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4 Must-Know Reasons Why This Oil Rally Won’t Last

Scorpio

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#1
4 Must-Know Reasons Why This Oil Rally Won’t Last
By Ellen R. Wald, Ph.D.CommoditiesMay 03, 2016 06:43AM ET


Ellen R. Wald, Ph.D.


The price of oil reached a new 2016 high last week - $46. Oil’s steady climb over the past few weeks, coupled with small but continual reductions in U.S. production, has many seeing the light at the end of the tunnel and expecting prices to continue to rise.

However, there are many reasons to doubt the strength and foundation of this oil rally:

1) Rising OPEC Production
At the OPEC/Non-OPEC producers meeting held in Doha, Qatar last month, participants failed to agree on a production ceiling (or freeze). Since then, OPEC production has grown to 32.64 million barrels per day during April. As the hot summer months approach, Saudi Arabia, Kuwait, and other Persian Gulf countries will have to increase their output to meet domestic electricity demand and to continue exporting at current rates. This could lead to historically high production levels over the summer.

2) Slowing Chinese Oil Production
Although China is a net oil importer, the country does produce a significant amount of domestically used crude oil. Indications are that Chinese oil production is declining, which will mean that unless demand also falls, China will be looking to import more oil in the future. China’s major partners are Saudi Arabia, Russia, Kuwait, and Iraq – all of whom are eager to expand their markets in China. Iran is another possible source of oil for China, although the Iranian oil industry is coming back online slowly. When major players like OPEC countries or Russia produce more, the global markets take notice much more so than if China decreases production.

3) Persistence of the Global Oil Glut
Crude oil stockpiles remain at some of the highest recorded levels. The Wall Street Journal reported that 370 million barrels have been put in storage since January 2014. Even with gasoline demand in the United States expected to grow this summer, crude storage levels are so high that it will not be enough to alleviate the glut. Even though oil production in the United States is declining, that decline is not nearly enough to compensate for increases in production elsewhere. For example, U.S. production has been “reducing output by 300,000 barrels since the beginning of the year,” while OPEC production is higher by 30 million barrels per day, just in the month of April. To really make a difference in the global oil glut, American production would have to decline much more significantly.

4) Tenuous U.S. Oil Production
Since December 2014, U.S. crude production has proven remarkably elastic. Part of this has been producers’ ability to cut costs and drill more efficiency, but even more important is the propensity of lenders to keep the lines of credit open. Some of the weaker producers are going bankrupt or selling off assets, but many small shale oil producers are still struggling along. The problem is that the closer oil gets to $50 a barrel, the more likely producers are to open nearly completed wells and produce more oil. Growing U.S. production could, in turn, send prices into a nosedive.

Oil is not likely to head back down into the $25-$30 range, but neither are prices in the $50-$60 appropriate at this point. Perhaps if more lenders revoke credit lines for more U.S. producers or an environmental or geopolitical incident takes out production in some major producing country, oil could temporarily surge. But absent a serious shock to the market. this oil rally is not likely to hold.


http://www.investing.com/analysis/4-reasons-why-this-oil-rally-won’t-last-200127468
 

Goldhedge

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#2
If current price/bbl is the 'norm' it seems to me that when oil was $100 bbl it was totally manipulated there.

Not until shale oil put up a good front did the rug get pulled out from under.

Competition is good for consumers.
 

solarion

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#3
Shale & tar sand oil are only an option when the price of credit is suppressed. Markets are totally dysfunctional at this point...no telling whats what without real price discovery.
 

Scorpio

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#4
I still maintain that without currency interventions and games, oil is fair valued at 60-70 per.

the ride to 120 and above was something other, as well as the drop to the mid 20's

IMO for sure
 

solarion

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#5
Hey didn't the Rockefeller gang of globalists divest themselves of fossil fuel holdings a few years back? ...supposedly due to global cooling/warming/changing/weather/_____ concerns?

Sure looks like a solid call now.
 
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#6
From the OP: "The problem is that the closer oil gets to $50 a barrel, the more likely producers are to open nearly completed wells and produce more oil."

This. Currently there are over 1500 wells in ND alone that have been drilled, but are awaiting higher prices before they are completed.

This "frac-log" will sink any prolonged price recovery.
 

FunnyMoney

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#7
I found the 4 "Must Know" items to be unimpressive from the PhD analyst. Item #2 is at best a wash and the other 3 (even though general consensus correctly agrees with them) simply fall into the realm of "tracking the data" something that any market trader is going to follow even if they're sleep walking through things right now.

In terms of oil stuck in a trading range around these levels, she's very likely right about that, I guess "must know" analysis starts with a course in Oil Basics 101.
 
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