RI... Some smart folks are saying that oil prices will be scraping bottom again before too long.
This means that the ruble will likely do the same, as since its crash, it simply mimics the oil price in a the most banal and unimaginative fashion.
For bonus points, we include a video analysis from the highly respected EconMatters (no connection to Haggith's analysis), arguing that it will go to $15.
The crude oil price rally has been completely crushed, though I’ll admit I was wrong when I predicted crude oil prices would plummet in March or April as the perfect storm developed against oil prices. Instead, they rallied. In spite of that, I continued to believe my error was in timing and not in fact — not in the fact that a another harsh fall in oil prices was beating a path to our doors.
Crude oil prices beaten down by a storm still building
So, I continued to write articles about the forces building against oil prices, even in the face of a strong rally — a rally that many believed would set a new floor for oil for the remainder of 2016. That storm has, as of today, completely clawed back the post-March rally by taking crude oil prices back to a three month low and to where they stood at the start of the year as well. West Texas Intermediate just struck $42/barrel today.
That said, oil still has not gone back into the dark valley from which it came in the winter of oil’s discontent, and to which I said it would return.
I still believe the full strength of this storm is yet to be felt. So, my oil price prediction is that we hit $30/barrel again, before next March, but probably even by this fall. I have to state a caveat to that prediction … and not because I want to hedge my bet. I don’t like hedging my bets, as I prefer to hit them straight on the nose for a clear victory.
As stated in an earlier article, we have no way of knowing anymore what the Fed with its cloaked operations, liberal hand, and infinite money potential is doing at any moment to manipulate the price of the oil market in the same way it has admitted to doing with the stock market. Anytime the Fed sees oil bringing a serious gale against its heavily encumbered member banks, you can now be sure it will intervene to save the banks (at any cost). The Fed is loathe to let markets be markets and has become so deeply involved in market manipulation that there is no longer any basis for assumingany market will run as a truly free market. (But, if my prediction is wrong, I don’t know how I’ll be able to show it was likely for that reason.)
Nevertheless, I think forces are moving in that will ultimately blow everything outside of the Fed’s control. When we arrive at that inexorable day when all the oil tanks of the world — and all the tankers on land and sea — are full (as I’ve said we are likely to do and as appears to be more the case all the time), it will be hard for the Fed to manipulate the price of oil with nowhere to store the oil it buys. Reality finds a way to leak in or seep out … eventually.
Crude oil price storm develops a new front as gasoline storage backs up
One of the big drivers in the current price fall is the rise in the number of full tanks on the demand side of refineries. Refined gasoline is starting to back up to serious overflow levels. As things back up on the outflow end of refineries, inflow of crude to the refineries has to be slowed down, so tanks start backing up more on the refineries’ supply end, too.
For almost two years, the spotlight in the global oil market has been on a surplus of crude. The latest stumble in prices has shown that the [now] glut extends further…. Combined inventories held by industrialized nations of all forms of oil — from crude to refined products to natural gas liquids — reached a record of more than 3 billion barrels last month…. In the U.S., gasoline stockpiles were at the highest for the time of year since 1984 as record consumption failed to drain the glut refiners created when crude was cheap…. “It is the plight of oil products — in particular the light products such as gasoline — that is slowing the pace of total stock-draws even as crude stocks fall, and of the eventual re-balancing….” [US] gasoline supplies are so swollen that at least five tankers hauling the fuel to New York were turned away over the past few weeks…. Even China, the world’s biggest energy consumer, has been dumping excess gasoline overseas to alleviate swelling stockpiles at home. (Bloomberg)
Yes, you read that right. Gasoline stockpiles — right now at the peak season of gasoline demand — are at a thirty-year high! If we cannot work down the oversupply of gasoline during the summer peak demand when everyone in the highly populated northern hemisphere is traveling, what will happen as demand drops off in the fall?
Gasoline inventories have increased four out of the last five weeks at the very time when they should normally be going down due to the normal rise in demand.
“We are gradually shifting from a crude glut to a refined product one, particularly in gasoline,” Thomas Finlon, director of Energy Analytics Group said by phone “The gasoline production numbers in the United States are just astounding.” (EconMatters)
Why are production numbers astounding for gasoline? Because with a glut that brings cheap crude oil prices refineries are boiling out as much gasoline as possible — more than they can sell — to take advantage of those prices. That is creating a major backup problem on the demand side of refinery storage where the final products are held for sale. (In essence, if your crude oil tanks are full, produce as fast as you can in order to move that oil into your tanks of product for sale … until those tanks are full, too.)
The red dragon has too much fuel for its fire
The over-abundance of gasoline in storage is certainly not limited to the US. The Great Red Dragon is choking to death on fuel. China is practically dumping gasoline and diesel all over global markets as a result of a supply overbuild already being at its limit throughout the Asian region.
The volume of China’s gasoline exports caught up with diesel last month as refiners dumped excess output in overseas markets to alleviate swelling stockpiles at home amid record domestic production. The world’s largest energy consumer more than doubled shipments in June compared with a year earlier…. The flood of shipments from China is exacerbating a glut of fuel across Asia, where processors are cutting operating rates as they grapple with a slump in refining margins…. (Bloomberg)
Dutch consultancy PJK International said that gasoline stocks held independently in the Amsterdam-Rotterdam-Antwerp (ARA) hub rose more than 12% to an all-time high. (Zero Hedge)
Earlier in the year, China ramped up refinery activity as much as possible in order to build gasoline and diesel inventory while the cost of crude was still in the basement. (Everyone wants to sop up as much cheap crude as they can.) Apparently, they have reached their limit on how much finished product they can store. So, both the supply side and the demand side of refinery storage in China is choked.
In late June, JP Morgan estimated that China had pretty well filled its strategic petroleum reserve tanks where it holds crude.
One of the pillars of oil’s recovery from the lowest price in 12 years may be on the verge of crumbling. (Bloomberg)
JPM estimates that, as soon as China has topped off their SPR to the brim, China will reduce its crude imports by 15%. (Recently, China has been the world’s largest petroleum importer.) No one knows what China’s maximum storage capacity is for either crude or gasoline, but JPM extrapolated last month that they are close to reaching their maximum based on what is known of their oil data. The rate at which they have suddenly started dumping gasoline on the market indicates their crude oil reserves are full and they are pushing oil through the refineries as quickly as possible and dumping into the market on the other side at minimal margins as everything finally backs up to capacity from the oil wells to the gas-station pumps.
Demand in China for crude oil fell by 2.7% in May; but Chinese imports of crude fell by a mind-blowing 41% year on year. That China is solving its backup by dumping refined products as exports is reflected in the fact that Chinese exports of refined petroleum products rose by 38% year-on-year in June, even as crude imports fell.
For the time being, pumping out gasoline as quickly as possible has kept China’s drop in imported crude to that 2.7%, but its creating a gasoline glut that is rapidly spreading across the globe. That is already choking China’s production and everyone else’s … all the way back to the pipes of the producers.
That all means we are much nearer that day when all the oil tanks in the world are full, which is extremely bearish for the prices of finished products and crude and should put more pressure on the margins of US refineries and oil producers alike. Certainly, China’s dumping of gasoline and diesel throughout Asia and Europe means that its imports of refined fuels from the US and other nations are terminated for those nations that customarily exported finished petroleum products to China. The market is now saturated everywhere.
Worsening inventories in oversupply of crude oil
The backup at the outflow end is new, but there is nothing new about the backup in tanks at the inflow end of refineries where crude sits waiting to be turned into gasoline and other products. Inventories on the supply side remain swollen. At 520-million barrels, crude oil supply is more than ten percent higher than where it was this time last year when it began its catastrophic price march downhill.
That combination of supply and demand-side inventory has reached an all-time record of 2.08 billionbarrels. Now that refineries have limited places to put the surplus fuels they are producing, they are spinning their wheels in the slick oil sands. Refiners, and not just producers (not always one and the same), are now suffering collapsing margins.
At the same time, we’re nearing another maintenance season, when production is always cut, but that didn’t have much effect last spring as I (and some others) thought it would; but will it help form the perfect storm now that the entire oil industry is starting to choke in overflow?
A dangerous new trend line in crude oil prices
Zero Hedge published the following graph that shows how crude oil prices fell and rose and fell in 2016 and how that almost exactly matches the pattern of 2015, only at lower price points along the journey:
2016 WTI crude oil prices fall, rise and fall to match the pattern of 2015.
Demand for crude oil typically falls off during the second half of summer. This year crude prices peaked (for the present, at least) in June and have since slid about 17%. Last summer crude prices also peaked in June, and then July broke their back. The summer before that (2014), crude oil peaked for the year in June and then prices fell off a cliff the rest of the year, dropping 50% by year’s end.
Oil producers are concerned by what is shaping up to look like a new trend in the oil market where prices rally until June and then crashes the entire remainder of they year.
US rig count not staying down
Because this year’s earlier crude-oil price plunge crippled the US oil industry, the number of rigs drilling new wells began to drop, causing a drop in US crude-oil supplies (and, therefore, a rise in speculative oil prices); but as soon as prices started rising, rig count immediately began to climb back up. The US oil industry, in other words, is not willing to concede its loss of market share without further battles. Last week, the number of oil and gas rigs in the US jumped by fifteen, double the increase of the week before. So, the rate of rise is accelerating.
With a total US rig count of 462, that’s better than a 3% increase in just one month. Since May, oil and gas drilling rig count has risen by 56 rigs (a 14% increase). Still, rig count remains down by 414 rigs from where it was this time last year. At a total of 863 last year, the number was far below the all-time peak of 4,530 in 1981. This last March, the industry saw its all-time low in rig count.
The ramp-up of drilling is happening in oil fields that are profitable below $50/barrel. The moves are small by historic perspective, but, still, not in a direction that helps the price of oil if you’re a hurting oil company, hoping for salvation from a little price relief.
Damage to the US oil industry as a result of crude oil prices
To give you some idea of how significant damage from low crude oil prices has already been to the US oil industry, the world’s largest oil-field services company (Schlumberger Ltd.) laid off 16,000 workers so far this year as it surprised analysts lowest estimates in this quarter’s reporting with the size of its losses. Second-quarter losses were $2.16 billion, compared to a profit last year (also a lousy year) of $1.12 billion.
“In the second quarter market conditions worsened further in most parts of our global operations,” [Schlumberger CEO] Kibsgaard said in the statement. (NewsMax)
The world’s second-largest oil-field services provider has not faired well in 2016 either. Halliburton reported a 14-cents-per-share loss for the second quarter. Of course, both companies put as much positive spin on this as being “the bottom” as they could; but is that a real prediction or just CEOs trying to save their stocks from crashing harder with a positive spin?
If the oil surge is hitting the giants of industry this hard, imagine how this storm is pummeling the little guys.
Tightening the vice a little harder, Moody’s just announced that it will start to downgrade the credit ratings of oil producers who are too aggressive in expanding production capacity, given the market’s inability to absorb more capacity.
But it’s not just the oil industry that is feeling the pinch.
General Electric reported a drop in orders, led by oil and transportation decline. They are selling less of their heavy oil-field equipment. Less equipment is also being transported on trains at the same time that less oil is being transported inside the US (as the US cut back production while the Middle East seized market share as it aimed to do). That means fewer GE locomotives are being sold as well.
GE’s total orders feel by 16%, if one excludes the effects of global currency shifts and corporate acquisitions.
I don’t care a wit about greedy oil companies. In other words, I’m not playing a sad song on the fiddle while refineries and producers burn because I’m concerned they’re not making the fat profits they once made (and even taking losses in many cases now), but the fact is that their troubles are having a negative impact on the overall US economy. At the same time, we have not seen any great benefit in the terms of lower fuel prices (compared to the size of the oversupply), but that may change now that a gasoline glut is also building.
… and damage to US stocks
Naturally, oil industry stocks have declined along with oil prices over the past month, but the losses have an interesting reason for being. What has torn the top off the US stock-market rally in the past week has been oil producers hedging their bets in anticipation of a third crummy year for oil prices now that the end of 2016 is not looking as hopeful as the oil bulls thought it would. They’ve seized the day when stocks have been selling at better prices as an opportunity to sell stocks in order to raise cash and pay off debts, etc.
“The producers have sold the hell out of this rally,” said Stephen Schork, president of Schork Group Inc., a consulting firm in Villanova, Pennsylvania…. U.S. oil and gas producers have been selling shares at record speed, using the cash to repay debt or buy oil and gas prospects, bolstering the asset side of the balance sheet. So far this year, companies have raised more than $16 billion in equity, according to data compiled by Bloomberg. “They’re trying to generate cash to stay alive and fight another day,” said John Kilduff, partner at Again Capital LLC, a New York hedge fund focused on energy. “The producers know full well that the oil market is not out of the woods yet.” (Bloomberg)
Where will this storm the oil market carry us?
As I said at the start of the year ,when oil was in its steepest dive and people were speculating that Saudi Arabia and Russia would strike a deal to stop the crash, there was no chance of Saudi Arabia backing off. Saudi Arabia repeatedly made it clear to anyone who was listening that from this point forward the oil market would work itself out by who can produce the most oil the cheapest and claim the largest market share in a oily price and production war. Thus, I also announced the death of OPEC as a price driver a few months ago.
Saudi Arabia, which once controlled market prices by adjusting its own production, decided that the market will decide who the winners are because they are also in the best position to win a price war, having oil that comes at the lowest production costs.
Heavy industry is locking horns all over the world to fight for market share, and the battle is far from nearing resolution
Originally appeared at The Great Recession Blog
Poster Comment:
FreeSpirit... This article totally exclude the effects of political decisions. It's all about market mechanisms. However in reality the prices on oil are heavily affected by political decisions including politically inspired market manipulations, oil wars (Libya, Iraq) etc. And so far the west has the upper hand in the oil market including a major influence on the arabian states. One reason being that if these arabian nations does not do what USA/England/France/Israel want them to do they will share the same fate as Iraq or Libya. Further I think the writer should have stressed how the oil market have developed due to peak oil. There is no such perspective in the article. Nor is it mentioned how western financial dragons manipulate the oil market
MickeyDr • The long term issue with oil is that demand may(probably will) collapse in the next 20 to 40 years. If climate change doesn't enforce it, cheap energy from fusion or solar will. If you look at the cost per Kw of solar, it declines very very steadily in line with an experience curve (or a slowed down version Moore's law). And what is a solar panel - a very simply silicon chip. So if you are Saudi with 90 years of reserves at current levels, what are you going to do? Leave it there? Never mind Venezuela or S AMerican countries who have as much reserves and producing almost nothing. In other words peak oil was wrong - the end to demand may come first.
Knave_Dave MickeyDr • That the end to demand may come first is a good point. It doesn't mean peak oil was wrong. Cheap, easily available oil has peaked, and supply has increased beyond that peak because OPEC-rigged high prices paved the way for more expensive technologies to expand supply, which they did in spades. However, that new supply is short-lived. Fracked wells give out much sooner than the old gushers did and come at a higher price.
As you say, demand will decrease in a world that is imploding economically and that has a lot further down the debt drain hole to go. So, peak oil takes this turn: The available oil is more expensive to extract at a time when the world cannot afford more expense. Therefore, demand will drop as you say, and the world will use less oil. Peak oil transition accomplished, whether the use of oil falls off a cliff because the oil runs out first or because demand drops due to economics.
The question that remains is what kind of world do we go into in one that cannot afford the higher cost of oil but also has a lot less money to invest in exploration of oil AND in invention and development of alternate energy. The markets will have to sort out such a complicated equation over time, but I suspect it will be a world of greatly diminished consumption of every kind, not just of less oil consumption. --Knave Dave The Great Recession Blog
Dasa Jarosova Russia's decision to mend ties with Turkey is not just about oil, what is far more important for Russia is that Turkey is part of NATO and partially controls the Black Sea. One Russian newspapers already wrote that USA tried to push Turkey into a (real!) war with Russia and Turkey was one of the main actors in what was to be US-led military fleet in the Black Sea. Bulgaria refused that, but Turkey was very happy to join this fleet.....until now, when Turkey is backing out of any kind of confrontations with Russia. I can also remind you that Turkey has the second biggest army in NATO. USA wanted to use their old Anglo-Saxon trick: divide and rule, make other countries fight wars and you stand on the side-lines and then collect rewards. Fortunately, it seems that neither Russia nor Turkey are stupid enough to fall into such trap. Turkey is definitely shifting its allegiance to the East as opposed to the West, as can be seen from the fact that Turkey is now also becoming closer with Iran, not just Russia. And Iranians are OK with that and even proposed a trilateral alliance: Russia-Iran-Turkey. So once again, it is not just Russians, it is Iranians as well. If you think Russians are stupid for doing this, are Iranians stupid as well? Are Iranians doing it for oil and money?+7
The Visit I do understand that there is strategic sense in trying to pull Turkey out of NATO. But unfortunately anyone who thinks that is possible is dead wrong. Turkey has been and always will be the enemy of Russia. As well as the Israel. Note the winner from this mending of the ties will be Turkey itself as the killing of Russians will go unpunished and they will get back the Russian tourist and business in Russia. In the same time Turkish Stream will never become reality as it is supposed to go trough EU (Grece,Bulgaria). The EU (USA) will never allow Russia to make this possible. I'm not sure that people in Russia understand that you are under attack and your enemies will not rest until you are either gone or enslaved. +3
Dasa Jarosova And I also forgot to mention that yesterday Putin officially announced that Russia is completing all necessary preparations (which took several years) and in about three months, Russia will start.............selling its oil in rubles and not dollars anymore. Lets wait, how that will change things and what other surprises Putin has in mind. Some people are just too impatient and do not seem to understand that all important steps take time to prepare.
Dasa Jarosova Turkey does not necessarily have to be pulled out of NATO entirely. It will be sufficient, when Turkey backs out of any confrontation prepared by NATO (for example the US-led Black Fleet, which I mentioned and Turkey now confirmed it will NOT join this US-led Black Fleet.) Now you get it? The Turkish Stream is actually more important for Turkey than for Russia, as Russia is already building another gas pipeline directly to Germany and anyway Russia now already exports more oil and gas to Asia than to Europe. Asia is becoming more important for Russia than EU. The Turkish Stream is just a lure for Turkey, but if it does not get built, it is no catastrophe for Russia - but it will be a missed chance for Turkey.
Tatarewicz • Big drop in price of oil seems to have occurred when Israel and Turkey "collaborated" with ISIS to buy their stolen Syrian oil at half the market price for domestic and export use. Saudis saw this as a threat to their market share so they dropped price, bringing the internationally rigged price down.