Wednesday, April 13, 2016

Oil & Plenty

I once raced a Thistle sailboat we named Good & Plenty, after the pink and white licorice candy treat. I digress but that Thistle was one fast boat when the winds were good. With all the focus on oil, and after the morning release of the EIA Petroleum Status report today, it is evident the world is awash in Oil & Plenty of it. The current price of WTI Crude has recovered to a level last seen in November of 2015. The rebound in the price of WTI to the $42 per bbl area has had a positive impact on the stock prices of many of the energy related companies. As the below chart shows, the energy sector within the S&P 500 Index has had the largest positive move off of the February 11, 2016 market low, i.e., up 19.6%.

The sustainability of the move in oil prices seems to be predicated on a potential for output cuts coming from a meeting in Qatar on Sunday. However, the decision point on Sunday seems to be revolving more around a freeze in production levels versus a direct cut in output. Absent from the meeting will be Iran. Saudi Arabia seems to be the producer with the most leverage as they can push prices lower by increasing production as they tend to maintain the most spare production capacity, around 1.5 -2.0 million barrels per day. Other Middle East and Russia producers are operating at near full production capacity.

In addition, with all the discussion about reducing supply, as the below chart of rig count displays, Saudi Arabia's rig count is essentially unchanged from January 2015 levels, while most other producers have dramatically cut production levels.

In spite of these rig reductions, and mostly outside of the Middle East, oil and gas supplies continuue to increase. The weekly EIA Petroleum Status Report for the week of April 8th was released this morning and Econoday notes, "Crude oil inventories resumed their climb to the tank tops in the April 8 week, rising 6.6 million barrels to a record-breaking 536.5 million barrels." Supply keeps coming and oil inventory continues to climb.

Econoday's analysis intimates oil storage has reached near capacity as they note supply has reached the "tank tops." A few articles from yesterday highlight the magnitude of the supply glut.
In summary, crude will likely continue to be volatile and we believe trade in a $25 - $45 per barrel range for the near term. Investors should note, oil does have a positive correlation to stock price moves and oil price weakness could translate to weaker equity prices. Although weaker equity prices are likely to be temporary, given the strength of the market since February, some consolidation of recent gains would be healthy and expected.

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