02 Aug COMMENTS ABOUT OIL
Oil is trading around $40.50/barrel, down about 20% from late June on renewed concerns of a supply glut. Many of the large integrated oil producers missed earnings estimates because of a decrease in production.
These shortfalls have caused share prices to fall, a decline accentuated by the lack of infrastructure spending that has greatly reduced proven reserves. In some cases, at current production rates proven reserves are under 15 years, a multi decade low. In other words, at current run rates some of the world’s largest oil companies would be worthless given that oil is finite and spent stores must be replaced annually.
But is this not bullish??
Yesterday CNBC placed the oil decline in the proper perspective when the media outlet commented there is a computer battle between New York and Chicago over $40 barrel. One city is selling while the other is buying.
Oil along with the rest of the financial markets is entirely coopted by algorithmic and technology based trading. There is little research into making decisions, an environment perhaps demonstrated by BBT who fired their entire institutional sales, research and trading department to focus upon ETFs and other passive investment strategies.
If it was only this easy?
As noted above, proven oil reserves for many large oil integrated are at multi decade lows. Almost eight years to the date Goldman Sachs forecasted “peak oil” because the lack of proven reserves which sent crude to an all-time high over $150/barrel.
While I must write today is not 2008, it will take years for oil companies to develop “upstream” production. Large projects cannot be developed in short order to meet demand.
Because the markets are only focusing on the immediate, I believe the odds favor a potential supply shortage vs. glut thus a spike in oil and oil company’s shares.
Some might suggest this is nothing but wishful thinking of anyone who is long crude. 2016 has been almost a complete replica of 1999. Crude initially falling over 50%, then rallying almost 80% then declining again around 25% before advancing 50% by year’s end. Will crude continue to follow 1999’s path and a recoup its current decline?
If supplies do not increase by expected levels, I think the odds are over 60%.
Yesterday the NASDAQ posted a nominal technology based rally. The Dow declined nominally because of oil. The 10-year was off 5/32.
What will happen today?
Last night the foreign markets were down. London was down 0.48%, Paris down 1.59% and Frankfurt down 1.43%. China was up 0 .73%, Japan down 1.49% and Hang Sang up 1.09%.
The Dow should open nominally lower as concerns are resurfacing about growth prospects, partially the result of the drop in oil. Oil today is up about 1.5%. The 10-year is off 8/32 to yield 1.55%.