Oil & Gas Prices - June 15

[dan_s]

I get e-mails all the time asking me why oil and/or gas prices are up or down today.

Supply & demand fundamentals have very little to do with the daily movement of oil & gas prices.
Speculators determine the price of oil and speculators outnumber commercial trades by 20 to 1. On some days the ratio is more like 100 to 1.

Today speculators are worried about the UK leaving the European Union or the latest jobs report or what the Fed is saying. Tomorrow it will be something else. There is just a lot of "stuff" that moves the oil markets and there is not much we can do about it. This is called "Market Risk". However, in the long-run the fundamentals do win out and the fundamentals for oil & gas prices are turning bullish. BTW a lot of oil traders have a lot of misconceptions about how the industry really works.

Less supply + increasing demand = higher prices < Especially for a commodity as important as oil.

FEARs to ignore:
> Inventories are too high. Yes, they are high BUT this world consumes a HUGE amount of oil and gas each day. Oil inventories are high because refiners know the price is going up and they want to get as much of the cheap stuff as they can. BTW remember the fear that inventories were going to fill up? That was total BS and it will never happen. PLUS, and this is a big thing to remember, as the world consumes more and more refined products we actually need more crude oil in inventory. Crude oil is the "raw material" that refiners turn into the fuels we actually burn up each day. Manufacturing companies always want an adequate inventory of raw material on hand.
> $50 oil will make the upstream companies run out and ramp up production. Yes, we will see a small increase in the active rig count, but it will not even be close to the number of active rigs needed to halt declining U.S. oil production. If the number of active rigs DOUBLES tomorrow it will take six months to stabilize U.S. production. I believe Wall Street has no concept of how long it is going to take to ramp up drilling & completion activity this time. The oilfield services sector has been devastated by this cycle.
> The UK leaving the European Union. It is above my pay grade to know what this will do, but my guess is that it will have very little impact on global oil demand. It will have zero impact on North American natural gas demand.

Hang tough and don't fret the small stuff. This cycle is rapidly coming to an end and the industry MUST have higher prices to develop the oil and gas supplies we're going to need.

[dan_s]

I can make the argument that commercial crude oil inventories in the United States are not high enough.

Since OPEC is all but "out of business" and there is almost no spare capacity in the world today, we should have a higher storage level to meet future demands should we be cut off from imports. Since more than half of the crude oil used by U.S. refiners each day is being imported from countries that hate us, I think it would be wise to have more in commercial storage.

BTW if we are cut off from imports, the oil in the Strategic Petroleum Reserve cannot be pumped out quick enough to take up the slack. Heaven forbid that we ever have to face this problem.