Sunday, May 10, 2015
Economy: Waiting For The Next Oil Crash
1. Since begin of the year the oil price (Brent Crude) rallied more than 30%. But: The fundamental situation didn`t change in this time! There is still an oil glut (over supply) which had caused the oil price collapse in the second half of 2014. Oil demand is still weak because China´s economic growth is slowing and the US economy came to a (temporary) still stand in the first quarter. The oil producers are still flooding the market: In April OPEC oil output was highest since Nov. 2012 (marketwatch) and the organization´s members are pumping almost 2 million barrels per day more than demand for their oil (cnbc). And the US oil production is holding steady close to its recent peak of 9.4 million barrels per day (cnbc).
The rally might even have amplified the oil glut because the recent price rises encouraged again production (suppliers who exited the market @ prices around $50 might come back) and they are curbing demand once more. So, the oil price is still too high to clear the market (reduce oversupply) and has to go much deeper to cut supply and stimulate demand.
2. The oil rally had only one reason: massive buying by speculators who are betting on a quick oil price recovery. "Investors have moved heavily into oil over the last few weeks as prices have recovered from a slump in January", writes Reuters and continues: "Hedge funds and money managers raised bets on rising Brent prices to another record, data showed on Monday, pushing net long positions to their highest since official exchange records began in 2011" (cnbc) "Hedge funds have made big bets that oil prices will keep rallying" agrees Businessinsider (businessinsider).
I think these speculators will get frustrated in the coming weeks when the climbing over supply will squeeze the price of oil down again. This could lead to a massiv selling pushing oil prices further down.
History shows that markets often fall from one extreme into another, massive overshooting leads to massive undershooting. From 2010 till summer 2014 the price of oil hovered high above the productions costs (massive overshooting), soon a period of massive undershooting could begin leading to oil prices below $30.