kept rising.

 

2016 had such a promising start. Whether you listened to government agencies, banks, analysts, oil companies, or the oil-producing countries you would have heard the same message — the market will begin to rebalance in the second half and inventories will start to fall as rising demand overtakes dwindling supply…. It hasn’t quite worked like that. Demand has not surged as producers had hoped, and supply has proven more resilient than expected. Demand growth is slowing from its lofty levels earlier this year, dashing hopes that the supply will get soaked up quickly. But the real story is the supply outlook. There’s little cause for optimism here, at least in the short term…. We’re still seeing additional supplies from projects that were sanctioned in an era of much higher prices…. The result is a delay in the start of a long-waited rebalancing. The pickup in prices to above $50 a barrel in June looks to have been a false dawn. The price recovery is not yet here. So, if not now, when? Russian oil minister Alexander Novak suggests the market may now reach balance by mid-2017. (Newsmax)

 

And the importance of all of that is its impact on banks an on the general economy.

As I said last week, something dark this way comes from the oil sands and tar pits.

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geno-econ's picture

Saving oil for future generations makes sense--- so does living a frugal life within our means,  I know, I am Crazy !

SweetDoug's picture

'
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So where's my 20% cut in gas prices?

•?•
V-V

Knave Dave's picture

Oil doesn't trickle down.

Debeachesand Jerseyshores's picture

The author didn't include the increase in rig count this week as reported by Baker Hughes....

Knave Dave's picture

Three more didn't seem terribly significant. Had it humped up, I would have mentioned it; but you're right that it's one more think still moving oil in the direction of lower prices.

epicurious's picture

Thanks for the Yeats this morning, just the little sweet taste of blood on the tip of the tongue to provide ample juice for a day of battle.

LawsofPhysics's picture

So what?  What can you actually do with oil (reduced hydrocarbons)?

oh wait...


wwxx's picture

Now that US oil exportation is now legal again, the US oil production will be quietly supertankered to China [& France as a distraction], because China is the remaining mfg. of everything. Because the dollar is drastically & intentionally inflated at the Fed level, and the US oil supply has been financialized [debt] toward moar production for at least the next 20 yrs. 'to compete with Russia', 'to subvert Venezuela's socialism', 'to sell into Europe' whatever the excuse of the day shall be, but the underlying thesis of all this has been about plundering N. America's resource at the new sustainable low price, considering the high price of exploration/infrastructure of the last 10 yrs. has only subsided, but not nearly concluded.

I could fix all that with a few pieces of paper, how about a oil production royalty check to every US citizen below the age of 18...it is their resource after all, not this generation's, even if this generation stubbornly disagrees.

There I've somehow done it, I didn't mention nor blame GWBUSH, Pelosi, Cheney, Obama, or The Bernanke...hahaaha

wwxx

Panic Mode's picture

The central banks & governments follow exactly what Japan done (the easiest option of all) in the 80's and 90's, yet they expect different outcome as Japan.

"Insanity: doing the same thing over and over again and expecting different results." - Einstein.

That's why you don't need waste of space charlatans running the economies. 

SpasticGramps's picture

Everyone I know in the oil business was super excited about oil at $50 "going to $70".

I would shake my head.

"Where is the aggregate demand going to come from?" Crickets

Where's Waldo?

McCormick No. 9's picture

Deflationary. Commodities across the board will get pushed down by the slump in oil prices. Retail prices will stay up, as retailers figure consumers have extra buying power with low gas prices. But this elevated retail market will simply cause consumers to cut back on purchases, thus driving the defaltionary cycle harder.

CB interventions cannot fix this. All extra income will be used to pay down debt, not spend. Helicopter money combined with NIRP is the analog to internal organs shutting down to save the brain. But in this case the brain is the elite, and as we all know, organ shutdown doesn't save the brain.

 

 

PaperTaperFakerCaper's picture

The Second Coming (1921) by W.B. Yeats

 

TURNING and turning in the widening gyre 

The falcon cannot hear the falconer; 

Things fall apart; the centre cannot hold; 

Mere anarchy is loosed upon the world, 

The blood-dimmed tide is loosed, and everywhere 

The ceremony of innocence is drowned; 

The best lack all conviction, while the worst 

Are full of passionate intensity. 

 

Surely some revelation is at hand; 

Surely the Second Coming is at hand. 

The Second Coming! Hardly are those words out 

When a vast image out of Spiritus Mundi 

Troubles my sight: somewhere in sands of the desert 

A shape with lion body and the head of a man, 

A gaze blank and pitiless as the sun, 

Is moving its slow thighs, while all about it 

Reel shadows of the indignant desert birds. 

The darkness drops again; but now I know 

That twenty centuries of stony sleep 

Were vexed to nightmare by a rocking cradle, 

 

And what rough beast, its hour come round at last, 

Slouches towards Bethlehem to be born?

lnardozi's picture

This is one of those Trump things, isn't it?

Auburn's picture

Something wicked this way comes - but it will take a while longer.  No price discovery, no free markets.  Just an opportunity to make a fairly easy buck by shorting the energy markets (HXD on the Toronto Stock Exchange etc.).   The day will come when Central Bank propping no longer works. I have patience.

Tinky's picture

Yeah, well, you're also testing our patience with the multiple posts.

Auburn's picture

Something wicked this way comes - but it will take a while longer.  No price discovery, no free markets.  Just an opportunity to make a fairly easy buck by shorting the energy markets (HXD on the Toronto Stock Exchange etc.).   The day will come when Central Bank propping no longer works. I have patience.

Auburn's picture

Something wicked this way comes - but it will take a while longer.  No price discovery, no free markets.  Just an opportunity to make a fairly easy buck by shorting the energy markets (HXD on the Toronto Stock Exchange etc.).   The day will come when Central Bank propping no longer works. I have patience.

heisenberg991's picture

Gas was 2.03 last week and then this weekend 2.17 WTF

LawsofPhysics's picture

Bingo.  Wake me when humanity actually stops using oil...

Agstacker's picture

That may take awhile, here is a list of things oil is used to produce-

 

http://www.ranken-energy.com/products%20from%20petroleum.htm

DeadFred's picture

Yeah, that's about it. $2.97 at the cloest sation to me but Costco was $2.09. Yet there's still people at the station. Still when I look at the charts I have to ask how can WTI not bounce off of $38? It just cries out to make a cute head and shoulders.