Topic: Energy — Oil
Jun. 10 2015, 1:51 PM ET - by VF member bz1516 (2482 )

Another week of record crude production, up 26,000 bbls to 9.61mm bbls. That’s up about 1.2mm bbls from last year, when we were running a $1mm bbl/d surplus of supply over demand.

Storage was down ~7mm bbls this week. Over the last 6 weeks it has been down 20mm bbls to the current 470mm bbls. While this sounds bullish, put in context with last year’s 13mm bbl decline during the same period, it is only down slightly, within the normal fluctuation range. The point here is last year the decline preceded a precipitous drop in oil prices. So decline is not an indication of anything by itself. As a matter of fact last year oil dropped from over $100 to $45 while storage was decreasing. Storage only plays a critical role when it exceeds capacity. Otherwise it is not a good predictor of price movement.

The production numbers are much more reliable than the storage numbers. Before anyone brings up production being a model, that is only partially correct. The actual numbers are known two months later and the model is constantly updated to reflect unanticipated changes. It works the same way for employment data and other economic series.

Here is how I look at it. We know that if the US was oversupplied by ~1mm bbls last year and we have added 1.2mm bbls this year we are still probably running an oversupply of over 1mm bbls now. That is why I and many others expect another price drop in oil. The GS price outlook looks as good as any.

One reason output may be more buoyant than anticipated a few months ago is the price of oi has been hanging near $60 vs an under $50 price when a lot of forecasts were made. There is just a lot more drilling and completion that is profitable at $60 than below $50 with a negative outlook.

At $60 my preferred oil play, sand companies look attractive. At $45 they don’t. That’s why I’m keeping my powder dry. Waiting to see what will happen in July with production and ultimately crude pricing.

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