All About Inventory

We suspect their projection of current prices into the future will again be frustrated by the market. For that reason we have closed out all of our bearish bets (at a substantial profit) and started adding to our bullish ones. We might be premature but think the chance of seeing new lows for oil prices—other than possibly at the very front of the curve—is relatively small even though volatility is likely to remain high in the coming months.

In the more than two years since then, Hall has remained steadfast about $100 oil – even as it went to $26. At that time in early 2015, under much the same calm as now, it appeared to be a possibility, perhaps likely. The “rising dollar” was really two events separated by several months (and Chinese currency machinations). What was the calm in between them, which allowed for WTI to climb all the way back above $60 from a then low of around $43, did for a time look like “transitory” weakness.

But is has been these intermittent sessions of improvement that prove to be temporary, not the weakness. In terms of global crude oil, there are consequences for that. It is all piled up right now in Cushing, OK, to the tune of half a billion barrels. That’s about 41% more oil than at this time in 2013. Oil went to $26 rather than back to $100 because it wasn’t really a supply glut after all.

Crude Oil Stocks, January 2009 - June 2017

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Now that oil has stalled out, however, having done so for a very long time now, these second set of speculators are being pushed by time and the same factors to either take delivery of that crude at a much lower price than thought or try to roll it further into the future. While that’s not as dangerous a position for those who bought futures at or near the bottom, those lucky few are, well few. There are far more who are now at risk of substantial loss.

If you bought a June 2017 contract last April instead of February, given the current spot rate you are already at a loss. Worse, the futures curve since the middle of last year flattened out tremendously, and up until the past few weeks has largely remained that way. That has meant there isn’t much if any profit to rolling into the future, either. Thus, if financing conditions maybe start to turn sour, angst on the other end of the phone with your margin provider, there isn’t really any choice at all – you have to liquidate perhaps alongside everyone else herded into the same crowded trade under recovery pretenses.

Oil Prices, May 2016 - June 2017

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US inventories of crude had been draining at an unusually good rate, turning lower a bit sooner than the usual seasonal drawdown. As of last week, inventory levels were nearly equal to the same week in 2016.

U.S. Crude Oil Stocks, July 2016 - June 2017

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U.S. Gasoline Stocks, July 2016 - June 2017

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Investors who were expecting higher prices have fled, leaving the market at the mercy of short sellers and algorithmic trading systems. Ironically, this capitulation has occurred at the very moment when inventories in the U.S. are starting to fall rapidly. Unless demand growth has completely evaporated – which seems improbable given generally encouraging global economic indicators – oil inventories should fall over the balance of 2017 at a rate of between 1 and 1.5 million bpd. Crude oil inventories typically fall in the U.S. by 30 – 40 million bbls from June through August. This year the rate could be significantly greater.

That was the God of Oil on June 1 this year, pressing his case with as usual “generally encouraging global economic indicators.” There was scarcely a time over the past three years when such global economic indicators were not encouraging, or at least described altogether in the mainstream that way (“strong” consumers). What made his commentary noteworthy, however, was that in part he blames the low level of oil prices on “fake news”, somehow suggesting that the media, they of the “supply glut” uniformity, have been so overly pessimistic as to distort what are truly favorable conditions.

Futures Curves, December 2016 - December 2020

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WTI Oil Prices, February 2016 - June 2017

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