In Focus: Oil Markets
This week we have oil prices in focus. Oil prices have been in a nose dive for the past two weeks, and this past week oil has fallen into bear market territory. While the stock markets (The Dow, S&P, and NASDAQ) have been bouncing back from their October declines, oil continues it's October slide. The price for dinosaur juice could close out 2018 well below it's highs after having a nice bull run for most of the year.
It's All About Supply and More Supply
Just as Future has "Too Much Sauce" the world has too much produced oil. The U.S. has been pumping out oil as if it were an olympic sport. From June to August U.S. oil production increased by 400,000 barrels per day. The U.S. Energy Information Administration (EIA) recently reported for the week ending November 2nd U.S. oil production shot up to 11.6 million barrels per day.
Russia's oil production has recently hit post-Soviet record highs and Saudi Arabia increased oil production adding more oil to their already plentiful daily output.
Many oil analyst expected for a tighter global supply when sanctions on Iran went into effect, but the U.S. granted eight countries temporary waivers, which will allow these countries to continue purchasing oil from Iran.
Of the few supply issues we've listed causing oil prices to fall, many analyst reports we've read pointed to the negative outlook on global economic growth as their primary reason for falling prices. The restructuring of global trade agreements is taking its toll on the oil industry. This makes sense, as oil continued to increase in price after OPEC increased production in June. A rosy global economic growth picture earlier in the year was able to absorb the increased oil production and push oil prices higher, However with things not looking so rosy oil prices have come tumbling down.
Overall oil reserves have increased way faster than expected and reserves continue to build in a global climate that has a more negative outlook going forward.
Is There a Bull Run in Sight?
We don't know. For all of the supply issues we've come across it's a wonder how crude oil prices were able to hit the highs that they did in early October.
There are some issues below the surface that could slow down the production output of oil. The issues include the problems in Venezuela, which are well documented. Then there are nagging political issues in Nigeria and Libya that could slow down their production. Iran, while still able to supply oil, is doing so in a limited capacity.
Then there is the U.S. and China, which could come to some kind of trade agreement that works for both countries, and more importantly that Wall Street loves. This could shift sentiment on global economic growth and cause demand for oil to increase.
Oh and winter is coming. Not only in Games of Thrones, but in real life too. The demand for oil does increase during harsh winters, but who roots for a harsh winter and how bad would the winter have to be globally to make a dent in the current oil supply?
For the technicians out there, WTI's 14-day Relative Strength Index has dipped into oversold territory. Will this trigger the bulls, probably not. If this decrease in price is truly an issue of oversupply coupled with a negative global economic outlook, oil prices will bounce up in price briefly, but then continue to fall. The area of support that we'll be paying attention to for a bounce is $58.07, which was the first swing low point of 2018. If that level doesn't hold we'll be paying attention to $55.87 the last swing low of 2017.
It Was All Good 5 Weeks Ago
Our thesis at the earlier part of the year was that crude oil would close the year out at $70 - $75 per barrel, and we almost got it right. But that doesn't look like the case anymore. Based on that thesis from earlier in the year we had a nice win on a few Phillips 66 (PSX) options, and we tried to replicate that success with Valero (VLO) but it hasn't worked out yet. With that said Phillip 66 is almost back to where we made our initial investment and VLO is well below where we initiated a buy. Still solid companies in our opinion.
Investors may want to stay away from oil related stocks right now unless you can find serious value. As one analyst stated going long oil now is like trying to catch a falling knife.
The global economic growth outlook is the key. The good thing about this is it gives investors an easy read. As the outlook for global economic growth improves, so should oil demand. Our eyes are currently set on Phillips 66 and Valero for the turnaround, but that could change.
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