Ok, so oil is in a bear market.
Stop the presses.
It’s funny because earlier this year we were marveling at the fact that if things kept going like they were going (i.e. if crude kept grinding inexorably lower), oil would be moving from bull market to bear market on a near daily basis.
We’d be remiss if we didn’t mention today’s EIA numbers...
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Crude +1,413k Bbl, Median Est. -1,750k Bbl
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Cushing crude -1,123k
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PADD 3 crude -1,315k
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Gasoline -3,262k vs est. -650k
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PADD 1B gasoline -1,356k
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Distillates +1,152k vs est. -700k
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PADD 1 Distillates -1,076k
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Refinery utilization +0.9 ppt vs est. +0.0 ppt
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Refinery crude inputs +266k b/d
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Crude imports +301k b/d
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Crude production -55k b/d
...which as usual bear little resemblance to what we got from API on Tuesday. There was a quick drop, then a pop:
It was probably the gasoline draw that fueled (no pun intended) the quick bounce. After all, it’s that gasoline stock overhang coupled with the end of the summer driving season and subsequent decline in refinery demand that’s driven the short-term slump.
Speaking of that, is it a “short-term” slump? Or is it just gravity conspiring with good old supply/demand to kill an unrealistic rally? Well, different analysts will tell you different things, which is usually the case when no one really has a clue. For their part, Citi was out this morning complaining of “bears gone wild” and calling the current downturn a buying opportunity. Here are a few excerpts from their note that’s making the rounds:
“Seasonal charts showing the similarities between this year’s and last year's price action are spewing forth from brokers desks, as well as ‘Oil Glut’ headlines surfacing across almost every popular newsfeed. If past performance actually is indicative of the future in this case then prices look bearish for another few months and if this really is guiding market expectations for 1Q’17 then the weakness at the back of the curve is understandable. Except fundamentals are actually trending in a very different way to last year. Visible Inventories have been basically trending in-line with seasonal patterns this year (see figure 1) as opposed to surging last year and shadow inventories are falling.”
“And most importantly of all last year non-OPEC crude production was holding up (Dec-July delta was -400-k b/d) as the US and Mexico were the only countries to see real declines, while this year it is both falling fast (Dec-July crude production is down -1.9-m b/d) and is also much more widespread.”
(Charts: Citi)
All of that may be true, but we like to take a kind of common sense, Occam’s razor approach to markets which in this case entails the following assessment: the red lines are still way above all of the other lines.
Of course as Goldman correctly notes, oil and the dollar have decoupled during the recent rout and refining margins are rising so the only thing left to do is blame the shorts. This is from Jeffrey Currie out today:
“From a macro perspective, the dollar weakened, not strengthened as it usually does during an oil sell-off. From a fundamental perspective, US refinery margins widened as opposed to decline despite heightened concerns over refined product surpluses, which we argued last week were simply a reshuffling of inventory with a neutral impact on global balances. Further, we also argued global balances haven’t substantially deteriorated as reflected in the relatively stable market term structure for oil and strong physical grade differentials. This leaves short positioning, particularly in deferred prices, driven by potential low-cost supply and the search for yield post Brexit as the primary drivers of the recent sell-off.”
(Chart: Goldman)
Ok, sure. We can buy that. But here’s the thing: you want to pay attention to all of the discrete data points, but you can’t miss the forest for the trees. We’ve been saying oil was going back down since… well, frankly since it went back up. Just like we’ve been saying that the yen is going to appreciate right up until Taro Aso intervenes in FX markets.
And we didn’t have to shake a magic 8-ball to make those calls. For oil, you just have to look at the fact that there’s so much supply out there that people are going to have to start storing the stuff in their swimming pools and the demise of the FCF negative US shale space was not only inevitable (you can’t operate forever with persistent funding gaps), but is muted by increased Iranian, Iraqi, Russian, and Saudi supply.
So the moral of the story is, when you think about markets, be smart. But don’t be too smart. Because that’s when you become dumb.