A Billion Barrel Bet

You know, sometimes you just have to laugh.

Or shake your head.

Or, my personal favorite, pull a Captain Picard…

picard

It doesn’t matter how many consecutive API and EIA prints we get showing enormous inventory builds, some folks are still determined that oil prices are going to stage a sustainable rally from current levels.

I mean yes, the OPEC production cuts are going ok. And there’s some speculation that the cuts may even be extended beyond the initial six months. But the logic is always circular. For instance, consider the following from Reuters:

OPEC could extend its oil supply-reduction pact with non-members or even apply deeper cuts from July if global crude inventories fail to drop to a targeted level, OPEC sources said.

It should be immediately apparent why I say that logic is circular. That is, the cuts are putting a floor under prices which is encouraging new US production. But that new production puts a cap on prices by driving up supply. This whole charade is self-defeating. 

As I’ve said more times than I care to remember, this would be ok if it weren’t for the fact that wide open capital markets are keeping otherwise insolvent US producers in business. Operators who can’t plug consistent funding gaps without issuing debt, tapping revolvers, or resorting to follow-on equity offerings should be allowed to fail. Otherwise, the circularity will never be broken.

But don’t tell the longs any of that because as Bloomberg notes, “for the first time ever, hedge funds hold more than a billion barrels of bets that crude oil prices will rally.”

billion

 

 

Advertisements

4 thoughts on “A Billion Barrel Bet

  1. Hmm, what do they know that we don’t. This is either a big bet on Trump doing something that will make oil prices rocket, or a sure thing because they know that Trump will do something that will make oil prices rocket.

    That doesn’t mean that the third option (Hedge Fund managers are just fucking stupid) is entirely off the table.

  2. A figure representing ten days of world production? Where would the price be without hedge fund involvement? The shale players are thankful?

  3. This is a scam. Fools looking for yield in market bleeding cash and bank passing out the heroin. “Sh*t no problem”, we have ink and funny paper lets just print some more “pain killer” for the addicts.

  4. Don’t forget there will be new sanctions on Iran according to Trump. Maybe some people are expecting the Iranian oil exports to decrease bigly, if this happens the angry Iranians won’t stay quiet.

Speak On It