In the movie Groundhog Day, weatherman Bill Murray relives the same day again and again until he gets the weather forecast (a blizzard) right.
The oil market is trapped in its own sort of time warp. It is in rally mode (again) as sweet talk of coordinated action to re-balance the oil market resurfaces.
Ignore the Saudi Nonsense
The U.S. momo (momentum) hedge funds were once again very excited that this talk was coming from Saudi Arabia’s oil minister, Khalid al-Falih. Of course, it is mere “coincidence” that this soothing talk occurred just as the oil price was once again threatening to breach the $40 a barrel level thanks to rotten fundamentals.
And once again, as in Groundhog Day, the same pattern repeated and the hedgies were falling all over themselves buying oil futures. Hedge funds increased their bullish bets by the largest amount in over two months in the week ended Aug. 9.
I can’t believe these guys actually run other peoples’ money. They seem to have forgotten that the Saudi oil minister has little say in the country’s oil policy, which is run by Deputy Crown Prince Mohammad bin Salman.
Mohammad bin Salman personally squashed the “freeze” talk last time. And, he very plainly told everyone that cared to listen that the Saudis were going to raise their output over the next few years by about 1-2 million barrels a day.
The Saudis’ actions speak even louder than the prince’s words. Since 2014, the number of oil rigs in the country has jumped from 58 to 67. And that number has nearly doubled since 2010. Last year’s number of rigs was at least a 20-year high for the Saudis.
So it should not come as a surprise to anyone that Saudi oil production hit a record high in July to 10.67 million barrels per day.
And more increases are on the way. Anyone who thinks the Saudis’ rig count ̶ at a 20-year high ̶ means nothing in the longer term deserves to lose money.
Oil’s Fundamentals Still Stink
Earlier, I mentioned that oil’s fundamentals are rotten . . . and they are. The oil market is not close to re-balancing, despite the happy talk.
Besides the Saudis at record output levels, the same is also true for Russia and Iraq. And Iran has ramped up its exports faster than anyone thought possible.
Here in the U.S., oil prices in the 40s has caused many shale companies to say they are completing their DUCs (drilled but uncompleted wells).
These companies include the likes of Continental Resources (NYSE: CLR), EOG Resources (NYSE: EOG), Oasis Petroleum (NYSE: OAS) and BHP Billiton (NYSE: BHP). A number of other companies including Whiting Petroleum (NYSE: WLL) have said they are also nearing a decision about their DUCs.
Now let’s turn to the inventories.
The two-year old oil glut has turned into a huge glut of gasoline and diesel that is overwhelming demand (despite demand’s rise).
The International Energy Agency (IEA) said that the pace of refinery run rate increases was 60% higher than the growth in refined fuel demand.
Not surprising then that U.S. gasoline inventories are just off all-time highs and are 5% above the five-year seasonal average.
The same is true in Europe and Asia, too.
Gasoline inventories in independent storage near the Rotterdam hub are up more 17% from just a year ago and sit near a record at 1.16 million metric tons. Diesel in inventory in Germany – Europe’s biggest diesel market – is at a seven-year high.
The United Kingdom has become the current center of the global oil glut with as much as 14 million barrels of North Sea oil sitting in supertankers off its coast.
In Asia’s regional hub, Singapore, refined product inventories are also very near all-time highs. And again there are an incredible number of ships offshore loaded to the brim with more product. The oil glut in Asia is unlikely to disappear soon with China exporting record amounts of refined products.
Oil Glut Not Easing Yet
Notice how many times I’ve written the words “record” and “all-time highs” in this article.
The oil glut has not disappeared; it has merely spread to refined products. And with inventories at these elevated levels, the market is at a minimum a year or more away from re-balancing.
Just look at what the world’s smartest oil hedger – Mexico – is doing. It is hedging its 2017 oil output.
Mexico made a record amount last year ̶ $6.4 billion – on its oil hedges.
It understands what Saudi Arabia and other OPEC members are doing. Once again, they’re spreading the manure about doing something about the over-production. But, as usual, they intend to do nothing.
They are simply trying to put an artificial price floor under oil. This will allow them to laugh all the way to the bank as they sell more oil than ever before at a higher price than fundamentals would dictate. All thanks to the momentum-chasing U.S. hedge funds.
But don’t be fooled. This isn’t a movie. Oil ETFs such as the United States Oil Fund (NYSEArca: USO) are still lousy long-term investments.