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Page added on September 30, 2015

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Bottom of the barrel


Sometimes when you are in the process of setting a long-term bottom in crude oil it gets ugly before you hit the bottom of the barrel.

Yesterday oil prices suffered as global growth fears and a falling U.S. stock-market overshadowed signs of more U.S. oil production destruction. Commodity giant Glencore’s stock fell 29%, and when a stock collapses it raises fears about the entire commodity space, which does not help oil sentiment.

The Wall Street Journal wrote that Glencore is less susceptible to commodity price downturns, but the large debts needed to run a trading house have alarmed investors as the company’s earnings and share price have fallen. Glencore has about $30 billion in net debt, which it says it is trying to reduce by a third to around $20 billion by the end of 2016. The company has scrapped its dividend, issued $2.5 billion equity and is trying to sell $2 billion worth of assets. Glencore’s stock is rising on talk that the firm may be taken private after the precipitous price fall.

Yet, there are more signs that U.S. oil output is continuing to fall much faster than many of the bears said was possible. The latest evidence comes from private forecaster Genscape that reported that oil stocks in Cushing, Okla.–the CME Group’s delivery point–fell by more than 1 million barrels last week. We were one of the first to predict that U.S. oil output would peak in April and we are also correct in predicting that U.S. oil output should fall over a million barrels a day from its peak to 8.6 million barrels before the end of the year.

India also cut interest rates, which is always a net positive for oil prices. The Reserve Bank of India (RBI) cut its repo rate to commercial banks to 6.75% from 7.25%, more than the 7% that was expected. They are worried about a slowing global economy caused the commodity consumer to juice up its demand expectations.

Even OPEC is taking notice of the U.S. output drop, and they realize that if demand picks up they may have to find a way to raise production, assuming they have any spare capacity to speak of. Iran, of course, is expected to come back on line so a cutback is going to be a bit complicated.

The Associated Press is reporting that, “Republican presidential candidate Jeb Bush says that ending the ban on U.S. oil exports and easing restrictions on natural gas exports will unleash the nation’s economy. The former Florida governor is calling for ending the 1970s-era law prohibiting the U.S. from exporting crude oil at a time when domestic petroleum production has grown rapidly over the past decade. Calling it a ‘once-in-a-generation opportunity,'”

Bush said in a piece posted today on the website Medium that reversing the export ban and widening U.S. natural gas markets would benefit U.S. consumers with lower energy costs, create a new manufacturing sector and generally fuel more rapid growth in the nation’s economy.

The Market looks its worst at the bottom of the barrel. Use market weakness to buy long dated calls!

resource investor

11 Comments on "Bottom of the barrel"

  1. BC on Wed, 30th Sep 2015 7:25 pm 

    Increasing exports of oil and gas will only hasten the depletion regime per capita and mean even less costlier, lower-quality oil that we can’t profitably extract that will be available per capita in the future, and thus even slower growth, or faster contraction, of real GDP per capita.

    Good grief.

  2. Ted Wilson on Wed, 30th Sep 2015 7:46 pm 

    US oil production is below 9.1 million b/d last week. Its going down steadily. So is the Canadian production.

    Saudi’s are showing who they are when it comes to producing at lower cost.

  3. makati1 on Wed, 30th Sep 2015 9:08 pm 

    Sorry, but we are now digging the oily sand that is under the barrel. The scraping in the barrel was over long ago.

  4. jjhman on Wed, 30th Sep 2015 9:33 pm 

    Perhaps there is some logic in a country that imports, what?, about half of it’s petroleum will somehow become more wealthy by exporting oil. The only benifit that makes sense to me is that it will ultimately raise the price of oil in the US with virtually no effect on the international markets. This will have the effect of reducing demand in the US and enriching those producers who are now restrained by the fact that they have a limited market.
    How this can sold the the average American consumer baffles me unless they have convinced consumers that we are producing an excess over what we are consuming.

  5. BC on Wed, 30th Sep 2015 10:07 pm 

    jjhman, that’s an interesting and clever speculation. Are you working for the Pentagon and Big Oilers? 😀

    “Drill, baby, drill!” is meant to imply that we suck every conceivable barrel of whatever the market will take at whatever price as quickly as we can get it out of the Earth’s crust, no matter how much we have to borrow, at what cost, or how many “invesuckers” take it in the shorts and hind quarters in the meantime, as we take the cash and head for the Caymans, Channels, Isle of Man, and any and all points in between.

    Goddamn Sucks, Bernie Madoff (with the cash), and Ponzi would be envious of these swindlers.

  6. Pennsyguy on Wed, 30th Sep 2015 11:42 pm 

    As I’ve said before, I have met several well-educated(at least on paper)Americans who think that fracking has assured the U. S. energy future for the next century. The main stream media told them so, and has done a double-plus-good job of indoctrination. Lots of people will be irked when they realize the extent of the lies that they have swallowed. If I was in charge when that happens, I’d point to scapegoats and extend the football season.

  7. Davy on Thu, 1st Oct 2015 7:01 am 

    BC, “drill baby drill” is not such a bad thing when you consider we have no plan B let alone common awareness of a coming descent. My thinking is keep the ship afloat until we get some lifeboats in the water. Although a part of me says let the drop begin so we maybe have a softer landing. That analogy is let the ship sink so the water extinguishes the flames on our burning ship. If we would have let this happen in 08 we may have been more adjusted now. These are the questions one askes when peering into the abyss.

  8. marko on Thu, 1st Oct 2015 9:19 am 

    Davy I dont agree plan B is PRINT BABY PRINT and the plan C is WAR against foreign and domestic enemies of the states. This imply to every strong state on Earth not only USA

  9. Bob Owens on Thu, 1st Oct 2015 2:50 pm 

    HUH? The Author starts off by showing us just how bad things have gotten. Then he quotes JEB about allowing Exports to juice the economy. He finishes by saying BUY! BUY! BUY! I say: HUH?

  10. makati1 on Thu, 1st Oct 2015 10:58 pm 

    Marko, you have a good picture of the coming events, I think.

  11. marko on Fri, 2nd Oct 2015 7:47 am 

    Thank you makati.The timing is what is bothering me the most

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