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There was a very dramatic development in the oil market last week. It involved a well-known insider and a bullish bet on crude oil prices.
Harold Hamm, the CEO of Continental Resources Inc. (NYSE: CLR), announced that his company – a major producer in the Bakken and other U.S. unconventional oil basins – had unwound its hedge positions.
Continental Resources CEO Harold Hamm
So why is that so important?
Hedges like the ones unwound by Hamm are used to compensate for the possibility of future oil price declines. In a single bold move, Hamm had made one of the biggest bets ever on rising oil prices.
So while the TV pundits are still wringing their hands over the decline in crude oil prices, a deep market insider was preparing for crude to go in the opposite direction…
Up.
Here's why I think Hamm and Continental have it right…
What Really Drives Crude Oil Prices
First, a number of analysts have been pointing out something over the last few days that I have been saying for weeks now. The decline in oil prices does not reflect the overall rise in demand.
You see, despite our penchant to view oil only through the lenses of the trading benchmarks in New York (West Texas Intermediate, or WTI) and London (Brent), the demand that drives today's prices is not American or European.
The real drive is coming from developing countries. And this is not simply the known giants such as China and India. Rather, it involves the greater (and exploding) Asian market, along with the resurgence developing in Latin America and Africa.
It is true that the emergence of shale and tight oil in the United States has prompted revisions in demand expansion by both OPEC and the International Energy Agency (IEA).
But the results still point to the following:
(1) An overall demand increase by at least 1.2% year on year.
(2) A sustained Brent price of about $95 a barrel, and a WTI peg of closer to $88.
Recall as well that the net impact of American shale oil on global pricing is tempered by the current (and more than four decades long) prohibition against exporting U.S. production.
This impact is limited to reducing imports into the United States – a situation that has been in place for some time now and is hardly a justification for the curious read of declining demand internationally.
So, let's look elsewhere to explain this disconnect.
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.
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