Forecasts from the International Energy Agency (IEA) and Goldman Sachs this week are trying to say that crude barrels are still overpriced. But the market isn't listening. I've been convinced that crude prices above $60 are counterproductive, as Goldman has said in its recent note, but other factors are continuing to help push prices higher.
Let's take a closer look and see what's going on -- and what might happen in the near future.
Some short-term fundamentals continue to push traders into long positions in oil. I've been the first to point out the large outflows of capital from just about every other asset class, save for energy stocks and commodities. This isn't particularly smart analysis, but clearly money managers and institutional investors are looking for "value" in a very hot market -- and oil stocks and commodities look just too low to them. For these "value searchers," it's damn the fundamentals, full speed ahead, and oil catches a bid with every, even small, bullish indication.
Like Chinese demand, which has incrementally picked up. But it's not like Chinese imports aren't being met for the most part; it is finding more oil now than ever before in its history. And imported oil is not being used. Several reports have Chinese oil stockpiles growing for the last seven weeks, an obvious way for China to hoard oil that it thinks is going to get more expensive later.
U.S. stockpiles have come down slightly in the last few EIA reports -- a surprise for many who believed that storage would increase throughout the summer. Many are extrapolating that the drop in stockpiles is a harbinger of slower production from the slashed numbers of rig counts, but this may be very premature. With the summer driving season set to get under way, there is a seasonal decline in stockpiles this time every year, and even a disaster in overproduction couldn't stop that historical trend this year.
But on the other side of a range-bound market is Goldman's correct call of "self-destructive" prices -- the whittling away of the "fracklog" of idled rigs should prices again approach $70. The IEA seems to agree. Add to that the several dozen oil companies that would love to financially hedge oil near $65 and there are tons of good reasons why we're likely near the upper end of our "bust cycle" range.
Both EOG Resources (EOG) and Whiting Petroleum (WLL) were quick to point out the opportunities that would emerge with oil that stabilizes above $65. Those two were the most vocal in the oil patch, but certainly not alone -- Continental Resources (CLR) and Hess (HES) have dozens of idled wells that would come back online as well at $65 oil, adding to an already historic glut.
Both Goldman Sachs and I agree that there needs to be a market-clearing event, marked by far more consolidation and outright destructive bankruptcy of smaller market participants, before we can call this downturn in oil officially over. I do not believe that a meandering price above $60 a barrel will do that. It will ultimately cause a secondary drop in price and an even more dire response from the oil patch.
Notice, for example, how badly the market has received the first two large restructuring events: the Royal Dutch Shell (RDS.A) buy of BG Group and the Noble Energy (NBL) buy of Rosetta Resources (ROSE). Both of these represented overpaying of assets in a market that had not yet been brought to heel -- and both acquirers have been punished in share price because of it.
Also notice Exxon Mobil (XOM), in the best possible position to make a monster acquisition, stay unnervingly quiet. It knows prices here do not represent value -- and does not want to make the same mistake it made by buying an overpriced XTO Energy in 2010.
I will watch for Exxon's move. It wants to make one, and I believe it will when the time is right. It isn't -- yet.
