Crude Oil Prices - August 3

[dan_s]

Speculators, which outnumber commercial traders by more than 20 to 1 (some days more than 100 to 1) set the daily price of crude oil. The price quoted is the front month NYMEX crude oil contract for West Texas Intermediate (WTI). Oil that will be delivered to Cushing, Oklahoma in September is what they are trading today.

Most speculators are trading on margin, so they are highly leveraged. Those "short" oil today lost a lot of money.

IMO speculators over-react to the weekly EIA reports and the weekly Active Rig Count report put out on Friday's by Baker Hughes. Over the years the EIA report has been proven to be way off from reality, especially during the beginning and end of oil price cycles. The weekly volumes for production, imports and storage levels are based primarily on formulas that are heavily weighted to historical trends. The weekly production volumes are nothing more than "Wild Ass Guesses" since EIA has no physical measuring devices on every well in the U.S.

Speculators that had been shorting oil got burned today because they did not expect the big draw from gasoline inventories, which was probably a correction of the mysterious build that the EIA reported last week.

My point is that you all need to understand that with the low number of rigs drilling for oil today it is a certainty that U.S. oil and gas production is falling and falling fast. There were 1,609 rigs drilling for oil in October, 2014. Today there are less than 400 rigs drilling for oil and many of the these rigs are drilling "obligation wells" to hold leases. Many of these obligation wells will not be completed. Yes, the rigs drilling today are in the best areas of the best oil plays, but there is NO WAY that 400 rigs can drill enough wells to offset the decline of more than a million wells. Did you know that just in Texas there are 475,000 producing oil & gas wells and 99% are on steady decline?

This is an industry with VERY BIG numbers

This world consumes 675,000,000 barrels per week of refined products, most of which are made from crude oil. Speculators over-react to increases or decreases in the weekly EIA inventory report that are less than 1% off from what they expected when they should know there is a very good chance the EIA report is wrong anyway.

Global oil supply / demand is near balance today. Supply is falling and demand just keeps going up. This is a recipe for higher prices.