Oil Price - Dec 27

[dan_s]

Oil Out Of Touch With Fundamentals
By Phil Flynn - Dec 27, 2018 08:41AM ET

We have never seen anything quite like this and we may never see anything like it again. A record one day Santa Claus stock market rally capped off one of the worst months in stock market history. A record breaking 1,000 point plus up day in the Dow on December 26 brought oil back up as we run this market on fear or a lot of coffee. The swings have oil basically out of touch with any real market supply and demand fundamentals and instead seem to be swung by the headline of the moment or whether stocks are going to skyrocket or plunge on any given moment.

Yet the break in oil regardless whether it is signaling a recession or a future drop in demand, is already causing ramifications for producers and oil companies big and small and the ramifications of these recent crazy moves will no doubt cost us barrels in the New Year.

Oil prices and stocks dipped after a Reuters report that said that Sinopec, officially known as China Petroleum & Chemical Corp (NYSE:SNP), suspended two top officials for inflicting severe losses in trading, the stock price plunged 6.8 percent in Shanghai and 4 percent lower in Hong Kong.

Shale company problems are also bubbling to the surface. The Houston Chronicle reported that Eagle Ford, shale’s third largest driller, shows signs of distress. “Sanchez Energy made it through the two-year oil bust that roughly ended in 2016. But now, despite a year of mostly rising crude prices, the Houston oil and gas company is showing signs of distress that in a worst-case scenario could land it in bankruptcy. The latest hit came late Friday when the New York Stock Exchange warned that Sanchez Energy would be delisted if it did not boost its stock above $1 a share within six months, a move that would hurt the company’s access to capital markets. Sanchez’s stock has been trading below $1 a share since mid-November. It closed Monday at 32 cents a share. Sanchez is the third most active operator in the Eagle Ford shale, holding more than 283,000 net acres of leases in the South Texas resource play where its wells produced roughly 179,000 barrels of crude oil and 5.6 billion cubic feet of natural gas in 2017.”

Russia is trying to calm the waters, assuring the market of their commitment to work with OPEC. Russia, like President Donald Trump, is blaming the U.S. Federal Reserve for the drop-in oil prices, said Igor Sechin, chief executive at Rosneft PJSC. Russia’s biggest crude producer said that rising U.S. interest rates are forcing speculators to sell their positions and drive prices lower according to Bloomberg.

“The drop-in oil prices hardly bother us because our budget is based on $42/bbl,” First Deputy Prime Minister Anton Siluanov told reporters ahead of a meeting between President Vladimir Putin and big business in Moscow Wednesday. “The price can stay around $40-$50 for a time -- six months or a year,” because U.S. producers have hedged some of their production, Siluanov said. “We think this won’t last long.” Even if it does, Russia has ample financial reserves, he said.

The price “should have stabilized, because everyone was supposed to be scared” by the OPEC+ deal, said Igor Sechin, “But nobody was scared.” I wonder if they are scared now.

While I would like to tell you that sanity has come back to the marketplace, I am afraid I can’t. In fact, we may have not seen anything yet. I was wrong about the American Petroleum Institute report because it is being released today. It should show another week of near record oil demand as travelers gobbled down barrels of gas and diesel like a big Christmas turkey. Yet, supply and demand may not matter until we lose the manic fear trade. Risks of a trade war, risks of rising rates and risks of a prolonged government shutdown are trumping the fact that the darn economy is doing pretty darn good.
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MY TAKE: This is more my "hope". I think the market will settle down after the holidays and after the Federal Government partial shutdown is over. Anyone that is over 25 and has a brain should know by now that these government shutdowns are a political joke and have no lasting impact, but we have a lot of very young people running large hedge funds these days. If API and EIA finally agree on what's going on and report steady declines in crude oil and refined product inventories, it would help a lot. Mother Nature will have something to say about natural gas and propane prices in January.

[par_putt]

What do I know?? Oil dropped to $1.77 per gal today. Whats happening?

[dan_s]

Henny Penny says the sky is falling!

Seriously, this is the craziest market that I have ever seen. CME Group has a daily video (only 3 minutes long) that tries to explain why oil went up or down that day. It is actually funny watching them try to come up with any logical reason for oil going up $4/bbl one day and down $2/bbl the next.

All I know is that oil cannot stay below replacement cost for long and there are very few places in the world where $45/bbl justifies risking $Billions.

I like Wells Fargo's take that $55/bbl for the fundamentals and $10/bbl for geopolitical risk premium is today's "right price" for oil. I put their comments in the newsletter, but I will send any of you the full article if you send me an email (dmsteffens@comcast.net)

PS: I did my part by burning up 50 gallons of gasoline going back and forth to Dallas for Christmas.