Why I'm Still Bullish About Oil

 | Oct 12, 2017 | 5:00 PM EDT
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Today's Energy Information Administration (EIA) Weekly Petroleum Status Report cleared up a few issues from last week's report. Much like Friday's report on nonfarm payrolls, traders have been skeptical of the EIA data due to noise in the numbers from recent natural disasters, especially Hurricane Harvey. 

As I mentioned in my Real Money column last Friday, the export spike shown in the Oct. 4 Weekly Petroleum Status Report was unlikely to last. It did not. This week's EIA report showed exports of 1,287 thousand barrels of oil per day (mbpd), a huge drop-off from last week's reading of 1,984 mbpd. This week's figure is a much more reasonable number and it puts to rest concerns that cropped up in the oil pits after last week's jump in exports. The narrative was that the U.S. was going to flood the global oil market with exports and that would dislodge OPEC from its regime of oil production cuts. This week's numbers shows the bearish, worst-case scenario is not occurring. 

That's part of the joy of analyzing the energy markets: The numbers are not reliable and the paradigms are constantly shifting. It is certainly never boring. 

Anyway, I am holding to my bullish outlook for crude prices for the fourth quarter. We are holding $50 a barrel after today's EIA report (I see West Texas Intermediate quoted at $50.66) and I believe that is a support level with upside to $60 a barrel as the inventory situation improves. 

An interesting figure to watch will be the WTI-Brent spread, which I mentioned in that same column on Friday. As of this writing, that spread sits at $5.67. Any significant widening in the WTI-Brent spread would likely lead to more U.S. exports. 

It has been my experience that Brent prices tend to lead WTI prices, as global energy traders tend to focus on that contract overnight while U.S.-based traders are still sleeping. I don't see the WTI-spread contracting much, if at all, so my bullishness on crude comprehends better pricing for Brent as well as WTI. 

Why? Because the world is using more of it. Forget about Tesla's (TSLA) Elon Musk and his plans for future dominance with his handmade (according to The Wall Street Journal, anyway) Model 3s and look at the data for current car sales, about 99% of which use internal combustion engines:

  1. According to Reuters, China vehicle sales touched 2.71 million units in September, up 5.7% from a year ago, That took year-to-date sales to 20.2 million vehicles, up 4.5% against the same period in 2016.
  2. According to ACEA (European automakers): In August 2017, passenger-car registrations increased by 5.6% across the EU, totaling 865,047 units. From January to August 2017, with more than 10 million new vehicles registered across the EU, registrations went up by 4.5% compared to the same period last year.
  3. And here in the good ol' U.S. of A., according to Edmunds.com: Automakers sold 1,519,081 new vehicles in the U.S. last month, 6.3% more than in August and a 6.1% jump from September 2016. The robust seasonally adjusted annual rate (SAAR) of 18.5 million vehicles, the highest since 2005, is up from 17.7 million units a year ago. 

Strong vehicle sales equal more demand for gasoline and, of course, for its feedstock, crude oil, as well. So I'm still bullish on oil prices. 

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