Oil’s Wild Ride is Far from Over

Nearly every indicator of whether the price of oil will go up, down, or stabilize is contradicted by another equally, or more important, indication of the opposite.

  1. Past Performance:

Last week, oil dropped 8%, nearly passing the $40 per barrel mark into $30 territory. But oil’s performance this week pushed the seesaw back up when oil spiked 10% to $45 per barrel for WTI and nearly $50 per barrel for Brent. The only thing these one-day spikes and drops indicate is that spikes and drops are not good indicators of whether oil is trending up or down.  Conclusion: It’s all speculation anyway

  1. Rate of Production:

The U.S. Energy Department released data this week indicating that since April, domestic oil production has dropped by about 300,000 barrels a day. Could this mean a greater drop in production in the future – of perhaps 1 million barrels a day? Some forecasters think the drop in production will accelerate and by this time next year America will have worked off its oil glut. But on the other side of the balance sheet, the real-time production numbers tell a different story. According to the American Petroleum Institute, North American crude oil stores are rising, and the oil glut is about to get worse. Refineries are running at full capacity now, but in the coming months will begin shutting down for maintenance and to switch over to winter blend gasoline. With producers continuing to drill, the glut will continue to grow.  Conclusion: U.S. production continues and the oil glut grows – for now

  1. Chinese Demand:

Data seem to indicate that one of the largest consumers of crude oil may be facing an economic slowdown. Factories are producing fewer goods, exports are down, and the Chinese stock market is in turmoil. An economic downturn should indicate a drop in oil consumption, except this does not appear to be the case in China. Over the summer China increased its oil imports, repeatedly asking its main supplier, Saudi Arabia, to send more crude oil and buying crude from Russia in a pinch. The Chinese government recently licensed some independent Chinese refineries to make their own crude oil contracts, a move that will surely boost crude imports since most of these refineries had been unable to procure enough crude from the Chinese government and were using low quality fuel oil instead of crude oil for feedstock. And finally, just this week, China signed a deal to loan Venezuela another $5 billion, which will mostly be repaid in shipments of crude oil. A drop in Chinese demand would exacerbate the global crude oil glut and push prices down, but strong Chinese demand would push prices up.  Conclusion: Chinese demand for oil stays strong

  1. The Fracking Card:

Technological innovation has made fracking profitable at prices in the $60 a barrel range, and in some cases, re-fracking has yielded profitability at even lower prices. Against all odds, fracking seems to be surviving – and perhaps thriving – if one believes Texas comptroller Glenn Hegar and investment consultants Donald Luskin and Michael Warren. But weighing down the other side of scale is the mountain of debt these companies have accumulated – estimated to be over half a trillion dollars. Right now liquidity is at a high, but when banks start to reign in unprofitable loans and lines of credit, the fracking industry will face bankruptcies and sell-offs. When the carnage is over, fracking assets will have entirely new owners who will want to pump strategically rather than continually. The question here is whether the price of oil will continue its slow decline or quickly crash, followed by a slow recovery.  Conclusion: Fracking is headed for a crash