By Leonard Brecken
This morning much to my shock investors woke up to yet another sensationalistic spin on “facts” from the media and brokers (GS in the lead) that Cushing won’t actually fill up. This is after months of other attempts to hype the negatives on oil prices while ignoring most of the supply/demand economics.
I won’t rehash all the negatives that were professed and that turned out false but see previous articles on that. But another of note is the recent hype on the Iran nuclear deal, as Saudis boost Asian prices by $1 and China increases its purchases from Iran in the summer! But isn’t demand weak?
Decide for yourself on what the facts say. For months many have professed that oil has to return to its normalized price where production would actually resume growth. That price has been theorized to be $70 plus for WTI in order to incentivize E&P companies to invest in new drilling programs. As the price remained below $50 we saw a 45% decline in rig count and 20-30% reduction in capex in response to the price being below what is necessary to spur new production growth vs. what is occurring now using well inventory to maintain production given depletion rates.
These fundamentals have been ignored while we went past peak refinery maintenance back in mid-February and also now as we are adding back capacity as production of oil declined for the first time week to week according to the EIA last week. Investors are finally beginning to see these negatives for what they are: media attempts to use oil as weapon to boost economic growth as the dollar rises in an attempt to get investors to cover their net short positions in futures. When do these talking heads realize low oil prices don’t boost economic growth if you if have an economy which actually produces most of its oil as capital spending reductions off set consumer spending boost?
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On a separate shocking note I also learned that Cushing, back in 2012, went to 88% capacity vs. where it is now in the low 70’s. Can anyone guess where oil was back then? Not $50 but $100! That thump was someone falling off their chair after reading this. The same can be said for natural gas inventories which are below their 5 year average, 10% below the mild 2012/2013 levels, and yet have fallen to record lows because the spin artists wish to focus comparisons only on last year’s levels. Selective perception is running rampant in the media and has gotten completely out of control, so much so that I think media outlets and sell side brokers discredit themselves, as their “facts” don’t match their reports. Just today, BOA was on CNBC again calling for oil to fall to $40.
By Leonard Brecken for Oilprice.com