Well, sentiment is deteriorating pretty goddamn quickly for crude as the epic struggle between soaring US production and the promise of OPEC cuts balancing the market continues.
Earlier this morning, the bottom fell out for no apparent reason, sending crude to November lows:
“We’ve now made new lows on an intraday basis. There was no news, it’s just ongoing negative market sentiment. The trend is your friend.” Commerzbank analyst Carsten Fritsch dryly remarked.
Yes, “the trend is your friend” or, if you’re long, “not your friend.” However you want to look at it.
Markets will of course be watching inventory data out of the US today and tomorrow, but Libya is back in the spotlight as the country is producing the most oil in four years after a deal with Wintershall enabled at least two fields to resume production:
“Right now there is little support to be found in light of recent supply-side developments, including further reinstatement of production in Libya, another rise in the U.S. rig count and reports of floating storage building up again in the Atlantic Basin,” Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas told Bloomberg on Monday, adding that “producers are using moral suasion but that appears to be falling on deaf ears for now.”
So yeah, this should be great for those DM headline inflation prints that really, really need another impetus to come in soft…
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I think the problem is an overhang of supply. I recently got to see the annual report for a small oil company that used to pump a few hundred barrels per day. Not so long ago they use to have revenue of around $2 million per year on that, and cash use to increase by few hundred thousand per year.
Now revenue is only about $600K, they are losing several hundred thousand doing it, and things got so bad this year that they were planning on stopping production around April 1, 2017 in an attempt to wait out the low prices, and this was all after selling off 20% of their oil rights last year. At this rate the company will be gone within five years.
They are fortunate, at least for the moment, since they have everything paid off and enough cash in the bank to last a few years, but if these low prices keep up for a few more years, the company will have nothing left.
I never thought I would see the day when an oil company could go broke over the space of a few years.
Were you asleep from mid-2015 to mid-2016?
I did see a number of companies go bankrupt in that time period, but had expect once the wave of bankruptcies were done with that supply and demand would have become more balanced.
Instead, we are seeing everyone that is still able to pump, pumping as much as possible in order to take in any money. A large part of the problem appears to be countries that are unable to balance their budgets without oil at $80, so to make up for it being at $50 and lower, they are pumping as much as possible, making the oversupply worse.
While OPEC keeps talking about new production quotas and limits, every thing there is a rig or stored supply report, the supply usually inches up a little.
Right now we are nearing peak driving season in the US and gas prices should be going up, instead in most places they are flat or down a little. The gas station I use as a measure has fallen from $2.23 per gallon to $2.17 within the past few months. Not a lot, but not what I would normally expect to see just as the 4th of July holiday approaches.