A Billion Barrel Bet

You know, sometimes you just have to laugh.

Or shake your head.

Or, my personal favorite, pull a Captain 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.”