The minor excitement of oil's two-day rally has quickly dissipated, as oil resumed its downwards trend this morning. The question keeps being asked: when will oil's drop (and the concurrent drop in oil stocks) cease?
It's very important to view the oil market dispassionately, something that gets harder and harder to do if you are maintaining any positions in oil-sensitive stocks, as I am.
Suddenly, every rally is no longer seen as a bounce in a bear market, but a hopeful end to the pain. This happened Friday as I got several calls from my media contacts and some from readers, asking me if this "big" move up (7%! 10%!) was, in fact, the long-awaited bottom (magic trick flourish here: ta-da!).
I've made clear what I'm looking at to determine when I'll be convinced that the bottom's come. Thursday's and Friday's moves did little positive to flatten the spread curve and today's move back down will do a better job to help judge whether we're reaching that bottom with the way that the spreads act today. But it also helps to get a view of what really happened on Thursday and Friday and how really insignificant that rally turned out to be.
I've laid out two groups of settlements from Wednesday of last week and Friday. Oil is always quoted at the spot price, or the contract that is closest to delivery. But Wednesday was the last trading day for February, where it settled at a last closing price of $26.55. Notice the March contract, which became the spot month on Thursday morning, settled that day almost two dollars higher at $28.35. After a two-day rally, March settled on Friday afternoon at $32.19, a healthy bounce of almost four dollars.
But the media and many watchers had used the settlement price for February on Wednesday to make a point about the apparent strength of the rally, quoting the move as closer to six bucks, or an even more misleading 21%. February isn't March and percentages at low prices like this are even more misleading.
All this to say that this two-day rally was, for me at least, far less impressive and did not convince me that the final bottom has yet been seen.
But besides the change in the crude curve structure, this two-day rally did provide some extra insight as to when it might come. Back in 2009, oil bottomed in a two-stage process, first bouncing off a $32 low in what was seen as a technical rally much like the one we've just had. It lasted about two weeks and added more than $15 to the price. But the important move was in the retest of those lows that came two weeks after that. When those lows were held, we had finally made a tradable bottom in oil.
And yes, that second bottom retest was accompanied by a distinct flattening of the curve.
Now, we all know that nothing in the world works in exactly the same way twice. I cannot expect oil to follow the exact same pattern of bottoming that it did in 2009.
What I can say is that $26 is as good as a low price as any by the standards of 2009. With the increased costs of oil production, inflation and the horrible basis pricing for producers in the Bakken and in Canada, we're well below any real costs for oil ever seen previously, ever.
I even saw one trade reported at -$0.50 a barrel. Yes, the seller PAID to have the oil taken. Numbers, in this case, have ceased to have much meaning. Our $26 price seen last week would be closer to $15 a barrel in real terms in 2009 OPEC core numbers and ridiculous.
Moreover, because there are some fundamental changes in production that must accompany a truly constructive turn in the oil market -- changes that are still slow to happen -- any technical turnaround in oil won't quickly turn into any kind of bull market.
So, patience is still the watchword on oil, where even a real $3.84 upwards move in oil, or even two or three of those, shouldn't be met with any real excitement of a sustainable recovery.
Not yet. We've got many months, if not more, to go.