In Energy

As oil melts down, I’m stuck between the writing the blog letter taking the long-term view on oil, or the short-term one.

Let’s go short this week; maybe next week, like a good last minute play from scrimmage, we’ll try to go long………..

Hey, here’s a bit of old-time trader know-how that applies to oil this last week:

When a market can’t go up, it usually goes down.

Well, Duh – except that this really isn’t as obvious as it seems – I mean, can’t a market just stand still?

Yes it can – but take it from a lifelong trader, it doesn’t usually do that. Markets tend towards motion, and oil is, if anything, more volatile and tends towards motion more than other markets.

So – let’s match this up to the current crash in oil.

Oil demand is strong.  We’ve seen from the IEA report that oil demand is accelerating, and will top 100m barrels a day sometime in 2018.

Oil supply is also dropping, although far more slowly than OPEC and US oil companies would like. Both the IEA and the EIA agree that supply and demand will meet sometime later this year. These two factors should be very bullish for oil, right?

But that’s where the optimism ends. Most analysts are concerned about projected increases in US production going into and through 2018, but there are two far more pessimistic factors to look at when trying to understand this month’s meltdown of oil prices.

First, few oil producers have been able to financially hedge any of the oil they’re planning to produce for 2018.

That means that oil producers will be sitting in wait for oil prices to rise and any significant rally will be met with producers looking to lock in some financial safety – by selling.

Second, US oil producers have continued to drill, even in currently uneconomic acreage. Those wells that can’t make money at $40, $50 or even $60 oil are halted before they begin to produce oil and gas –  and become what’s called a “drilled but uncompleted well”. These “DUCs”  have been increasing almost faster than producing wells have been increasing, with May showing “DUCs” increasing by 125 wells in the Permian basin ALONE.

This also represents an inventory of oil ready to be put on market as soon as oil rallies – More selling.

Both of these factors have been enough (and look likely to continue to be enough) to hold oil prices below $55 a barrel for now.

So, even if oil has positive factors that will work in its favor, the negatives of having these financial and physical short-term sellers above the market looks likely to keep a cap on prices for at least another several months.

And what did I say about a market that can’t go up?

It tends to go down.

Before you leave, remember this, however:

In the end, oil below $70 a barrel is unprofitable, and therefore unsustainable for everyone – whether those producers are US oil companies or sovereign states. Ultimately, they cannot last.

But for now, we must maneuver in a market that will have barriers to going much higher. How to successfully do that is what I’ll try very hard to answer in my next webinar – scheduled for Thursday, July 6th at 4PM (avoiding the long July 4th weekend). I hope you’ll tune in by clicking here.