What does the bear say?

July 8, 2015 11:48 AM

Pay no mind, OPEC will be here soon to save the day, so to $50 we go. I hate to be the one to tell you I told you so, but I never had a chance. I danced around the idea and I had no shot at seeing the drop come in so fast and deep. There were plenty of signs and believe or not, they had nothing to do with Greece. There was the stock market rout in China. China has had to halt IPOs and curb short selling in the past few days and actually took measures by last week. Yes, that in itself is a clear signal that they are about to take a major hit to demand, but this was also after they cut interest rates two weekends ago. Losing China’s demand for crude oil was already a red flag that if this were NASCAR, the race would have been suspended. Japan (3.8MM b/d) has been doing a nice job of increasing their demand the past year, but they are not coming near the 9MM b/d of imports that China was pulling in.

You throw in the EU now, and you can see where there should be some fear that oil prices were ahead of demand. Then, there were signs that fund money was easing out of the picture. Trying to find fund money that is exclusive to energy these days is like trying to catch Kanye smiling. We had seen the past three Tuesdays a strong rally in crude and today looks no different so far. The thing is: it’s not exclusive to oil. If the teeming millions step back and look across the whole board we’ll see that commodities as a whole are getting the love. The spike is more consistent with money flowing into an Index fund.

Go figure, throwback Tuesdays. It’s well deserved though. When you figure that the strong U.S. dollar, the spectre of rising interest rates and a global economy that is stop and go on recovery, there’s money to be made on increasing demand or an inflationary bubble. This is what Index funds are made for and that exposure across the board is worthwhile. On the other hand, the lack of action in oil alone has been a bust. Maybe it gets to $50, maybe it gets to $70, but that’s all she wrote. In 2015 so far we’ve traded basically in a range of $50 to $60. There’s not a lot of interest in betting on a trade that goes nowhere.

Then there’s the last and final piece de resistance: OPEC. I’m pretty sure that the whole “”We can survive with $20 oil” experiment is over. They tried to listen to garbage and they are left with garbage. I’m not sure who told them they could continue to pump 30MM b/d to weakening demand and still make budget, but it’s about over. The Saudis and the UAE have taken hits to their economy and it’s not looking good if oil stays down here. The hard thing to understand is that if price is an indicator, the lat time we averaged $50 over a year was back in 2005. Back then the OPEC quotas were only 28MM b/d, but everything else was looking good. Demand in the U.S. was over 20M b/d (20.2). Crude imports into the US we’re getting high on supply and pulling in over 10MM b/d (10.1) and China was blazing a path to glory as they hit 10.6% to mark the first double digit growth by any major economy. It’s hard to figure out what OPEC has been thinking and how they should be thinking as the demand is drifting away, wave after wave. It feels like I’m drowning, going against the stream.

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About the Author

Carl Larry is Director of Business Development Consultant for Oil and Gas at Frost & Sullivan. Follow him on Twitter (@oiloutlooks) or on his website. He can also be reached at carl.larry@frost.com