It’s time to take the gloves off and rattle a few cages around the energy complex! We’ve all been preconditioned to think crude oil prices were going up because the “Gilded Guard” (The old guys in the industry that have been around long enough to make us think their words are made of pure gold) stood up on our favorite financial news program or at some energy conference and said it would be so! We saw analysts from the big banks to big hedge funds pushing their wares in the financial media and almost all of them told us we would see $55 to $60 crude oil by now, and some even said $70. It didn’t happen, because you can’t wish a market up, no matter how hard you try.
I’ve been a student of the energy complex since 1980, when I took my first Commodity Futures class at Texas Tech University. Except for a period in the ‘90s when I worked in medical sales, I’ve been trading, watching, forecasting and charting crude oil for 30 years. I’ve seen everything from the huge price spikes on the futures markets that lasted for three days when Chernobyl melted down in 1986, and I remember driving into my office early in the morning of September 11, 2001, wondering what kind of airplane just flew into the World Trade Center and what effect this would have on securities and commodities around the world. I watched painfully as “Black Friday” developed in October of 1987, and I watched the financial crisis develop in 2008 and give way to the meteoric climb of crude oil to a high of $154.48 in June of 2008. Then, six months later, it crashed only to start its next rally. I’m sure many of you have experiences like mine over the years; so, today it’s time to call it like it is, from our perspective.
I see several contributing secondary factors that are affecting the markets, and we’ve talked about them over the last several weeks; including too much supply, too little demand, and the lack of impact from OPEC’s production reduction program. However, the single biggest contributing factor that has moved prices is news reports from banks with brokerage houses, or some hedge fund source for the major financial news outlets that really needs the price of crude oil to rally to cover their exposure! We’ve all been sucker punched over the last three or four years because these guys aren’t talking pure supply and demand. They are “wishing” prices higher like we did in September of last year when the Saudis began working on a program to cut OPEC production. We all got sucked into this, we even watched as OPEC increased their production enough to more than cover their cuts. It was a kind of “Buy the rumor sell the fact” deal. We didn’t care, a cut was a cut.
We’re all guilty of falling for the positive news, because it would mean the industry was growing once again. Everybody likes profits, heckfire, I would love getting a royalty check in the mail, just like the next guy; but getting that check cut in half stings. We even thought a new president would start things going again, but with so much resistance, nothing is getting done at “Disneyland on the Potomac” and the glow most of the country felt right after the inauguration has faded into a slow burn. It’s burning in the bellies of the financial markets because optimism helps move markets. Pessimism only leads to pulling back and a shrinking economy. We need things to grow again.
The Bottom Line
What wasn’t changing in the US and the world was the tremendous oversupply that was on the books, reaching near capacity by April of this year at 535 million barrels. There was supply captured in rail cars and in floating storage on the high seas. Our ports had tankers stacked up and staging 200 miles out to sea. So, how in the world would prices rise if the US and world depots were nearly full? It didn’t make any economic sense. Add to all this, a wishful report from the International Energy Agency (IEA) calling for higher demand in 2017, better than what we saw in 2016 in the US, and stability from China and the EU. These were all nice words to hear, but they weren’t true; just more wishing.
I’m so sick of the inaccuracies that abound in these myriad reports that we see each and every day on some search engine. I listened to Porter Stansberry and Flavious Smith last week on a call making the exact point we have been making here for months. They were right on track. The bottom line here is this: there is too much oversupply of crude oil in the world and until demand turns around, we will still have too much supply.
What we need to see in the energy world is a realization that prices still have room to fall, and they will keep falling up until we can document a shift in the market supply toward balance and a return to increasing demand. It’s as simple as that! If we don’t spur economic growth and create new demand, we will circle around and do this all again.
There can be disruptors in these markets like hurricanes or some natural disaster that cause spikes in prices, and yes, we acknowledge the risks from geopolitical conflicts. We see growing tensions from the Russians over Syria, and we see the North Koreans with their now functioning nuclear threat, but those threats are always out there and most believe they will never cross the line because the result would be so economically crippling that most economies would not survive.
I’m not a nay-sayer, or as we say in our industry, a contrarian. I am a market realist who chooses to do my own research so I can have informed opinions and share them with you in publications like Equities.com.
Read More from Crudefunders
- Who Is OPEC and Why Do We Care?
- OPEC Appears To Be Delivering On Production Cuts, So Why Aren’t Prices Rising?
- When Times Get Tough in the Oil Patch, Amazing Things Can Happen…
- Crude Oil Production & Supply: Have We Made Any Actual Progress in A Year?
- Innovators Make a Difference in Oil and Gas!
- Geopolitical Risk and Its Effect on the Price of Crude Oil
- What Can We Learn from Crude Oil’s First Quarter Report Card?
- Crude Oil: What is the Future
- How Crude Oil Prices React to Geopolitics
- Prices at the Pump Are Rising: Is It Seasonal or Something Else?
- Is Ethanol Worth the Fight?
- What Are OPEC and the Saudis Up To?
- Energy Independence: Why US Crude Oil and Natural Gas Matters
- Crude Oil and Market Psychology
- Crude Oil: A Technical Analysis
- Crude Oil: Technical Analysis II
- Crude Oil: What’s Really Dragging Prices Down
- The Real Culprit of Low Crude Prices: Oil Demand
If you want more information on the energy markets and what is making prices move every day, go to our website www.crudefunders.com and scroll down to where it says “Subscribe”. There you will find our link to the daily commentary “Energy Wise”, a comprehensive piece that includes both fundamental and technical analysis of the day’s energy markets and provides you with the detail that you need. For more on Energy Economist Tim Snyder and his company, go to www.matadoreconomics.com.