launch oilYou will not be surprised to hear that much like air travel the most dangerous phases of space travel are take-off and landing. So even though I have generally felt a tremendous amount of admiration for astronauts, this feeling has always been the strongest during the launch phase. Imagine being strapped in at the top of a giant metal tube, with several tons of high explosives under you. Imagine preparing for months, sometimes years for the trip, and knowing that the actual start of the voyage is almost totally out of your control. Imagine having to trust the engineers to do their jobs properly, accurately and without exaggeration, and hope that you will survive their contribution… I say “imagine” but I am quite sure all of you have no trouble visualising the situation. If you are reading this, there is a very high statistical probability that you are interested in finance and oil… There is also a very high probability that you are wondering when the price of oil will launch back into the stratosphere… Some of you may even be sitting on a chair with several high explosive long positions under you, praying that they launch properly and do not blow you to smithereens…

You are also wondering if the analysts, agencies and CEO’s on whom you rely to formulate your plans do their jobs properly, accurately and without exaggeration. The big problem here is that NASA engineers usually know the astronauts whose lives are at risk so they take extra care. Analysts and CEO do not have the faintest idea who you are, and many of them couldn’t care less as long as their agenda is on the table. Fortunately for you, since Magma oil does not care which way the market is going, we hope to help you formulate the best plan for you.

For a majority of “speculators” out there, oil is definitely about to launch back into space… Again! Since the end of August, prices have been confined to a rather terrestrial 3 dollar range. The end of the summer driving season and, unless you live in the Bahamas, the end of an uneventful Hurricane season, have led to a relative drop in volatility. Usually when that happens, a big break-out is on the cards. Dutifully, prices ran up, with Brent reaching a high of US$ 53.15 and WTI reaching for the long term uptrend at around US$ 49.5.

Why the sudden attempt at lift-off? Other than technical reasons, it seems a confluence of news and opinions motivated the move. Most importantly, US stock markets seem to be recovering from their Fed induced hangover. In a classic example of “bad news is good news”, a lacklustre September jobs report convinced everyone that the FED will not raise rates any time soon. There is also the continued belief that low prices will spur demand to accelerate in 2016. At the same time, many are now pointing out the factors we mentioned several weeks ago: there are many signs that the supply situation is starting to shift. Investment is down across the board for non OPEC producers and everyone is shying away from riskier projects. Brazil has been trying to unload several deep water blocks without receiving even one bid. The possibility of a future supply crunch was even underlined by the CEO of Shell who, stealing a line from the Goldman Sachs playbook, spoke of the potential for an eventual “spike” in prices leading to another boom and bust cycle. The icing on the cake was a report by the American Petroleum Institute (API) on Tuesday evening that US crude stocks dropped this week. Without as much as a quick count-down, someone shouted “Ignition!” and the market ran up. Is this finally the big adventure? Is oil finally returning towards outer-space? I hope none of you are holding your breath… you could be disappointed.

In reality, other than the stock market rallying, you are seeing a situation where either nothing has changed or you got the wrong information. From a supply point of view, we are still in the same situation. The overhang is still close to 2 million barrels a day and OPEC is still producing every barrel it can. At the same time, while we pointed out that US production was declining before the market realised it, we also have to insist on two points. First it will be a slow process. The EIA still sees US production in 2016 only dropping to an average 8.9 million barrels a day from the 9.2 million of 2015, so nothing interstellar. The second issue we have already raised is price. The eventual “spike” is assumed to be the result of a prolonged spell of low prices… So if you go to the edge of the atmosphere too early, you may delay going into space later. Worse, you may crash back to earth.

As for demand, everyone has been harping on about its eventual acceleration. Sadly, while I definitely think we will see growth, I do not think it will help until the beginning of the 2016 driving season. The US is shrouded in uncertainty by the Fed’s inaction and Europe is not seeing the improvement everyone thought the ECB would bring. China is still struggling, and the IMF has just announced its economy should decelerate to a 6.3% growth rate in 2016 from the current 6.8%.

Cet article Is Oil ready for Launch? est apparu en premier sur Investir.