OIL PRODUCTION 2016

You know what they say about death and taxes – you cannot avoid them.    Add one more  -  “oil and gas production declines”.

Oil production in the US has been holding steady – stubbornly – this past year….. until the last month.

This could be the start of the “house top drop” that we all know will eventually happen.   Down 133k in one month.   On an

annualized basis – that’s 1.5MM down.   We don’t need 1.5MM in 2016  -  just a drop in US by 750k would firm up oil into the +50’s.

The ramp up in Dec to Jan may be the last gasp effort for the shale players to stay in business.  The drop to below $30 may

have finally started the decline we have been waiting for. 

Buckle up – it could be a wild ride.

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OIL PRICE, WHERE IS IT GOING?

OIL PRICE GOING INTO 2016

The price of oil has decoupled a bit from the dollar.  Not on the long term correlation – one year or more – but on the shorter term.   The dollar wants to find out what it will do when the Fed raises rates tomorrow by ¼ point.

Oil is trying to find a bottom – and I think that bottom may be in.  $32 was the long term bottom from the financial crisis, and we tried to test that low price this week.  The test was a failure – and I think that it was the big capitulation down move.  If oil had gone below $32, it would have opened the door for a lower low in the 20’s.

The technical guys have now given way to the fundamental traders in the oil pits. For the last few months, the story in oil has been how stubbornly the US oil production has held up.  This has allowed the technical traders to move oil prices.   It may be time for the fundamentals to take over.

The truth is that at the beginning of 2015, non OPEC production was increasing at an annual rate of 2.2 million barrels per day.   Now, that increase is only 0.3  million barrels per day.  Not exactly balance, but moving in the right direction.   The fundamental traders don’t need immediate relief – they just want to see the numbers moving in the right direction.  That’s what will give us a bottom – and it just may be here.

The chart below shows how oil prices have moved in three down-moves, and each successive move has been smaller than the previous.  The third time may be the charm.

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OIL VS DOLLAR UPDATE – MAY 15, 2015

The chart of the dollar and oil continue to move in opposite directions.

The market for the US Dollar is far bigger than the oil market. Therefore,we believe that the dollar dog is wagging the oil tail.  It is the dollar that is determining the direction for oil at this time.

Just as in November - when the dollar was in ascent and the Saudi’s talked the price of oil into a free fall – the same thing can happen now in the opposite
direction.

With the dollar in a decline mode, if there is an outside reason for oil to spike – this spike can get exaggerated to the upside.

What are the possible outside reasons for oil to spike –

1) Continued instability in the middle ease.
2) A sharp decline in US production month over month.
3) Opec agreeing to  maintain quotas as world demand continues to increase.
4) A surprise increase in the global economy

We don’t know if any of these things will happen, but it seems that there
are a lot of things that can happen to drive oil higher.

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OIL PRICE UPDATE  -  JANUARY 13, 2015

This past Thanksgiving, the Saudi’s announced that they would not support higher
oil prices by cutting OPEC production.  The bottom fell out of the market the next
day.   They announced this action on the Thursday of Thanksgiving – when
the US markets would be closed.  Wow….quite the coincidence.    I think not.

With a 900B sovereign wealth fund, they shorted oil in the futures and options markets
and in essence, purchased a floor for their production for a period of time.  And, drove
the price further down with their huge shorting action.

Ok, so the bottom fell out of the price of oil after the Saudi announcement in November.
But, the dollar was rising anyway, so any additional influence on the price of oil would have
a double effect on the price drop.   That’s  what happened – oil went into a “parabolic”
drop with the Saudi announcement at a time when the dollar was already in a steep rise.

There is usually only one end to parabolic rises or drops – a correction to the mean.  We
maintain that a parabolic drop is better in the long run than a slow bleed down in prices.
Prices usually rebound from the parabolic drop and stabilize along longer term trend lines.

So, what does this mean for the price of oil?  When can we expect a bottom?
The dollar has just gone through a possible “blow off top” from 90 to 92.  The dollar
is taking a short breather right now and may consolidate here for a while.

The dollar will take another leap after this consolidation – the direction of that leap
will tell us where oil is headed.

Stay tuned……………..

Oh, and Happy New Year to all the American Oilmen out there!

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WTI vs USD

The two charts included here show the US Dollar and the DEC 14 WTI

Crude price for the last twelve months.

Do you see anything interesting when you compare these two charts?

Pretty much mirror images of each other, right?

In July of 2014, the US imposed the third and final round of sanctions on

Russia.  These biting sanctions were heavily imposed on the Russian

money making machine – its oil and gas sector.

Without lower energy prices, these sanctions could not have an impact.

How can the US reduce oil prices without directly intervening in the market?

The answer is by strengthening the US currency.   A stronger dollar results

in lower oil prices. 

So, the question on everyone’s mind is this  -  how low can oil go?

The real question should be this  -  how high can the dollar go?

Stay tuned for an attempt to answer the second question.

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(charts from marketwatcy.com)

Just a short follow up to the most recent Corner  -  see the following link:        

Add caption

http://www.nytimes.com/2014/06/17/world/europe/russia-gazprom-increases-pressure-on-ukraine-in-gas-dispute.html?_r=1

We will be paying the tab……………………….

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