Pessimism About Oil Is Firmly in Place

 | Jul 10, 2017 | 1:00 PM EDT
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Oil prices, as I have said for the last few columns, have been range-bound for much of 2017. But oil has a bad reputation of standing still. So as oil's pessimism gains steam, oil stocks look less and less like an exciting investment, at least for the next few months of the summer. 

Last week, we were able to predict and use a rally in oil prices that came from a very large financial short-covering move from speculative hedge fund and energy traders. That was busted late last week, despite an unexpected 6 million barrel drop in stockpiles, and oil stocks have continued to struggle, just as they have for most of the year. 

I've been quick to note why in several previous columns: I don't care what oil executives say, including this frankly hilarious graphic that supposedly outlines "break-even" costs in the Permian and other shale plays: 

The idea that U.S. shale producers can make money at less than $40, and that more than a few respondents are even claiming profitability in the Midland below $24 is beyond laughable. If that were true, Lord knows we would have seen far better first- and second-quarter

results from these Permian producers, and far, far higher stock prices. 

For while the oil price in 2017 has been range-bound, the stock prices for U.S. shale producers have hardly been -- they've been on a one-way trip lower. 

One interesting article I saw last week gives even the most optimistic oil trader pause. "Permabull" Andy Hall of Astenbeck Capital, in his latest letter, certainly tempered much of the optimism he previously had. This is the first time I can recall Hall not counseling patience,

and turning -- well, if not pessimistic, then certainly tempered. 

What's interesting is not only his fundamental view of the oil markets: In his letter, he noted the increasing production from U.S. shale players and the increased Libyan and Nigerian production. He also notes the slowdown in global oil demand and U.S. gasoline demand, although on these thoughts we should also point out that he is being deterred by a slowdown in the acceleration of demand, not the numbers themselves. 

But what stands out about his letter, and what makes it most interesting for me, is his take on the negative sentiment surrounding oil. On this score, his feelings are very similar to mine. Why is sentiment so important? Hall knows, as I do, that the ultimate price of a barrel of oil is

not determined by the fundamentals -- it is arrived at through a financial marketplace that matches buyers and sellers. If there are more buyers than sellers on any given day, the price for oil is going to go up, no matter what the fundamentals say. If sellers outnumber buyers, prices drop. 

Those who know me and have read my columns and books know I also believe these financial absolutes trump everything else when dealing with the oil market. Find out where the next batch of buying or selling will be coming from and how much will be there and you don't need to know a thing about fundamentals. The rest of the story will write itself. 

And here, Hall makes the right point about sentiment. It has turned pessimistic not just among the speculators, but among the commercials that also contribute to drive price. And with that universal negative sentiment overhanging the markets now, we might see a short-term upward blip or two in the next midterm for oil prices, but for the next few months, we've likely seen a fairly hard top. 

In other words, not the best time to be adding to oil stock positions. Perhaps even an opportune time to lighten up positions and wait for a bit on the sidelines.

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