Only a few weeks ago, pundits were bemoaning the collapse of oil prices.
Then these self-proclaimed soothsayers became doomsayers and started predicting oil prices would decline to $40 a barrel (or below).
When Hurricanes Harvey and Irma hit, these self-same founts of wisdom declared Mother Nature had hurled at us a double whammy, guaranteeing problems in oil infrastructure, refinery demand, and distribution interruptions.
Certainly, both hurricanes had an impact.
With refineries – heavy users of crude oil – shut down, demand for oil declined.
And as residents in South Texas and around here in South Florida quickly learned, the availability of gasoline soon became a major issue.
Oil exports – another big "use" for American oil – also took a big hit.
Now, it's only been just under two years since Congress lifted the U.S. oil export ban.
But in that time, American companies have raced ahead to more than 1.1 million barrels a day of oil being moved out of the country, largely from the Gulf Coast.
That, of course, is where Harvey hit. Especially the coast from Corpus Christi to Galveston and beyond was badly affected, and that's where many of America's oil export terminals are located.
This would seem to set the oil market up for a major fall.
But despite what the doomsayers would have you believe, the effect in each case turned out to be very short-lived.
The pundits' fear quickly went by the board.
That's because in today's oil market, demand is a combination of elements that are much more difficult to understand than any talking head on TV can get out in thirty seconds…
Even if they had the genuine experience and knowledge required.
Here's what these doomsayers are missing…
Despite All the Doom and Gloom, Oil Prices Are Heading Up
As of 2.30 p.m. Eastern Monday (the close of oil trading in New York), WTI stood at $52.22 a barrel, while Brent was at $58.87.
WTI stands for West Texas Intermediate, the benchmark crude rate for futures contracts on the NYMEX. Brent is the other primary global standard, set each day in London.
Despite two hurricanes and the Chicken Littles appearing on the tube, wailing that the (oil) sky is falling, WTI was up 3.1% Monday alone, 5.5% for the week, and 9.1% for the month. Brent is on an even greater tear – 3.6% Monday, 6.7% for the week, and a hefty 12.8% for the month.
That, by the way, is where I predicted oil prices would be by the end of September. Monday, WTI hit and Brent blew past the pricing floors I'd called for – $52 and $56, respectively.
Here's what's happening.
First, the run-of-the-mill oil prognostication you see on TV is often less objective than it may appear.
"Analysts" are often fronting for their brokerages… and those agencies are taking short positions on oil.
In other words, if the Chicken Little on TV can persuade the market that oil is going to decline, then his "The Sky Is Falling" parent firm makes a nice trip to the bank.
That's not to say shorts don't have their place in a market; they do. But that place is hardly as the first reaction and never to satisfy a self-justifying manipulative move.
Over the past several days, as oil prices rose, these guys have had to quickly wind down their short positions. That's an expensive proposition.
It only goes to show that there may be some justice in the world after all.
Second, when you get down to the actual oil market fundamentals, you notice some interesting developments…
Oil Demand Is Rising Faster Than Expected
Oil demand is accelerating, not just in the United States, but globally (where the price of oil is really determined). The International Energy Agency (IEA), the U.S. Energy Information Administration (EIA), and OPEC all agree on this.
There's certainly more than enough excess supply that can be easily extracted, especially in the United States. But this surplus does not factor into the equation unless it's actually lifted.
Managing the amount of excess in the market is a necessary component of keeping prices higher. Most oil companies now understand this.
As such, the IEA, EIA, and OPEC are all now projecting that a balance in the oil market will emerge much earlier than initially expected.
However, it's important to understand what that balance actually means.
This is not a case of supply meeting demand exactly. That "just in time" provision of crude to the market would be disastrous, with no one being sure whether they'd be able to buy another barrel of oil or not.
If that were to happen, excessive volatility would rule and average oil prices would be flirting with $100 a barrel.
No, the balance we want requires a surplus as a safety cushion. It's the size of that surplus, not simply that one is present, that determines the impact on prices.
The balance currently in the works takes this into account and provides some leverage for producers in the process.
There is also another sort of offset in play…
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.