Energy Prospectus

WTI opened lower this morning and dipped to $43.21. Shortly after EIA's rather bearish crude oil storage report, the price started moving up and closed at $46.28. Better than a $3.00 change from low to high after a bearish storage report! What is this world coming too??????????????

The good news is that the speculative traders that are shorting oil are now getting burned and burned fairly bad.

My take is that the "tea leaves" are now showing signs of a much tighter oil market by year-end. All OPEC has to do is say they are "considering" a production cut and Brent will be over $60/bbl within hours. The shorts know this of course.

LET ME BE CLEAR:

These reports from the talking heads that keep telling everyone that the oil markets are oversupplied by two million barrels per day are total BS. Over the last five months U.S. crude oil in inventory has DECLINED by 30 million bbls. Storage levels in Europe are up some, but not 600 million barrels. There is not a massive fleet of tankers floating around the open seas full of oil.

Here is why the higher storage level makes sense: Crude oil in storage is primarily held by refiners. This is their "raw material". They use crude oil to make the products we use like gasoline, diesel, jet fuel, etc. Demand for refined products in the U.S is up a million barrels per day over last year AND refiners are exporting more stuff. Global demand is up 1.6 million bbls per day. It is basic business that if you are a manufacturer and demand for your finished products is going up, you increase your raw material inventory.

FYI: The U.S. has 640 million barrels of crude oil storage capacity, not including the Strategic Petroleum Reserve. Today there are ~455 million barrels in storage. WE ARE NOT CLOSE TO FILLING STORAGE AND WE NEVER WILL BE. Smart people run the storage facilities and they will not take delivery if they cannot handle it. In less than a year, the U.S. will be importing more than 50% of the oil we need every day. We are going to be very glad we have a lot in storage.

Wrong Number, Right Idea
9/2/2015 By Robert Rapier

While there are actually other stories unfolding in the world of energy, you would never know that from my email inbox. Most of the correspondence I have received in the past week is still focused on oil prices, particularly following the big late-week rally in crude futures.

As I advised in this column last week (Panic Creates Opportunity) the fearful trading had created an opening last seen in 2008. While we don't yet know whether we've seen the absolute bottom of this cycle, my strong belief is that crude oil below $40/bbl is a price point that simply can't be maintained for long in today's world.

Robert said: "I make predictions to set up a narrative that describes what I see in the market. As I always indicate when going out on a limb, the context of the predictions is important. In this case, the context was "$40 is so ridiculously cheap for crude that I don't think we will get there."

I considered this my riskiest prediction when I made it, because WTI was already in the $40s and dropping at a rate that would have taken it below $40 by the end of January unless it changed course. So it was a prediction that had the potential to be wrong shortly after I made it.

Instead, the prediction survived until nearly September. On Jan. 28 WTI closed at $44.08, but then ran back up to $53.56 over the following three weeks. Then WTI retraced to $44.02 by March 19 on concerns of growing crude oil inventories before running back up and bouncing around $60/bbl for most of May and June. So for most of the year, the price proved to be pretty resistant to $40 -- even though each time the price reached the low $40s, there were predictions that oil would continue to fall, possibly to as little as $10/bbl.

While the prediction is now wrong, the future will dictate whether the context was wrong as well. If oil falls to well below $40 and remains there for an extended period, then my narrative will turn out to have been wrong. I still don't see that happening. So even if the bottom proves to have been $38, I still view this as an unsustainably low price for oil. At present, U.S. oil production is falling, and global demand is increasing by about 150,000 bpd per month. On the other hand, crude oil inventories are still high. The next major price move by oil will probably be dictated by how quickly falling production and rising demand can put a dent in crude oil inventories.

MY VIEW: The global oil markets are now tightening at a rate of AT LEAST 200,000 bbls per day PER MONTH. By year-end global supply/demand will be in balance. By early 2016, the United States will be importing more than 50% of the oil it needs each day. It is already heading in that direction. - Dan