Brexit Crash?

Jim Brown
 
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Crude oil prices fell to $46.14 on Thursday on worries Great Britain will vote to leave the EU and throw Europe into turmoil that will reduce demand for oil. At least that is what the talking heads on TV would have you believe.

Crude prices declined because production is coming back online from all the various outages over the last six weeks that drove prices higher. The dollar spiked to a two week high and that is negative for oil prices because it takes less dollars to buy a barrel of oil. Lastly, it was time for oil to take a breather. Profits are not actually profits until the position is sold.

Crude prices ran up from $26 in February to $51.50 last week. That is a 100% gain if you round up. Analysts have been saying for months that $50 was the target and maybe $55 but moving over that level would be practically impossible. After spending more than a week fighting to get over $50 it was only able to hold that level for three days. Once the momentum died the sellers appeared in volume. Couple it with the crash by the Dow and S&P to four-week lows on option expiration pressures and fear of the Brexit vote and traders were running for the exits.

There is a saying in trading when everything is crashing at the same time. "You sell what you can rather than what you want to sell." Traders may have been getting margin calls on equities and they were forced to sell their long crude positions to raise cash. There was also a strong rumor that funds were liquidating their long crude positions before the end of the quarter. The current crude futures expire on Tuesday so anyone still long was forced to make a decision to exit the trade.

Helping them make that decision was a note from Goldman Sachs warning that the rise in prices was over. They pointed to the end of production outages as a reason to take profits. In May as much as 3.5 million barrels per day were offline for various problems. The wildfire in Canada took 1.5 mbpd out of production and that has been coming back online and completely restarted by the end of June. The militants in Nigeria have shutdown about 1.2 mbpd and the military has stepped up protection of oil facilities and that production is slowly coming back.

OPEC production outside Venezuela and Nigeria rose 225,000 bpd in May with Iraq adding 100,000 bpd and Saudi Arabia adding 85,000 bpd. Brazil saw a 6% rise in production.

Goldman and the IEA have differing views on future production. Goldman believes there is still an 800,000 bpd surplus and grow in early 2017 before finally balancing by the end of 2017.

The International Energy Agency (IEA) believes the current surplus is about 800,000 bpd compared to prior estimates for 1.5 mbpd in January. The various outages accounted for the decline in the estimate. However, the IEA said U.S. gasoline demand is very strong and rising 225,000 bpd or 2.8% this year. That is increasing demand estimates for crude. Contrary to Goldman's outlook the IEA believes global production will fall 900,000 bpd by year end. They expect supply and demand to be balanced in the second half of 2016.

For 2017 they expect the same demand growth of 1.3 mbpd while non-OPEC production will rise only 200,000 bpd. They expect total demand at the end of 2017 to b3 97.4 mbpd. This will put the supply-demand balance back into a daily shortage. However, after three years of excess supply there are currently 3.065 billion barrels in storage, a rise of 222 million over the same period in 2015. With that monster inventory overhang it will take a long time before prices move significantly higher. Somebody is paying monthly storage on every barrel and every time the price of crude rises a couple dollars, holders of that oil are going to be putting some up for sale.

The low prices have killed nearly $1 trillion in capex spending and oil projects that have been cancelled or postponed. Many of those projects will not be reconsidered until is well north of $75 and some would require $100 oil to put them back on the table. The offshore drilling sector has been decimated. In the U.S. there are only 21 active offshore rigs compared to 65 three years ago. Deepwater drilling needs oil prices close to $100 to justify the $500 million per well and billion dollar drilling platforms. It will be a long time before that sector recovers. Leases are being abandoned every month despite millions in license fees that will be forfeited.



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  Active Rigs

Active drilling rigs rose +6 to 414 for the week ended on Friday 6/10. That is the second consecutive week of gains and the only gains since August 2015. Oil rigs rose +3 for the week to 328. Active gas rigs rose +3 to 85. Active rigs have now declined -1,517 since the high of 1,931 in September 2014. Active offshore rigs were unchanged at 21.


Oil Inventories Week Ended 5/6/16

Crude inventories fell -0.9 million barrels to 531.5 million. The historic high at 543.4 million was on April 29th.

Refinery utilization declined slightly from 90.9% to 90.1% now that Memorial Day gasoline demand is behind us.

U.S. production declined -29,000 bpd to 8.716 mbpd. That is a decline of 894,000 bpd from the peak in 2015.

Cushing inventories rose 900,000 barrels to 66.5 million and only 1.2 million below the May 13th record high.

Gasoline inventories fell -2.6 million barrels to 237.0 million.

Distillate inventories rose 800,000 barrels to 152.2 million.

Details in the graphic are for the prior week. All numbers are not available until the Friday of the following week. In the graphic below, green represents a recent high and yellow a recent low.


The weekly OilSlick Newsletter is a publication of OptionInvestor.com. Please visit OilSlick.com to sign up for the free email newsletter that comes out weekly.

This is a publication of the Option Investor Newsletter. Learn how to profit with options on stocks and indexes. If you would like daily market commentary and option recommendations you can sign up for a free trial and have the daily plays and commentary delivered to your inbox. No credit card or phone number necessary.

Free Trial Now

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