The direction of the price of oil remains the key issue for global economies and investment opportunities. Here, Kent explains why most analysts continue to get it wrong, and what that means for your investments. For more of his market-leading insights, receive Oil & Energy Investor at no cost. Click here to start receiving it.
It sure has been amusing to watch the instant oil experts trying to shove their "square peg" explanations into the "round hole" price of oil.
When prices have declined recently, we hear a familiar refrain – a strong dollar, oversupply – and yet they consistently miss the boat when it comes to calling the market correctly.
Typically when the price rebounds, the pundits are true to form. They say nothing.
So why do these analysts keep getting it so wrong?
Well, some of these folks are fronting for short plays that are now overextended. If they can convince you the sky is falling, they make money. There is no objectivity from them (whereas I just want you to be well-prepared to make money from any move).
But beyond those with vested interests in oil falling, something else is afoot…
The oil market has actually stabilized. This has obvious consequences for oil investments – ones that the other pundits are getting wrong. Here, I'll explain why the market has finally found its footing….
The Same Old Arguments Are Falling Short
The traditional way the oil market has been analyzed doesn't seem to be working very well these days; the normal factors aren't telling us what they used to.
The "instant read" had nothing new; rather the continuing mantra about the value of the dollar and concerns over supply. In other words, same old, same old.
Is there any merit to these arguments? Sure. But it's limited.
1) A stronger dollar does put some upward restraint on price acceleration because it makes purchases with foreign currency more expensive. Since a barrel of oil is traded in dollars, an increase in the foreign exchange rate for the greenback requires more euros or pounds or yuan to effect a purchase. That effectively moves demand down, all other matters being equal.
The dollar argument has been gaining traction among pundits lately. The speculation surrounds the likely Greek debt default, a Fed move to raise interest rates at some point later this year, and unexpectedly strong U.S. construction spending. All of these, it is argued, have strengthened the dollar.
2) And then there is the speculation surrounding supply. Much of this is hardly new either, but we are now into a "news cycle" focusing on the latest OPEC meeting in early June…
The cartel continues to overproduce – well above target and above current anticipated demand – in a move to maintain market share at the expense of non-OPEC producers. On both the supply and the demand side the moves are very different from what OPEC has traditionally done in the past.
But once again the OPEC dual move has been part of the oil landscape for some two months, with a continuation virtually guaranteed for some time now. Hardly high drama.
3) And then there is the "explanation" attempted for what happened in the last week of May. A significant price hike in both New York and London was written off as a reaction to a decline of 13 rigs in U.S. oil and gas production fields.
There are still 646 in operation, but somehow a reduction of 13 (after one the previous week and declining rig counts for the past seven months) spurred the largest percentage increase of oil prices on both sides of the Atlantic (4.5% in New York, 4.9% for dated Brent, the benchmark set in London)… since the beginning of April for WTI and April 16 for Brent.
Now, I am not saying we are breaking out on the up side for some quick move north of $80 a barrel or that volatility in the oil patch is over.
Here's what I am saying…
This Oil Market Has Stabilized
In the 41 trading sessions between April 1 and close on June 1, WTI rose 23 times and declined 18. But it has also posted an average daily increase of $0.30, with 12 sessions posting a rise of more than $1 against four posting a decline of more than $1. All of this is happening despite the huge recoverable resources available in the United States and OPEC producing at levels not seen in years.
This market has stabilized.
It's not an indicator of a massive upward pressure brewing, but of a solidifying floor and stabilization. We are establishing a base, and that foundation will provide a better overall view of actual demand levels.
There, global demand is once again rising and faster than either OPEC in Vienna or the International Energy Agency (IEA) in Paris had forecasted. But this trend goes unnoticed by commentators still fixated on the situation in the United States or Western Europe. The action for some time has been elsewhere.
A Clearer Global Demand Picture Means Upward Pressure on the Price of Oil
My current projections point toward a huge push into developing markets and out of the established industrialized nations – which is already underway. It will intensify through at least 2030. This has led to a rising belief among some of my more knowledgeable international colleagues that the current model for determining global demand is increasingly underestimating major demand curves in several regions of the world.
This is likely to provide more accentuated upward short-term pulses in oil prices as the broader market rebalances paper barrels (futures contracts) against wet barrels (actual oil delivered). I have for several years criticized the IEA on this score. But that is a subject for another time.
All of this occurs each day without any genuine ability to handicap geopolitical impacts on oil prices. Most of these will put additional pressure on oil to rise, although a breakthrough in the negotiations with Iran or a resolution in the Libyan civil war may prompt concern over new supply entering the market and depress prices.
Nonetheless, we have a slow but tangible upward move underway.
Is there any way this upward move will be overridden?
Sure, U.S. shale producers may decide to commit suicide and turn on the spigots full out, drive down the price of their own oil, drive themselves into insolvency, and turn the oil market back to the Saudis.
But is that likely?
…About as likely – now that a lesson about balancing American production has been learned the hard way – as a 30-second TV sound bite explaining it correctly.
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.