By James Cordier
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Oil bulls have been "picking the low" in oil prices for a year now. For the most part, that has not worked out so well. Oil prices are down 45% since this time last year. A number of big-name hedge funds are down sharply in 2015 — due in no small part to long oil bets. But the larger question is if lower prices continue to be the case in crude, will that be the factor that actually spurs prices higher.
It was Baron Rothschild who said, "The time to buy is when there's blood in the streets…" If that is the case, the "blood," as evidenced above, may finally be starting to flow in earnest.
Despite the big shooters’ attempts to buy low, oil prices have remained, with the exception of last year's winter rally, stubbornly depressed. This has been primarily because of three factors:
Reasons for low oil prices
1. Burdensome global inventories: Global oil supplies in both the U.S. and world — currently classified as a "glut" — are at record highs. At the time of this writing, U.S. weekly ending stocks sit at 460 million barrels, 28% above the five-year average.
2015 crude stocks remain well above historical ranges for this time of year .
2. Global inventories have continued to grow: This is the crux of the bear argument. Even as U.S. producers pull back on production, the rest of the world is not. The oil market is a global game. That point became abundantly clear last March when OPEC rattled oil markets with its announcement that it would not only not cut production, it would increase production. In August, OPEC production hit 31.5 million barrels per day (bpd) — above its target of 30 million bpd. OPEC producers refuse to scale back as each member fears doing so would result in loss of market share to others who would not.
Despite U.S. cutbacks, global oil supply has continued to grow.
As a result, global oil supplies are expected to hit 93 million barrels per day in 2015, an all-time record.
3. Iran nuclear deal: The finalization of the Iran nuclear deal is expected to result in Iran doubling its oil exports to 2.3 million barrels per day. Bears have been handwringing for months about the effects of an extra one-million-plus barrels of oil hitting the world market.
Indeed, with the budgets of Middle Eastern countries such as Saudi Arabia, Iraq, Iran and Oman predicated on $90 to $100 oil, oil prices at current levels for an extended period could certainly lead to civil unrest.
However, as Robert DeNiro once said, "There’s a flip side to that coin."
Low prices curing low prices?
While the current oil glut is what has grabbed headlines in recent months, the rebalancing of the crude oil market is already well underway. At some point, Economics 101 dictates that low prices will eventually cure low prices. The key evidence of this taking place includes:
