Oil Cycle: The Rebound Phase

[dan_s]

All oil price cycles eventually end and the commodity's price rebounds to a reasonable level. This has to happen because the Oil Market is literally too big to fail. EIA has increased their 2017 year-over-year demand forecast to 1.6 MMBbls per day. Before the end of this decade, this world will be consuming over 100,000,000 barrels of hydrocarbon based liquids per day, most of them refined from crude oil.

The global market for oil now exceeds $2Trillion, which is more than double the combined market value of all raw metals. < I bet you didn't know this.

Oil prices must settle in a range that covers replacement cost + return on investment or else capital will be cut off. In my opinion, the "right price" for crude oil is somewhere in the $55 to $60 per barrel range. Brent crude went over $55 today. Keep in mind that it is impossible for the Tier One areas of the U.S. shale plays to meet rising global demand for oil.

The problem with all previous oil cycles is that they overshoot the mark and the "glut" can quickly turn into a shortage. The global oil market requires a steady stream of the "black gold" coming out of the ground. We just got a lesson in how fragile the supply system is when Hurricane Harvey took 30% of refining capacity offline. Within a few days there were gasoline shortage all over the country.

IEA Oil Market Report: "While the industry responded much better than a decade ago when severe storms hit the Gulf Coast, the region nowadays is more important to the global oil market. For a long time it has been a production and refining hub; today it is an important global trading centre with more than 4 mb/d of products and 0.8 mb/d of crude oil being exported. For products, US exports are important for many countries e.g. Mexico, Venezuela and several Central American states. Crude oil from the US finds its way to an increasing number of countries including China, Korea, Italy, the Netherlands, Singapore and the United Kingdom. With US export volumes expected to increase, the strategic importance of the Gulf Coast will only grow. The rise of the Gulf Coast as a major energy hub means that, in some respects, it can be compared to the Strait of Hormuz in that normal operations are too important to fail."

I have mentioned in my weekly podcasts that the amount of U.S. crude oil in commercial storage is less than 30 days of supply. For a nation that depends heavily on imports, that seems a bit too low for my comfort level.

IEA Oil Market Report: "OECD refined product stocks were only 35 mb above the five-year average at end-July and could soon fall below it because of the impact of Hurricane Harvey." < Considering the fact that we consume a lot more refined products than we did five years ago, this little tidbit from the IEA report should draw some attention.

[dan_s]

Stock prices are moving a lot higher than the oil price today because the first step in the rebound phase is to remove FEAR. Wall Street fund managers know the sector is oversold, they just needed a little push and the IEA report gave it to them.

All of the stocks in our Sweet 16 and Small-Cap Growth Portfolio are grossly oversold unless you believe oil prices are going a lot lower. In my opinion, the IEA report puts a hard floor under the price of oil. There are support levels at $47.50 and $46.00, with Strong Support at $42.00

Plus, there are a lot of very nervous traders that hold shorts.

There is very strong resistance at $50.00, so we need a few closes above that level to call this a real rally.

Regardless, oil supply/demand is definitely tightening. < Just like it has done in 100% of all previous oil cycles.