$65 per barrel oil coming soon to a commodity screen near you.
May I have the envelope please? Could this be the year for a crash? "Crash" may have won best picture at the Academy awards but I don't think we are in for an oil crash. In fact if you had to give an academy Award for best picture of a bull market, the oil market would win hands down. In fact, it probably deserves a special award for the best continuous performance in the history of commodities bull markets... a market that most of you readers are wishing you got in on a while ago. Oh sure, we have had some wicked corrections, but make no doubt about it this oil bull is still running strong. In fact, recent evidence seems to suggest that not only is this aging bull market unlikely to break down further, but is probably getting ready to leg up to all-time historic highs. Ah yes, we broke back from the highs and in all rights we had a chance to collapse but in spite of this we continue to walk the line. That's the long-term trend line. Recent events had Crude Bears licking their chops. The bears though they had finally tamed the bull and were ready to see the market collapse. Yet the truest sign that a market is near a bottom is when you seem to have wildly bearish news and the market still refuses to break.
Take a look at U.S. crude oil supplies for example. A recent surge in imports and strong continued worldwide production has put supply at the highest level since 1999. Crude bears thought for sure that "glut" of crude would send prices tumbling. The last time crude supply was this high oil was in the twenties and struggling not threatening to make a run to all time highs. Yet despite that fact, oil held its ground and refusing to drive down into the mid-fifties.
Some thought that OPEC's recent decision to keep the oil spigots open would be the major factor causing the crude bubble to burst. In fact some members of OPEC actually said that they were trying to keep oil prices below $60. Well despite these efforts oil markets refuse to take them seriously. Oil prices broke after OPEC's decision, but failed to continue a drive a significantly lower price levels.
Technical traders were sure that the April Crude Chart had completed a head and shoulders top; a top that seemed to look a bit like Broke Back Mountain. Some seemed to think the top indicated that oil would break somewhere into the forties. Yet as bearish as the chart formation looked it failed to fulfill its destiny as a topping formation just like Broke Back Mountain failed to win best picture. Don't walk the line or disrespect the trend line as long as this trend has stays intact!
We have heard from the oil agencies that demand is on the decline. The International Energy Agency and the Department of Energy is indicating that we will see recent energies demand growth falter. Yet despite these predictions the market seems unmoved.
So why in the face of rising supply and predicted faltering demand is oil getting ready for another move?
Some believe it is all based on geo political events. And as in the film Syriana the oil world and its politics are a strange and confusing place. The real world is much stranger than Syriana’s paranoid fiction however. We have terrorists looking to destroy civilization and attacking oil facilities in Saudi Arabia. We have a wild man in Iran making outrageous statements and seeking to acquire nuclear weapons. We have a want -to-be dictator in Venezuela who is threatening to stop selling his oil to the U.S. All of a sudden the world has gone crazy and it all seems to come back to oil. Surging oil profits have gone to the head of some oil producers giving them a sense of unlimited power. They are betting that the world is so desperate for there oil that they can do anything they want and no one will have the courage to stop them. Oil is there ace card and they are keeping the world on edge with it.
Yet it should not be surprising that oil continues to stay strong. First of all the seasonal pattern is very strong as we head into the summer driving season. With refiners shutting down for maintenance the hope is inventories will remain high so that when refiners come back online they will be able to make up for lost ground on products. This year it is no exception as maintenance by refiners will be longer than usual. The refiners had to produce oil at record paces to maker up for supply lost after Katrina. New gasoline regulations and a phasing out of the MTBE additives will also add to the intrigue.
The reason why I think oil will achieve new highs is that good old fashion demand will seriously stretch our ability to meet it.
We saw a crazy rebound in natural gas that also seemed to defy expectations. They say it's not nice to fool Mother Nature but why is it ok for Mother Nature to keep fooling us? Mother Nature has wreaked havoc with the natural gas market. First with devastating hurricanes and then a crazy winter that had only one blast of record cold in between the warmest winter on record. And now the winter heating season is coming to a close with what looks like a record amount of natural gas left in storage. So the question now is has Mother Nature changed the nature of the natural gas market? Will the natural gas market shake off its seasonal tendency to rally in the face of near record storage?
Perhaps last week might be an indication that maybe, just maybe the seasonal may stay in tact despite the challenge of more natural gas than we know what to do with. And make no doubt about it; the tendency for natural gas to rally in March is as strong as it gets. According to Moore Research, natural gas has rallied 15 out of the last 15 years in March. Of course some doubt may be warranted given the extenuating circumstances surrounding the market this year.
After the hurricanes the situation in natural gas was critical because unlike crude oil or gasoline we couldn't ramp up imports. Our ability to import LNG - liquefied natural gas -is limited by the number of import terminals we have. Some of those portals were closed because of the storms. Ten percent of our nation's natural gas supply comes out of the Gulf and production was slow to come back on line so we feared the possibilities of real shortages. In December those fears played out as temperatures plummeted and natural gas prices hit all-time record highs. Then Mother Nature fooled us again and spring came in January and mild weather has stayed with us ever since. This created a demand vacuum causing prices to plummet and storage to rise. Now at the end of winter traders are bearish and predictions are for prices to continue to go lower.
Yet how bearish is too bearish? Despite record storage the truth is we still have major underlying structural problems in the natural gas industry that existed long before the storms of last summer. We have had demand rising much faster than the gains in production. And we still have not totally recovered the production lost from last year's devastating hurricanes. Before we know it another scary hurricane season will be upon us.
This brings us back to the basic nature of the market. Has the market fundamentally changed after the warm winter? Can the market rally this year as it has the last 15 years even in the face of near record storage? Can it rally when every producer is having a hard time moving the stuff and nowhere to store it? Well the answer is yes. They say that sometimes the market always looks the worst at the bottom and I admit that this market can't look any worse. There are many ready to sell on even the smallest bounce. Yet when you get too many people leaning too hard one way in front of a strong seasonal tendency that goes the other way, sometimes this can lead to a larger than expected pop even in the face of some extremely bearish short-term fundamentals.