Let me say this upfront. My wife works for Roenthal Collins Group and has worked in the Energy Commodity Futures Market. So the following are excerpts from an email she sent me last night on the rise of WTI price and importance of this price on credit. I was a math major and then got an engineering degree. So this is all voodoo to me and quite frankly I am too black and white to understand this fully (Market psychology), but my wife is always right on this! Here it is: WTI has moved up on several small factors over a week period that combined to push WTI to a rather high percentage upturn. Better news than expected on U.S. quarterly GDP. EIA data showed 9.3 million barrels a day about 100,000 a day less than predicted. The stock market has been on an upswing as it has come to grips with China's stock market.....Also short sales drove up prices. Investors were caught off guard and closing out short bets against an expected market drop and anxious traders began shorting oil in an effort to minimize their losses. My opinion on this surge is when bearish predictions proved to be off base, this results in a wave of investors rushing to get out and exacerbates the situation, driving the price of oil (or any commodity for that matter)up even further. Now this is all psychological short term speculation, the blip. Now lets look at the fundamentals of oil and the large supply concern. Quite frankly a PROFOUND supply and demand imbalance still remains that is going to get substantially worse over the next 2-3 months. Total global oil production stands at 95.66 million barrels per day, demand lags drastically behind at 93.62 million barrels per day. World supply is still rising and in fact hitting record levels of 1.283 billion barrels Combining refined and crude U.S. crude stockpiles will hit 500 million barrels which is a record and would never ever have been considered 2 years ago. So the small blip of 100,000 barrel a day decrease was only psychological not fundamental........................................................what we were discussing over the phone will indirectly affect Chevron as the lenders become skittish to even a giant like Chevron. September is the lenders’ review of lines of credit backed by oil reserves. How does this affect energy companies? Well, the lower the price of crude oil, the lower the amount of credit that is extended. All oil executives are praying that this rally holds for a few weeks. I would tell your coworkers friends DO NOT BUY INTO THIS HYPE. This latest rally is momentary blip and the true reality will take hold of the oil price and drives it below $40.00 per barrel again.
4 replies (most recent on top)
While the US production trend is helpful, my bigger worry is the ever growing amount of oil sitting in storage, not to mention Iran adding to the glut beginning Q1 2016. From the figures I've seen, Iran has maybe 40 MMBO sitting in storage. In tanks and tankers around the world, there's also another ~500-800 MMBO in storage that was not there 9 months ago. The glut continues to fill these tanks. If it takes until late 2016 for the supply and demand curves to intersect (as per the EIA forecast), it might take another 2-3 years for consumption to bring the inventory down to more normal levels. BTW, I think EIA is optimistic on the demand growth side. Given the current uncertainty in China, all bets are off as to when demand will climb enough to intersect with the supply curve. What we really need is global supply to be on the decline. The US is part of global supply, but I think US decline will be largely offset and balanced by Iran. It remains to be seen if reduced drilling internationally will result in declining international production capacity elsewhere in the world. But I continue to watch and be hopeful.
The 100,000 bopd drop shown in the EIA data is the beginning of a trend. For this reason, I don't agree that it is all psychological. US production will continue to decline for many months, perhaps not bottoming until Q3 2016. By that time US oil production will likley be between 8.4-8.8 MMBOPD, a far cry to the 9.6 MMBOPD peak.
EIA Monthly data for April, May, June: 9.612 MMBOPD, 9.400 MMBOPD, and 9.296 MMBOPD respectively, a decline of 300,000 bopd in 2 months.
The weekly data through 4-Sep shows we're down at about 470,000 BOPD off the peak. The trend in US production is finally going in the right direction, and I think will not soon reverse.
Thank you for the interesting insight and references.
Here is the second of the emails from the wifey It's sad that my wife know more about the financial health of my company than I do lol. Here is the cut and paste. Chevron has been financing debt mainly through bonds. They did not have to worry about debt until recently. Cash flow covered there expenses. But that has dried up and what was the driver of all things great can now be the demise of the company. As we discussed babes, I just don't see the oil price going near a stable price of 70 for at least a year. Here is the MS bond page I promised. Look at the big red bar (cash flow), and bond debt vs. total debt. http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=cvx. Also here is the promised article of reserve financing. http://www.ogfj.com/articles/print/volume-11/issue-2/features/reserve-based-finance.html