About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Wednesday, December 09, 2015

Oil Price

The recent decline in WTI crude below $40 bl. beckons the imagination to wonder if the world is
going retro to the decade ending in 2004, when crude ranged from $20 - 40. WTI Monthly Back
in that period, spare production capacity at the wellhead averaged near 4 million bd., a tidy amount
on a much lower base of oil supply / demand. Oil production surged in recent months at what may
well be an unsustainable pace, and if demand grows moderately in 2016, spare capacity may be at
only a little over 1.5 million bls. a day, even factoring in expected larger output from Iran. Cover
stocks are currently put at 3 billion bls. which is triple the size of inventory held a decade ago and
represents a dramatic increase in cover stock investment, no doubt.

Even with the large increase in stocks on hand, eventual tightening in the balance of production
capacity and demand may eventually lead to stabilization of the oil price, followed by a modicum
of recovery.

There has been a dramatic bust in the price of oil on expanded relative supply, but not a bust
in the global industry. In the 40 odd years there have been price busts in oil where excess capacity
at the wellhead ranged between 4 - 11 million bd. Seen historically, the supply / demand balance
currently is fairly tight. However, financial speculation in this industry has at the least quintupled
over the past ten odd years, which I strongly suspect has added greatly to the volatility of the
oil price relative to the fundamentals of the industry.

It is clear the oil price remains in a bear market with periodic moments of panic, and now that
the price of WTI crude has broken major support around the $40 area, the tensions among players
are palpable. The market is once again moving toward an intermediate term oversold condition,
but since OPEC timed the elimination of production constraints for the current seasonally weak
period, one cannot rule out a fast spike down in price. But, as importantly, folks need to recognize
that given what a high stakes game this has become, any perceived improvement  in fundamentals
could trigger a surprisingly positive response in the price of crude. $WTIC Weekly


Anonymous said...

Would you say that supply shocks are the unpredictable component of changes in crude oil production and therefore oil supply has played a small role in the recent drop of oil prices?

Peter Richardson said...

There has been a "supply shock" as this year wore on -- large increases of supply
by producing countries to maintain market share and force trims in production for
the high cost producers (US shale). Historically, oil price forecasts go wrong
most often because of errors in forecasting demand. The trend in supply tends to
be stable for long periods of time, but demand has a sizable cyclical component
and it's much easier to blow demand forecasts for this reason. The main point of
the post is that the oil market has become increasingly "financialized" via much
greater use of futures by investmet firms to speculate on the price. The current
steep decline is a vivid example of this new force at work. PR