Saturday, February 7, 2015

Commodities: Oil - The Fairy Tale Of A V-Shaped Recovery

(Drivebycuriosity) -  The price of oil jumped around 20% in the last 2 weeks - the greatest leap since 1998, reports Reuters (reuters). It seems that hedge funds and other speculators are betting on a v-shaped recovery of the oil price, which is still around 50% below the levels from last summer.

Some oil speculators refer to the period 2009-2010, when oil prices recovered quickly after the sharp drop in the 2nd half of 2008. They also might be in inspirited by the v-shaped recoveries we saw on the stock market in the recent months.

The oil speculation got sparked by the falling number of us oil rigs. Last week the rig count declined by 83 to 1,140 (business). This is down from a peak of 1,609 hit in October 2014. The drop in the rig count fanned speculation that US oil production, which is a major cause for the current oil glut on the markets and the recent drop of oil prices, will shrink soon. The funny thing is, nobody cared about the rig count as the numbers were rising (from around 2006 until last summer). Why is the falling number so important, but the rising number didn`t count?

The media also claim that the oil rally was fueled by positive news about the general economy, for instance the strong job numbers from yesterday. But this is humbug. The sharp oil price rise in 2009 and 2010 slowed down the global economy considerably and was the main cause that the recovery was so disappointing. And the strong economic growth from 1982 until 2000 was accompanied by low oil prices. It seems that cheap energy goes with strong economic growth, while expensive energy goes with a sluggish economy.


                                                      Typical Snowball Effect

The sharp price gains attracted more speculators who`s purchases drove the oil price even higher - a typical snowball effect. We have seen this phenomena often before, especially in the first half of 2008 - when the oil price exploded to $148 - and then again in 2009 and 2010 as climbing oil prices caused more price gains.

I assume that the oil rally is ill founded and created just another bubble.  US production continued to climb in January, in spite of the much hyped falling rig count (markets). And US oil inventories are in a sharp upward trend and rose on new record levels (bespoke).

If the rally would continue it would soon slow down the idling of the oil rigs, because many oil rigs are still be profitable with $50 oil. (bloomberg) Maybe some of the shut down rigs would come back. Furthermore, the oil glut, which has caused the price drop, will continue because of the climbing production from Iraq, Iran, Russia and other oil producers (seekingalpha). And if Saudi Arabia wants to get rid of the US competition, as their speakers claim, then a continous oil rally would be against their interests, meaning that they could expand their oil production to bring the price down.

I think that the aggressive oil speculation will be frustrated by the fundamental numbers and oil prices will resume their dive soon.

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