Here's a monthly chart of the international crude oil benchmark, $BRENT. You can see that it is coming down to support.
I realize the supply/demand picture for $Brent has changed since it tested support around $43 and $40 years ago. However, there are many technical analysts in the market. We can expect buyers to come in and defend those levels.
And while there could be panic spikes to the downside, I think $40 is probably where $brent will base this year. But we'll see.
The US oil benchmark, West Texas Intermediate, trades at a discount to Brent, but that is changing. And Canada's oil benchmark trades at an even deeper discount.
People are trying to call a bottom in crude oil right now. Most recently, OPEC General Secretary Abdullah al-Badri made vague comments that they "will see some rebound very soon", based on nothing but his own intuition, I guess. Also, he said oil prices could reach $200 per barrel if there's a lack of investment following this price slump. This reversed oil's earlier price decline, when it seemed to be drifting lower (again) after new Saudi regent, King Salman Bin Abdulaziz, pledged to maintain the old king's policies. Since those policies seem to be to pump as much oil as they want, those comments hurt oil.
So who's right? al-Badri or Abdulaziz?
I'm seeing lots of articles on oil; certainly "bottom" speculation is high. Some may say that such a media frenzy is itself a sign of a bottom. I'm not so sure. What we need to see is global supply go down and global demand go up. THEN we can start bottom-calling.
This morning, we saw the front-month WTI contract dip below $80; it has since rebounded and crude oil is flat-to-up for the day as I write this. Still, it's fair to say that oil is under pressure. Almost as soon as the Saudis said they would accept a US-dollar $80 oil price for an extended period of time, the price of oil set out to prove them right.
We can point to fundamental reasons for oil weakness. Those are ...
- Rising oil production in the U.S. and other regions (Libya, Iraq, etc.).
- Economic weakness in China. The latest is that China's CPI came in weaker than expected (1.6% vs expectations of 1.7%). That's adding to disinflation worries.
- Weakness in Europe, which is ground zero for deflation and slowdown concerns
- The International Energy Agency keeps cutting its estimates for growth in global oil demand. It has now cut demand estimates for four months in a row.
You will find links to these stories and more below.
But there is also a political component to the oil price crunch. And that is, the Organization of Petroleum Exporting Countries (OPEC) is starting to fracture. I'll have more on this in an InvestmentU.com story later this week. But the Cliff's Notes version is that despite falling prices, OPEC increased its oil production last month to a 13-month high. At the same time, Saudi Arabia is cutting prices to retain market share. Iraq and Iran are also cutting prices to keep market share.
All this is driving the price of Brent Crude, the international oil benchmark, lower and lower. It's down around 23% year-to-date, dropping from $113 to below $84 briefly this morning.
The Saudis don't like lower prices, but they know they can bear them better than higher-price producers like Canadian oil sands or Russia.
In the meantime, OPEC members like Venezuela are shouting LOUDLY for an emergency meeting to prop up oil prices. The Saudis -- who have been stabbed in the back by the Venezuelans enough times that they should have a whole set of steak knives by now -- are saying "too bad."
That doesn't bode well for the future of the cartel. I know, I know -- it couldn't happen to a nicer bunch, right?
So here's the question. If there is a political component to the oil price, what does this mean for the falling price of U.S. oil?
It means that the fall in U.S. oil prices is more in sympathy to the move in Brent crude. It's NOT because the U.S. economy is slowing.
In fact, domestic U.S. oil demand is sitting near all-time highs.
So is this move in U.S. oil companies overdone? If they can make a profit at current prices, or at least at $70 a barrel or so (probably as low as we'll see WTI crude go), then yes, they are being priced for a disaster that is not going to happen. Not unless Godzilla is moving toward San Francisco right now and nobody told me.
Now, that doesn't prevent me from having a position in ProShares UltraShort Oil & Gas (NYSE: DUG) in Gold & Resource Trader. It's our second time holding it, we got into it early, and while we took partial gains, we'll hold the rest for the wild ride that is probably ahead.
But my analysis which I've just shared with you also prevents me from panicking. It's not the end of the oil boom story. It's maybe the end of a chapter. A new one is beginning.
News and Links of Interest
Estimate of Global Oil Demand Growth Cut Again. Global oil consumption will increase by about 650,000 barrels a day this year to an average 92.7 million a day, according to the IEA, which advises 29 nations on energy policy. The estimate for demand growth is 250,000 barrels a day lower than last month’s forecast, and about half the level the agency projected in June.
(Source)
Commodity Price Drop Gives Fed Additional Breathing Room. Goldman Sachs economists last week estimated the combined effects of a weak dollar and soft commodities prices would shave 0.2 of a percentage point off core inflation next year, pushing against the Fed’s efforts to lift already-low inflation up to its 2% target. Senior Fed officials have signaled pretty clearly in the past few weeks that they’re looking at mid-2015 for liftoff from near-zero interest rates. The confluence of developments weighing on inflation is dampening the urgency in that discussion. (Source)
Global Oil Glut Sends Prices Plunging. The good news: Every one-cent drop in gas prices means a $1 billion annual decline in energy spending by Americans, estimates Brett Ryan, U.S. economist at Deutsche Bank. “It’s like a tax cut that consumers can use to eat out more often, buy more goods or help save for a new home,” he said. (Source)
Lockheed makes breakthrough on fusion energy project. On Wednesday LMT said it had made a technological breakthrough in developing a power source based on nuclear fusion, and the first reactors, small enough to fit on the back of a truck, could be ready for use in a decade. (Source)
Retail Sales in U.S. Dropped More Than Forecast in September. Wages remain low, which means people aren't spending. (Source)
Crumbling U.S. Fix Seen With Global Trillions of Dollars. Another public-private partnership. Every $1 billion in new infrastructure investment creates about 18,000 jobs, according to a 2009 report by economists at the University of Massachusetts’ Political Economy Research Institute. (Source)
They saved the eurozone; they just forgot to save the people. Eurozone officials have preached a gospel of budget austerity and "structural reform" to ailing economies as the cure for the crisis. The eurozone has ten countries — including big ones like France, Italy, and Spain — that are doing worse than Rhode Island. Greece has 11 million people — making it more than 10 times the size of Rhode Island — and an unemployment rate of almost 27 percent. Meanwhile, Finland is considered one of the healthy eurozone economies but only Nevada and Rhode Island have unemployment rates higher than Finland's, and they're close. (Source)
See also: EU Austerity Witch Doctors Attack Each Other
Economists are increasingly worried that Europe is going to drop into deflation. Here are the latest deflation figures from Europe, for September.
- Italy: -0.1%. Italy is in its second month of deflation
- Spain: -0.3%. Spain has the most serious deflation of any large eurozone economy; it's in its third consecutive month
- Germany: 0.8%. The fact that Germany has some of the highest inflation in the eurozone tells you a lot.
- France: 0.4%. A five-year low. Core inflation is actually now at zero, the lowest in modern history.
- The UK: 1.2%. The UK isn't in the eurozone, but inflation is also at a five-year low.
(Source)
Good luck today.
Gold miners got hammered this week, and we had to take another round of gains in Gold & Resource Trader as another raised stop was hit.
I think gold's weakness has a lot to do with physical demand from China cooling off as that country's anti-corruption campaign heats up. They'll be back. And meanwhile, yesterday's dip spurred physical demand.
But the drop in gold prices also has to do with strength in the US dollar. Remember, gold is priced in dollars. As one goes up, the other usually goes down.
First, here's a chart of the US dollar ...
(Updated chart)
The US dollar is on the path to test its highs from last year. The wind beneath its wings is the collapse of the euro, triggered by eurozone stimulus.
August jobs numbers generally sucked. This was expected. And here's a big part of the reason why.
A major New England grocery store chain shut down last month due to a strike. The strike is over. One would think that will help the next round of job numbers.
Overseas, the population of Russia is plummeting like it is suffering a major catastrophe or world war. And no, Ukraine doesn't count. People are generally miserable as the oligarchs squeeze them mercilessly. A lesson for our own ruling class, not that they care.
Freeport McMoRan reached a deal with the government of Indonesia; laying out a roadmap for how the mining industry in that country could get back on track.
The US imported 878,000 barrels of Saudi crude a day in August, the least since 2009. This chart from InvestmentU tells the real story.
I'll have more on America's energy production tomorrow. Have a good weekend.
