DID THE BIGGEST OIL BEAR CAPITULATE AFTER A 75% THREE MONTH SURGE?

Equities—led by energy—advanced yesterday.  As widely noted long time oil bear Goldman surprised all with its reversal regarding oil stating demand is now higher than input.  It cited numerous reasons including the massive reduction in capital spending outside OPEC, supply disruptions in Nigeria, Libya and Canada, falling Chinese production and surging demand in China and India.

Oil is now up about 77% from its early winter lows approaching the psychological $50 level.

What was also quietly reported yesterday by the Financial Times, Goldman has overtaken Chevron and Exxon as one of the biggest natural gas merchants in North America.  The FT reports that last year it bought and sold 1.2T cubic feet of physical gas in the US—equal to a quarter of the country’s residential consumption and more than twice its volumes in 2013.

Wow!  I cynically ask is there any relationship between Goldman’s sudden change about oil and its huge natural gas trading operations?  This answer may never be known.

In my view—a view that I have articulated for many months—Goldman’s stunning reversal should not be a surprise.  Many times I referenced the record $300 billion in infrastructure cuts that has occurred in the last 16 months, reductions that will cut production and are now just beginning to be felt.

I have also commented about the lack of funding for the oil markets both from banks and the capital markets, funding that is unlikely to return any time soon even if crude advances to $75/barrel.

Furthermore I discussed at length the probabilities of supply disruptions given complete anarchy in the region that supplies the world with 50% of its energy needs.  Venezuela is refining oil by candle light whose exports are essentially nonexistent.  So is Libya because of civil strife.  Nigeria is quickly deteriorating for the same reason.  And then there is Iraq.  Iraq is already a failed nation state and may become the next Libya.

Finally I discussed demand at length, comparing 2016 to 1999.  In many ways today is analogous where in 1999 demand surged while production slumped. Prices increased almost four fold from its lows in two years.

I am not suggesting crude will be over $100 by 2018, however given the growing global anarchy I think there is a 30% chance oil will be at the level at one point in the next 2 years.

What will happen today?  The economic calendar is crowded as the CPI, industrial production/capacity utilization, and housing starts are released.

Last night the foreign markets were up.  London was up 0.71%, Paris up 0.56%, and Frankfurt up 0.43%.  China was down 0.25%,  Japan up 1.13% and Hang Sang up 1.18%.

The Dow should open little change ahead of a big data day.  Oil is also flat.  The 10-year is

 

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