The longer oil stays here, the more conviction you must have that we have seen the bottom, but we are bound at the top.
We have to meld several threads at this point. One is the trading, of which there is little doubt after yesterday that inventories in this country are not affecting the world price or even West Texas Intermediate for the moment. Inventories are too high to believe that we shouldn't be lower, but we aren't. Frankly, that means we are refining gasoline at a pace that we aren't going to get so backed up in the big Cushing, Okla., hub that we are going to have to discount U.S. oil even higher than we are now to move it.
The battle is between Mexican and Canadian oil for a share of our refineries and for where they send their oil. That would cut to the thinking that the bottom price, the $43 price, is going to hold.
But how high can it go? Exxon Mobil (XOM) CEO Rex Tillerson makes some interesting points. He talks about how oil wouldn't be going up big any time soon because demand is too slow and supply is too great.
Plus, let's face it, with Goodrich (GDP), Laredo (LPI), Antero (AR) and Encana (ECA) raising equity in the last few weeks, that eliminates four of the most vulnerable companies with the biggest reserves from buckling under and being scooped up by the majors. They are now off the critical list. And the price of drilling has come down so precipitously that many oil companies' marginal prospects are now profitable again. That means supply will be too plentiful to get back into even the $60s any time soon.
So where does that leave us? I think traders will be emboldened to run oil to about $55 or $56, where I think it runs out of gas, so to speak, and then drifts down. We are settling into an era of reasonable but dramatically lower profitability, and we will be there for some time, making these stocks trading vehicles and nothing more.
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