The oil market is one of the most illusive and difficult markets to understand. In past decades it was simple. OPEC controlled prices. When prices got too low, they cut production and prices rose. Now, however, we no longer have a single group in charge. The market is fraught with trends and counter trends that create confusion and places traders on edge. Just about a month ago, West Texas Intermediate (WTI), the US benchmark, was trading at $106-$107 per barrel. This Friday prices have dropped to $93.65 per barrel for October delivery. There are rumors of a price drop to $70-$80 per barrel.
One of the theories put forth was that massive money printing under quantitative easing would create hyper inflation and cause prices to spike higher. The inflation did not materialize, leaving the bulls out on a limb. Recent numbers for the Commitment of Traders show 423,136 open futures contracts for bullish speculators and 445,492 open contracts for commercial hedgers. This group includes the major oil companies that use the futures market to hedge their product and lock in profits. In other words, the smart money is bearish. (Forbes)
Now with QE winding down, we could see a bull market in the US dollar. Oil prices tend to run counter to a bullish dollar.
The US now has a glut of oil. Oil shale production has boosted US production to an estimated 9.2 million barrels in 2015 and 9.6 million barrels in 2016. Canada, also a major shale oil producer, will bring 3.9 million barrels to market in 2015 with most of this oil exported the US. Natural gas production has increased by 40% since 2007. Natural gas is now used to generate electricity, heating, chemicals and transportation. To sum up, US production is at a 25 year high with imports at a 28 year low.
While the Mid East is in chaos, oil production is growing. Iraq, the world’s 5th largest producer has output at a 30 year high. It’s no wonder the ISiS is trying to carve out a piece of Iraq. It’s all about oil.
Libya is slowing bringing back production after their Arab Spring revolution. They had lost almost half of their production, but are now on track to return to their normal 500,000 barrels.
The US and Iran are slowly negotiating an agreement on nuclear production. If this materializes, we could see still more oil on the market.
Venezuela now produces 250,000 barrels. They now are sitting on a new oil discovery, the Perla oil fields, that is one of the biggest in the world.
One of the problems with the US production of shale oil is the high cost, estimated at $70 per barrel. Any sudden price plunge could wipe our many of the shale producers.
With the US oil glut, shale producers are lobbying Congress to allow export of US oil, especially from the states of Texas and North Dakota.
For investors, it is prudent to avoid taking on new positions. If we see prices fall to the $75-$80 level, then we could see a reversal to the upside.