Update on Oil Market
How Richard Soultanian and his team at NUS Consulting Group read the situation.
*****
Last year I published my thoughts on how the oil price decline, then still only half-way to today’s levels, might not turn out to be as beneficial as most analysts thought (OIL, OIL… SO MUCH OIL). I still think that balance sheet pressures are more important than consumer spending benefits.
Today I’d like to share, with permission, a concise opinion piece by NUS Consulting Group. In essence things may not necessarily get worse than now, but have little chance of getting better anytime soon.
I won’t expand on the supply issues discussed in the paper. As global demand goes, I reproduce an updated graph from the above-mentioned post which does not offer a pretty picture: world activity appears set to slow down further.
Source: Bloomberg; Orthos Advisory calculations.
Photo source: Bloomberg.
“the current status quo between major producers is more durable than most expect” This is now the dominant view……therefore it is tautologic
The consensus has certainly moved on the supply question. However, what I don’t think people fully realize is the vicious circle between producers – expenditures-debt; some of this is in the prices (of high yield bonds in particular) but not all of it. And most commentators I read about still focus predominantly on the demand side (“if only growth goes up the problem goes away” type of thinking).
What confuses me is the recent reconnection of oil and nat gas in US. factually as shale oil exploration declines (as is already the case and as outlined) a side effect is reduced production of natgas. Oil v Nat gas has disconnected for some time driven by the advent of fracking….. and in the oil oversupply scenario US nat gas should experience an inverse relationship to oil (reduced well count and fracking for both). In the last few weeks it hasn’t, which seems illogical to me given the difference in distribution economics. oil from Iran can replace marginal oil production in the US but nat gas from anywhere will not replace US produced nat gas. what am i missing? …..as i just went long UGAZ??? 🙂 Merry Christmas
And to you and the family – especially THE boss.
When I read your question I realized I needed help, and so I went back to Richard for some ideas. Here’s what he had to say:
“You must view the crude oil and North American nat gas as two separate animals. First, the crude oil markets are international – remember despite significant growth in domestic production the US remains a significant importer of crude oil – approximately 7 mb/d. The US nat gas market is almost completely domestic (the US has yet to export LNG) and thus is driven more by fundamentals (i.e., supply and demand) rather than currencies, risk, monetary policy, etc. Presently (and by coincidence) both market are oversupplied. The crude market for the reasons in our note. The nat gas markets due to increased production (which is only partially offset by increasing power burn) but presently exacerbated by unbelievably mild weather – it is currently 60F in NYC in mid-December. If the weather would suddenly turn cold in the Northeast – and gas consumption moved back to typical levels – prices would begin to rebound.”
In all fairness, I’m proud I had thought of the weather issue. But that’s small pickings… However, one thing I never liked is betting on the weather; be careful my friend.