The Energy ReportPhil Flynn
The Energy Report 02/12/16
We Won't Back Down
No matter what, we won't back down. Well on second thought, maybe we will back down. It's not what is being proposed but it is who is doing the proposing. After a late break in oil that drove it to the lowest level since 2003, we rebounded on an OPEC production cut story.
Dow Jones reported that UAE Energy Minister Suhail bin Mohammed al-Mazrouei said that OPEC may be open to cutting production. This is the same OPEC oil minister that just a month ago said that OPEC wound not back down and would not cut production. Mr. Al-Mazrouei said it was the job of other high cost oil producers because it was their production that was creating the glut. Now it seems he has had a change of heart.
There was also talk of a production freeze. In other words, perhaps OPEC will put in a new production quota that would justify current production. If you remember, the OPEC production quota went out the window at the last OPEC meeting which raised concerns that every OPEC country would produce as much oil as they can. Now with prices falling as hard as they have, it is possible that with no money, most OPEC countries are already producing as much oil as they already can. So in other words, OPEC output is near a peak.
We know U.S. oil output was at a peak. The Wall Street Journal reports that more cuts in the North American energy sector loom as oil nears $25.00. U.S. and Canadian producers are losing at least $350 million a day at current prices. The plan to pump more oil, lose money on every barrel and try to make it up in volume is not working. This is unsustainable and it will mean more output cuts.
The Journal also reported that globally, nearly $1.5 trillion worth of oil spending will be canceled between 2015 and 2019, according to IHS estimates, which should eventually mean global oil output will fall.
Yet we still have to get through the glut that as the Journal points out, in the U.S. more than 500 million barrels of oil are in storage now, near levels not seen at this time of year since the Great Depression, according to the latest federal data.
OPEC may also be realizing that this oil drop may be actually hurting the demand for their oil. What good is maintain your market share if that share quits buying oil. The situation with the sell-off in bank stocks and the spike in gold may have been the sign to OPEC that it was time to stop the oil price drop before it stopped the global economy.
Interesting story in the Journal. They say that the gold price is already at its most expensive since the Victorian age - against oil. An ounce of gold will now set you back more than 40 barrels of oil. The cost of gold relative to oil prices is one metric and used by some investors as a signal of financial jitters. The current divergence of these two high profile commodities says a lot about investor's current appetite for risk amid a widespread market swoon. Concerns about global growth typically drive oil prices lower and the gold price higher, causing the ratio to spike. The precious metal is now four times as expensive relative to oil as it was in 1968, when Factiva's data series begins.
Since that year the crude oil/gold relationship has never been so stretched. Yet that period includes some serious periods of market stress, from the oil price collapse of the late 1980s to 2008's financial crisis.
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February 12th, 2016
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