Hip to be bullish

May 25, 2016 08:11 AM
Daily Energy Market Analysis

It is suddenly hip to be bullish crude oil again. Bearish calls that oil could crash to $10.00 a barrel seem be off of the table. Talk that oil would never exceed $40.00 a barrel ever again has been proven to be wrong. Now the market and the analysts are starting to understand the impact the oil price crash has had. It has created a long lasting effect on future oil production and has sparked a surge in demand.

The historic crash in oil prices that caused unprecedented cutbacks in oil investment around the globe has set the market to get back in balance much quicker that many people thought. Even the expected comeback of shale oil production is in doubt as bankrupt and cash strapped producers may not have the resources to ramp up production. Noted oil bears like Goldman Sachs and Citigroup have changed their tune from bearish to bulish as oil makes a run for $50.00 a barrel.

Citigroup seems to think that Jupiter has aligned with Mars in the oil market, setting its new bullish outlook to music in a report tune titled, “Let the sun shine in as commodities enter a new age of Aquarius.” Citigroup sings, that commodity markets appear to have turned the corner and, led by the petroleum market, are accelerating their price recovery from the lows of the last year. So it appears that Citigroup has had golden living dreams of visions and a mystic crystal revelation and now are in harmony and understanding of my bullish outlook.

Even the odds of an OPEC production freeze might rise as Qatari energy minister Mohammed bin Saleh al-Sada says that a minimum price of $65.00 a barrel for oil is, “badly needed at the moment”. Throw in a labor union strike in France and now I don’t feel like the loneliest guy in town anymore as former bears become more bullish.

Earlier in the year I was talking about a new super spike in oil. I was comparing the price crash that we saw in 1998 and 1999 to use a blueprint for what would be a generational bottom. A bottom that would mark a new bull market in oil. I am glad that Citi-Group and Goldman Sachs are starting to see things that way as well. I spoke of how the price collapse that we had to start the year in January and February would lead to more production destruction as long as the global economy did not fall into a recession and that we would see supply start to tighten. What is production destruction? It is the opposite of demand destruction. When prices go too high we see demand destruction or demand fall. When prices go too low, we see cut backs in spending and investment that will cause production to fall. We are now seeing the early stages of production destruction on a mammoth scale that will be felt for years to come.

Oil prices also saw support from fears that the American Petroleum Institute (API) might show a drawdown in supply. It did. The API reported that crude fell by a much larger than expected 5.14 million barrels. The market rallied but a 3.61million barrel build in gasoline tempered the rally. Distillates did fall by 2.92 million barrels in line with my expectations.

In France gasoline shortages from a labor strike continue to be felt. Bloomberg says that all eight of the nation’s refineries were affected by strikes as workers at Exxon Mobil Corp.’s Gravenchon plant in northern France began taking steps to shut down, following similar action by staff at Total SA facilities across the country, said Emmanuel Lepine, a CGT union representative. This has supported oil.

Short-term natural gas is falling on reports of cooler weather but longer term the outlook is for warmer. Most of the continental United States is facing elevated chances of well above average summer temperatures, according to the latest outlook from NOAA’s Climate Prediction Center. 

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.