Oil Price Bump Coming Soon?

Posted by: David Schwedel on Tuesday, November 17, 2015

Oil Tanker Parked at Sea

There is so much oil being produced these days that sometimes, believe it or not, there is not enough storage capacity to hold it all.  In fact lines of tankers can be found offshore in markets in Asia and the Middle East.  They float there day after day with no place to sell their goods.  This has been happening now for more than 6 months, and it will go on for the foreseeable future.

The continued curbing in of oil prices, while a benefit for the transportation industry does not seem to trickle down to everyone.  I don’t know about you, but I have not seen the price of my air travel plummet in step with one of the largest oil price declines by a percentage basis in decades.

When one contemplates oil, as they say, all roads lead to China.  An economic slowdown with our largest trading partner has put a damper on the price of oil.  My personal belief is that the slow down in China is much worse than what is being reported.  Just 2 to 3 years ago many of the groups we work with “thumbed their nose at doing business in the U.S.”, and they strictly focused building out their enterprises in China. Not so much today.

Lately we have received numerous inquiries from North American companies with operations in China coming “back home”.  They are looking to roll out opportunities in North & South America.  Until the markets in Asia stop their “slide”, and move in the other direction, I would not expect the price of oil to experience any tremendous gains.  A good indication of this is the recent horrific terrorist attacks in Paris. 

Historically oil speculators would bid up the price of a barrel of crude when any type of civil unrest or terrorist activity would take place.  Their logic was it would spark a potential short fall.  Today’s price of U.S. oil fell to nearly $40 per barrel.  Add to this that global demand for raw materials has continued to drop as well.  There is an overall economic slowdown outside of the U.S.  None of this bodes well for pricing, or strong economic growth indicators.

Our estimates show that there are more than 3.1 billion barrels of crude oil in storage today.  That is equivalent to nearly 8% of the annual amount of global production.  Mark my words.  You will soon start to see oil traders sending signals to ship Captains to send their inventory from Asia into the U.S.   The Gulf of Mexico will start to see ships lining up within the next 30-60 days.

This market is driven as much by speculation as it is by supply and demand economics.  There are certain pundits that claim oil demand in China has been up by more than 5% since January, and that global oil demand is up “sharply” by more than 1.2 million barrels per day.  Therefore, according to them, there is good demand for oil, and it is increasing.  Some people are pointing to the fact that growth in China is all well and good, and the real problem stemmed from their failure to devalue their currency.  If this theory is proved correct, then we can expect to see a resurgence in the price of oil during 2016.

I choose to measure that possibility on the number of companies looking to come back to the U.S, for new business opportunities.  Bottom line, some lucky folks will call this commodity market bottom right, and create massive returns over the next 12-24 months. 

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