The sky is falling! The end is nigh! Such phrases are often uttered by oil market analysts as they try and decipher the results of the day's trading in the oil futures pits. As of this writing the front-month WTI crude futures contract is quoted at $60.84, actually a full $8 dollars above the settlement level of the corresponding contract one year ago today. Viewed from a longer-term perspective, oil prices have been remarkably steady over the past 12 months, but you wouldn't get that idea from listening to pundits in the financial media.
One of those pundits was none other than TheStreet.com founder Jim Cramer, who proclaimed this morning on CNBC's "Squawk on the Street" that oil prices are "collapsing" and that oil "is headed for $40 per barrel." Sorry, Jim, you are dead wrong.
To understand the probability of a crash in the oil markets, one must look at the causal factors of the past one, which took shape after OPEC's disastrous Thanksgiving meeting of 2014. U.S. oil production had been on a steady increase in the first 10 months of 2014 just as it has been for the first 10 months of 2018.
What has changed? It's the economy stupid. More specifically, the Trump Economy. I am so sick of hearing about and talking about politics this week, but the fact of the matter is that Obama was the only post-war U.S. president to preside over an economy that failed to produce a single year of 3% growth. In fact, according to the Bureau of Economic Analysis, 2017's GDP growth of 2.2% was the 12th consecutive annual reading below 3% for the U.S economy. With a 3.5% initial print for 3Q2018 GDP growth following 2Q18's scalding 4.5% reading, the U.S economy would have to suffer through a sluggish fourth quarter to fall below the magic 3% growth mark. The Atlanta Fed's GDPNow indicator currently forecasts 4Q2018 U.S. GDP growth at 2.9%, so recent data has shown no indication of a rapid slowdown in the U.S. economy.
That growth is expressed in the demand for oil, and based on the most commonly used metric of domestic oil demand -- the EIA's measure of products supplied -- that demand is quite robust. Thus far in 2018 total U.S. crude oil products supplied have averaged 20.643 million barrels per day, a 2.7% gain versus 2017's level. If that held it would be the fastest annual growth rate of crude oil product supplied since 2004. It is clear to see that oil demand -- as has the broader U.S. economy -- has finally shown accelerating growth after more than decade of below-average readings.
The other factor positively impacting the U.S. energy balance sheet versus its status in 2014 was the lifting of the 40-year old crude oil export ban by the Republican-controlled Congress in December 2015. Last week U.S. crude oil exports totaled 2.405 million barrels per day, versus 411,000 barrels per day in November 2014 and 56,000 barrels per day in 2013. Those barrels are freely traded in the world market, and that is an important safety valve now that production is at record levels.
World market is the key phrase, though, as my confidence in the balance in the domestic market for crude oil is not matched by confidence that OPEC will act in the best economic interests of world oil producers. This Sunday the mellifluously-named Joint OPEC-non-OPEC Ministerial Monitoring Committee (JMMC) meets in Abu Dhabi. My sense is that OPEC -- understanding that the U.S. government's liberal granting of waivers to its sanctions on Iran will greatly diminish the impact of those penalties -- will continue to rein in production.
That production discipline is measured by a "conformity level" to the sum of member nations' individual production quotas that the JMMC reports after each meeting. In March that conformity level was 149%, but as of July it had fallen to 109%. The sheikhs are just as aware as I am that the individual OPEC members are notorious for breaking output quotas, and without Saudi and Russia (the world's second and third largest oil producers after the U.S.) demonstrating restraint, the other members are liable to cheat.
So, I am looking for continued restraint from OPEC's JMMC and that will support oil prices in the face of strong demand for oil. Crude oil demand is not just strong in the U.S. either, as Reuters reported this morning that China's crude imports rose to 9.61 million barrels per day (bpd) in October, up 32% from a year earlier.
That's the bottom line. A reinvigorated U.S. economy and always-thirsty-for-oil China will provide enough incremental demand for oil to stave off the crash that Jim and some others are predicting.
There's no groupthink at Real Money, and to quote the hoary old cliche "disagreements are what make markets." So, I will agree to disagree with Jim's oil call and I'll present the best ways to play -- winning an intellectual argument is fun, winning a stock trade is lucrative -- in my RM column tomorrow.