Well, you can certainly tell everyone is on vacation. It’s quiet out there although we imagine there have been some loud nights in the Hamptons of late.
Oil’s up (again) and that’s certainly helping the bid for risk.
Ostensibly this is all thanks to Saudi jawboning and today we got some vague commentary out of Russian energy minister Alexander Novak who indicated Moscow would be open to discussing an output freeze “if necessary”, although it’s not even clear why that’s relevant anymore. What good does it do to freeze production when production is at record highs? Here’s how TD’s Bart Melek sums it up:
“Russia, Saudi Arabia can’t really increase capacity very much, so any statements referring to production freezes are a reflection of what is really happening on the ground -- that there may be little ability to increase production materially.”
So they’re not really actively “freezing” production. Production is freezing itself because everyone can’t physically pump any more than they’re already pumping.
Novak also said prices won’t get anywhere near $100 in the “foreseeable future.”
There’s also quite a bit of chatter about this all being a short squeeze. Credit Suisse’s Jan Stuart said as much as did Morgan Stanley’s Adam Longson who noted the following:
“A large option position and delta hedging left the market vulnerable to a rally. Thus, bullish comments from OPEC and the IEA caught the market uniquely offside to reverse bearish positioning (see detail and calcs inside). Yet, once option expiry passes on Aug 17th, this issue should fade.”
(Chart: Morgan Stanley)
Who knows. But what we do know is that the fundamental picture is overtly bearish, as we’ve said a thousand times. Here’s a snapshot:
(Charts: Credit Suisse)
And here’s Citi summing things up nicely:
“Oil prices reversed their recent downward trend. Headlines are circling over informal meetings between OPEC members at next month’s International Energy Forum, and whether this implies a resurrection of the failed Doha “output freeze” talks. These have proved supportive for spot prices, yet even if a freeze were to materialize, it is unlikely to impact physical OPEC supplies given almost all OPEC members face plateauing or declining production prospects now.”
(Charts: Citi)
Meanwhile, JPMorgan is holding out hope. “Saudi Arabia may be positioning itself to be more accommodative at future OPEC negotiations,” the bank says, adding that a “Saudi move to support prices above current spot price is more realistic due to the size of nation’s budget deficit.”
Count us among the skeptics. The more Iran pumps the more recalcitrant the Saudis will be and boy, oh boy is Iran doing some pumping:
(Chart: Citi)
But hey, who are we to complain? Stocks are loving it:
There’s always an excuse for a rally these days.
As for US production - the purported target of the Saudi’s long-running effort to suppress prices - we got further confirmation on Monday that $50 is probably the magic number as Cabot Oil & Gas CFO Scott Schroeder told a conference in Denver that he needs $55/bbl to “get back active in Texas.” As we’ve noted on too many occasions to count, ramping up US production is entirely self-defeating. All that will do is drive prices lower again at which point America’s FCF negative producers will have to stop pumping just as soon as they started.
(Chart: Goldman)
At the end of the day, the story is still the same: there’s a global deflationary supply glut and unless you think producing nations intend to actually cut (as opposed to “freeze”) production, there’s really no reason to believe that a sustained recovery in prices is in the cards.