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Physical Oil Markets Don’t Lie – Is Another Crash Likely?

Physical Oil Markets Don’t Lie – Is Another Crash Likely?

OPEC oil

Oil prices are falling and analysts and market players are as eager as ever to explain the decline in accordance with their own bullish or bearish leanings. It’s a natural correction that was only to be expected after the buildup of long bets on crude oil and oil product futures, the bulls insist. It’s the start of a trend, thanks to the major jump in U.S. production, the bears counter. Now, data from physical oil markets has surfaced that supports the bears’ stance.

North Sea Forties, Russian Urals, WTI, and Atlantic diesel have all fallen to their lowest in several months, Reuters reports, citing commodity traders and analysts. These are physical markets — the markets where actual oil is taken from one place and shipped to another to be refined into fuel and other products, as opposed to the speculative futures market. If the physical market points down, chances are the price drop — 15 percent in three weeks — is not just a blip, as OPEC’s Secretary General Mohammed Barkindo said earlier this week.

Interestingly enough, Barkindo also said he had Russian President Vladimir Putin’s word that Russia will not flood the market with oil while the cut deal still holds. The reason this statement is interesting is that it is the latest example of OPEC’s tendency towards upbeat comments that have little substance, unlike the physical oil market data.

RBC Capital Markets’ Michael Tran told Reuters that, “Physical markets do not lie. If regional areas of oversupply cannot find pockets of demand, prices will decline. Atlantic Basin crudes are the barometer for the health of the global oil market since the region is the first to reflect looser fundamentals. Struggling North Sea physical crudes like Brent, Forties, and Ekofisk suggest that barrels are having difficulty finding buyers.”

…click on the above link to read the rest of the article…

IEA Warns Of New Oil Glut

IEA Warns Of New Oil Glut

oil pipeline

The global oil market could slip into deeper oversupply on the back of non-OPEC production growth led by the United States, the International Energy Agency said in its latest Oil Market Report.

“The main factor,” the IEA said, “is US oil production. In just three months to November, crude output increased by a colossal 846 kb/d, and will soon overtake that of Saudi Arabia. By the end of this year, it might also overtake Russia to become the global leader.”

Commenting on the recent reversal in oil prices, the authority attributed it to profit-taking and a market correction spanning all industries, adding that oil’s fundamentals supported a decline in prices.

The situation in the United States suggests that history is repeating itself and what we are seeing now is indeed a second shale revolution that could bring petroleum liquids production on par with global demand growth.

But that’s not all. The IEA noted the recent shipment of the first U.S. condensate cargo to the UAE, which although unique might prove to be the start of a new era in international oil trading patterns.

The news is certainly not good for OPEC and, to a lesser extent, Russia, but there is some light at the end of the tunnel: global economic growth could turn out to be stronger than previously expected and this would help offset the impact of growing U.S. production on prices and keep them where they are now.

The authority hinted that the end of the OPEC deal could be in sight given that the overhang in OECD oil inventories has shrunk to just 52 million barrels from 264 million barrels a year ago, but added that the trend in oil prices could convince the cartel to wait.

Separately, the IEA maintained its 2017 oil demand growth estimate at 1.6 million bpd and said this year demand will grow by 1.4 million bpd, a 100,000-bpd upward revision on the January OMR estimate thanks to IMF’s expectations of stronger economic growth this year.

Oil Prices: Collapse Now, Spike Later

Oil Prices: Collapse Now, Spike Later

Oil storage

Oil prices closed out the week sharply down, wiping out all the gains posted since the start of the year.

Surging U.S. shale production, along with broader financial turmoil, has clearly put an end to the bullish mood in the oil market. U.S. shale struck several blows against oil prices this week.

First, the EIA dramatically overhauled its forecasts, predicting U.S. oil production would hit 11 million barrels per day (mb/d) this year, rather than late next year. Then, on Wednesday, it revealed estimates that put U.S. oil production at 10.25 mb/d for the week ending on February 2, a staggering 330,000 bpd increase from a week earlier. Those weekly estimates are subject to revision when more data becomes available, but if those figures hold, it would point to a significant ramp up in drilling activity and new supply coming online.

As a result, it seems that, in the short run at least, U.S. shale has killed off the oil price rally, which saw WTI move from $50 per barrel in October to the mid-$60s per barrel by January. Brent saw a similar jump from the mid-$50s to $70.

But we’re now potentially moving into the next phase of this cycle, an all-too-familiar correction after prices have seemingly climbed too far.

This time around the downward swing could be aided by a rebound in the strength of the dollar. Typically, a weakening dollar pushes up oil prices, and the rapid run up in prices over the last few months occurred not coincidentally at a time when the dollar posted a steep decline. But the greenback has clawed back gains, particularly over the last week, with expectations of rising interest rates.

“The dollar index got down to 86 [cents], crude got to $66,” John Kilduff, founding partner of Again Capital, told CNBC.

…click on the above link to read the rest of the article…

WTI/RBOB Sink After US OIl Production Hits Record High, Surpassing Saudi

WTI/RBOB held on to gains after last night’s surprise crude draw from API, but quickly tumbled after DOE reported a 1.9mm crude build (2nd week in a row) and significant gasoline and distillate builds. However, US crude production’s massive spike to 10.25m b/d was the big headline.

API

  • Crude -1.05mm (+3.15mm exp)
  • Cushing -633k
  • Gasoline -227k
  • Distillates +4.552m

DOE

  • Crude +1.895mm (+3.15mm exp)
  • Cushing -711k (-263k exp)
  • Gasoline +3.414mm (+500k exp)
  • Distillates +3.926mm (-1.25mm exp)

Last week’s surprise (huge) crude build from DOE was dismissed by API overnight but DOE ruined that party and showed the second weekly crude build in a row. Gasoline and Distillates stocks resumed their rise…

As Bloomberg’s David Marino notes, Total U.S. inventories grew the most since early September. It’s actually even a bigger deal than the headline number suggests: if not for a 6.4 million draw from propane/propylene and “other” oils, we’d be looking at a 10 million barrel build.

But all eyes were once again on US crude production as it smashed above 10m b/d.

As Bloomberg’s Julian Lee notes, that huge jump in crude production is not the result of a sudden burst of drilling. More likely it is the correction we expected after the earlier release of monthly data for November that showed production was already above 10 million barrels a day three months ago.

U.S. crude output hits a record high of 10.25 million bpd, surpassing both the monthly high set in Nov 1970, and Saudi Arabia’s latest production.

 

The reaction in WTI/RBOB was swift…

…click on the above link to read the rest of the article…

Are Oil Prices Heading for Another Spike?

 Pipeline moves crude oil from Prudhoe BayJoe Sohm/Visions of America/UIG via Getty Images

Are Oil Prices Heading for Another Spike?

The decline in the dollar’s exchange rate seems to have gathered momentum, in part because the person who has his signature on US currency, Treasury Secretary Steve Mnuchin, seems unperturbed by its weakness. If it continues, will energy costs spiral upward?

CAMBRIDGE – The price at the pump for premium gasoline topped $3 per gallon in much of the United States over the past few weeks, which is surprising to consumers but not to analysts of the world’s oil markets. From its local low two years ago, the price of oil has more than doubled. As with any market, where you stand on this price increase depends on where you sit.

Higher oil prices buttress the fortunes of producers abroad and at home. The International Monetary Fund upgraded the GDP growth outlook of all six of the top ten oil producers that were shown separately in its 2018 forecast update, and the projected growth of world trade volumes was raised half a percentage point this year and next. Increased oil revenues improve the fiscal positions of most producing economies, and some have taken advantage of global investors’ hardier appetite to issue sovereign debt.

In the US, the five states with the largest gains in oil production this decade recorded employment growth of 2.75% in 2017, double the national average. Meanwhile, the number of oil rigs nationwide increased by roughly 50%.

At the same time, a doubling of energy costs takes a significant bite out of US households’ budgets, with energy costs directly accounting for about 6.5% of consumer spending. Even more problematic, this is a regressive tax, disproportionately draining lower-income households’ discretionary spending power.

…click on the above link to read the rest of the article…

Why Oil Prices Could Dive

Why Oil Prices Could Dive

Rosneft oil tanks

WTI briefly touched $65 per barrel after the EIA reported a surprise drawdown in inventories — the highest price since late 2014. Although the rally hit some stumbling blocks in recent days, prices remain at multi-year highs. However, absent further bullish news, the downside risk looms large.

One of the most acute threats to prices is the exorbitant positioning by hedge funds and other money managers, who have staked out record net longs in the oil futures market. With everyone piling into one side of the bet, there’s little room left on the upside. This kind of lopsided positioning has consistently ended with a rush for the exits, setting off a sudden — and often sharp — price correction.

Mad Money’s Jim Cramer spoke about the problem on Tuesday on CNBC. “As of last week, large speculators were holding the single largest bullish position in the history of crude oil,” he said. “Being bullish is NOT a good sign … when everyone’s bullish, well, then, you don’t have anyone to convert to be able to start buying … You need to convert bears but there’s no bears.”

Cramer, citing data from Carley Garner, co-founder of DeCarley Trading, said the current makeup in the futures market points to a near-term price correction. “As Garner points out, when one of these massive speculative bets in oil unwinds, you do not want to get caught anywhere near the blast radius,” Cramer said.

Another force working against the current rally is the recent decline of the dollar, which has been weakening for the last several weeks. Since oil is denominated in U.S. dollars, a weaker dollar can put upward pressure on crude prices as crude becomes relatively less expensive to much of the world.

…click on the above link to read the rest of the article…

What Could Push Oil To $100?

What Could Push Oil To $100?

Oil rig offshore

If anyone thought the latest oil market outlooks of the EIA and the IEA are upbeat, here’s an even more upbeat one from Energy Aspects: The consultancy expects crude demand this year to grow by 1.7 million bpd, and says Brent could touch above $100 a barrel in 2019.

According to Energy Aspects, the reason for the further jump in prices will be a drop in new production outside the U.S. shale patch. It’s a little hard to buy that, however, if one remembers that there is 1.8 million bpd in production capacity ready to be tapped again once OEPC and Russia taper their production cuts. That alone should take care of the demand growth that the consultancy predicts for this year. That is, unless it booms by 2 million bpd, which is the top of the range forecast by Energy Aspects. But even then, the U.S. and Russia alone could take care of it: The Russian state majors are itching to expand production in eastern Siberia.

Of course, the likelihood of OPEC and Russia bringing all that production online is highly debatable, as the partners in the cut deal seem still determined to continue with the original plan. Nevertheless, the barrels are there, so there’s no urgent need for actual new production yet. However, if global demand grows so much so quickly, does anyone have any doubts that the new, expanded oil cartel will be flexible enough to make the best of the situation? Hardly.

So how likely is this demand growth? According to Energy Aspects, there is currently “no real drag on demand growth.” The global economy is in growth mode, which lends strong support to the price momentum, and the short-term forecasts for the top consumers of crude oil are all bullish. Yet, there’s one potential drag: prices.

…click on the above link to read the rest of the article…

WARNING: Markets Reaching Extreme Leverage

WARNING: Markets Reaching Extreme Leverage

As investors’ bullish sentiment moves up to euphoric levels, the markets are reaching extreme leverage.  This is terrible news because a lot of people are going to lose one heck of a lot of money.  According to CNN Money’s Fear & Greed Index, the market is now at the “extreme greed” level and if we go by Yardeni Research on “Investor Intelligence Bull-Bear Ratio,” it’s also is the highest ratio in 30 years.

But, of course… this time is different.  I continue to receive emails and comments on my blog that the Fed will continue to prop up the markets.  Unfortunately, there is only so much the Fed can do to rig the markets.  Furthermore, the Fed can’t do much to mitigate investor insanity in record NYSE margin debt or the massive $2 trillion in the global short volatility trade.

The record NYSE margin debt suggests traders have racked up a record amount of margin debt (33% more since 2007) and the largest short volatility trade in history.  By shorting volatility, investors are betting that it will continue to move lower.  A falling volatility index suggests more calm and complacency in the markets.

So, the market will likely continue higher and higher, until it finally POPS.  And when it does, watch out.

I’ve put together some charts showing the extreme amount of leverage in the markets.  While this leverage may increase for a while, at some point the insanity will end in one hell of a market correction-crash.

The Commercial Banks Are Betting On Much Lower Oil Prices

As I mentioned in previous articles and my Youtube video, Coming Big Oil Price Drop & Market Crash, the Commercial banks have the highest net short positions in the oil market in over 20 years.  In the video, I explained how the Commercial net short position in oil increased from 648,000 to 678,000 contracts in just one week.

…click on the above link to read the rest of the article…

Can Anything Stop The Shale Surge?

Can Anything Stop The Shale Surge?

Shale

Higher oil prices may lead to huge growth in U.S. shale production, according to revised predictions from both OPEC and the IEA.

(Click to enlarge)

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…click on the above link to read the rest of the article…

WTI Tumbles To $62 Handle After IEA Predicts “Explosive” US Shale Production As Oil Prices Surge

Update: The IEA report has impact prices – as would be expected – sending WTI back below the crucial support level of $63 once again…

With WTI Futures net long positioning at extreme longs, one wonders if $63 can hold.

 

*  *  *

Overnight, the International Energy Agency became the latest entity to recognize that 2018 is shaping up to be a pivotal year for energy production in US shale fields, and a showdown between OPEC and non-OPEC producers, namely those in the US.

According to the latest IEA report, US shale output is poised for “explosive” growth in 2018 as WTI trades at its strongest level since the summer of 2015, which in turn will unleash pent up US output, potentially leading to a sharp oversupply of black gold,

As Bloomberg  notes, the IEA’s forecast supports OPEC’s own projections: As we pointed out yesterday, the cartel also expects US production to ramp up in 2018 as shale producers – much more lean and efficient and significantly delevered after the 2015/2016 “episode” – unleash output as oil price continue to rise well above the generally accepted shale breakevens in the low $50s.

The IEA boosted its forecasts for non-OPEC supply growth this year by 100,000 barrels to 1.7 million barrels a day compared with last month’s report, modestly higher than OPEC’s projections. It also warned 2018 could be a “volatile” year as Venezuela’s energy industry teeters on the brink of collapse.

Both OPEC and IEA expect Venezuela’s difficulties to continue after Latin America’s socialist paradise brooked the biggest unplanned production decline of 2017.

“The big 2018 supply story is unfolding fast in the Americas,” the IEA said in its monthly report. “Explosive growth in the U.S. and substantial gains in Canada and Brazil will far outweigh potentially steep declines in Venezuela and Mexico.”

…click on the above link to read the rest of the article…

Will The Coming Big Oil Price Drop Cause The Next Stock Market Crash?

Will The Coming Big Oil Price Drop Cause The Next Stock Market Crash?

The oil market price is setting up for one heck of a fall.  Now, could this large oil correction cause the next stock market crash?  Time will tell.  However, the indicators in the oil market are showing the largest net commercial short positions in history.  The current net commercial short positions in the oil market are even higher by 174,000 contracts than the level when the oil price fell from $105 in mid-2014 to a low of $30 at the beginning of 2016.

Furthermore, there was a previous trend in the 1980’s that suggests we are setting up for a MAJOR stock market crash.  I discuss the details of the current record net commercial short positions and the similar setup that took place during the 1980’s in my newest video, Will The Coming Big Oil Price Drop Cause The Next Stock Market Crash?

Here is one of the charts discussed in the video presentation above:

As we can see in this COT Report (Commitment Of Traders), the commercial net short positions jumped from 648,000 to 674,000 in the past week.  However, this chart only shows the change traders’ positions over one year.  To see how large the present commercial net short positions, please check out the short 12-minute video.

I believe the oil and stock markets are setting up for one large correction or even a market crash.  Thus, as the stock markets crack, we will likely see a huge move by retail investors into Gold ETF’s as well as precious metals investors tremendously increase their demand for physical gold and silver investment.

 

Is An Oil Price Spike Inevitable?

Is An Oil Price Spike Inevitable?

Oil Rig

The oil glut is over, at least when it comes to U.S. commercial inventories: over the past two months they have been within the average range for the season, thanks to hefty draws. These draws, one analyst argues, are a signal of higher-than-expected demand that is not only an American trend but a global one.

Judging by recent price movements, Flynn is hardly an exception: Brent touched $70 last week, a level only the most bullish of the bulls hoped to see at this time of the year as doubts about OPEC and Russia’s ability to offset growing American production persisted. Now, with new discoveries continuing to sit at record lows, there is a chance that $70 a barrel is only the beginning—as long as demand delivers on expectations, that is.

For now, global crude oil demand forecasts seem to be overwhelmingly positive. The EIA, in its latest Short-Term Energy Outlook, forecast global oil consumption growth of 1.7 million bpd this year and a bit less in 2019.

The International Energy Agency is a bit more guarded, forecasting in its latest Oil Market Report an average demand growth rate of 1.3 million bpd for this year. This would be a slowdown from last year’s 1.5 million barrels daily, but still a robust growth rate, in spite of the wider adoption of EVs and the increase in renewable power generation capacity.

If these forecasts turn out to be accurate—the oil market is notoriously difficult to predict—then we could see a real price spike before too long. In fact, we could see a deficit at some point in the future, according to Flynn, who estimates that the one-trillion-dollars in exploration investments that fell victim to the 2014 price collapse could cause a global production drop of between 8 and 11 million barrels per day.

…click on the above link to read the rest of the article…

$60 Oil Will Not Last Long

$60 Oil Will Not Last Long

Refinery

U.S. oil prices are treading water above $US 60/B (WTI) again, the first time since 2015.

Crude oil has a northerly wind in its sails, though everybody on board this fickle ship is cautious about its compass bearing. Since 2013 we’ve seen the price of a barrel peak to $110, capsize to $26, and roll back to $60.

The gyrations make sense.

Here is what we’ve learned over the past decade:

Above $80 is too high. Cash flow is ample. Investors gladly fund more drilling rigs. Pump jacks work hard. Too much productive capacity is added. But costs inflate quickly too—competitiveness diminishes within the oil industry, and also encourages alternative energy systems. Consumers become more miserly and demand growth decelerates.

Under $40 is too low. Cash flows dry up and investors jump ship. Rigs head back to their yards with drooping masts. Costs deflate, rapidly decimating employees and equipment in the service industry. Production begins to decline in marginal regions. State-owned enterprises are unable to pay their ‘social dividends’. On the consumption side, conservation and efficiency lose meaning; consumers revert to guzzling oil like free refills of coffee.

So, simplistically a mid-range price of $US 60/B should represent what oil pundits call “market balance.” It’s the elusive price point where daily consumption is equal to production; inventory levels are neither too low nor too high; and economists’ cost curves intersect with demand.

Yet, if there is one thing 160 years of the oil age teaches us, there is no such thing as a mid-range balancing point in oil markets. Everyone either rushes to one side of the ship or the other, almost always at the wrong time.

…click on the above link to read the rest of the article…

The Leveraged Economy BLOWS UP In 2018

The Leveraged Economy BLOWS UP In 2018

Enjoy the good times while you can because when the economy BLOWS UP this next time, there is no plan B.  Sure, we could see massive monetary printing by Central Banks to continue the madness a bit longer after the market crashes, but this won’t be a long-term solution.  Rather, the U.S. and global economies will contract to a level we have never experienced before.  We are most certainly in unchartered territory.

Before I get into my analysis and the reasons we are heading towards the Seneca Cliff, I wanted to share the following information.  I haven’t posted much material over the past week because I decided to spend a bit of quality time with family.  Furthermore, a good friend of mine past away which put me in a state of reflection.  This close friend was also very knowledgeable about our current economic predicament and was a big believer in owning gold and silver.  So, it was a quite a shame to lose someone close by who I could chat with about these issues.

While some of my family members know about my work, I don’t really discuss it with them.  If they ever have a question, I will try to answer it, but I found out years ago that it was a waste of time to try and impose my knowledge upon them.  Which is the very reason I started my SRSrocco Report website… LOL.  So, now I have a venue to get my analysis out to the public.  I don’t care about reaching everyone, but rather to provide important information to those who are OPEN to it.

…click on the above link to read the rest of the article…

Oil Price Scenario for 2018

Oil Price Scenario for 2018

It is that time of year again where we try to forecast what the oil price will do over the coming 12 months. Last year I forecast $60 / bbl for Brent year ending 2017 and with Brent trading on $66.50 as I write I can conclude that I got lucky this year. My friend wagered on $78 and our bet this year was too close to call. My forecasting effort is based on trying to understand the supply, demand, storage, price dynamic and since this seemed to work pretty well this year I will repeat the exercise with some slight modifications.

I have some reservations about the methodology stemming from 1) US LTO production has unpredictable impact on supply elasticity and 2) OPEC + Russia et al are withholding ~ 1.8 M bpd from the market. In effect this group will determine the oil price in 2018. If the price goes too high they may open the taps a little to maintain the price they want, whatever that may be.

[The inset image shows “shale” fracking pads in the USA.]

Disclaimer

No one has ever been able to confidently forecast the oil price that is subject to a vast array of socio-economic, geo-political and technology variables. The best we can do is to assemble some of the key data and to try and use our experience to draw some inferences about what may happen. Readers act upon the information presented here at their own risk.

Oil Price Narrative for 2018

  • The oil market is now subject to production constraint amounting to ~1.7 Mbpd. This has led to rebalancing of supply and demand by the end of 2017. The Brent oil price has recovered strongly since the summer to close the year at around $66.50. Last year I forecast $60 / bbl for December 2017 and therefore came close.

…click on the above link to read the rest of the article…

Olduvai II: Exodus
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Olduvai
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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