Oil prices have shot up around 10% over the last month. Of course, this spike occurred following a crash of epic proportions (oil has fallen over 50% from its $107 high in June 2014 to just over $52 today). The question now is what’s next?
Here at Hedgeye, we would suggest that the next move may be lower based on the reasons outlined below.
1) U.S. Production At 32-Year High - As measured by the Energy Information Administration, U.S. energy weekly production is at an almost 32+ year high at 9.2 million barrels per day (bbl/d).
2) U.S. Weekly Production Growing Over 10% - Not only is production at a multi-decade high, it is also growing double digits year-on-year. Specifically, in the week of February 6th 2015, production was at 9.2 million bbl/d versus 8.1 in the week of February 6th 2014. That’s 13.4% y-o-y.
3) U.S. Production Is Likely To Grow Into 2016 - The EIA estimates that in 2016 U.S. oil production will eclipse 9.6 million b/d. This would result in the highest U.S. production since 1970, or more than 45 years.
4) Global Growth Is Muted (At Best) – Oil consumption is obviously closely correlated to economic growth. Globally, economic growth is faltering – it is slowing in China, negative in Japan, flattish in Europe, and likely to slow in the United States this year.
5) Saudi Arabia Can Withstand Sustained Lower Prices – The world’s largest oil producer in theory needs $90 oil to fund its budget, but has more than $726 billion in foreign reserves it can use to fund its budget during periods of sustained lower prices.
6) Field Economics May Be Lower Than Many Think – According to a recent report by Wood Mackenzie, a survey of 2,222 oil fields globally found that only 1.6% would have negative cash flow at $40 per barrel.
7) Oil Dependent Nations Have No Choice But To Produce – In major oil producing and dependent countries like Russia, the government may have no choice but to produce at lower prices. Roughly 42% of Russian government outlays are financed by oil exports. In other words, to cut production in an environment where prices have collapsed would be economic suicide for the Russian government.
8) Global Demand Outlook Continues To Fall – OPEC’s most recent forecast for demand outlook suggested that global oil demand will hit a 12-year low in in 2017. This is more than 600,000 barrels less than it forecast a year ago for 2017 demand.
9) IEA Follows OPEC- Consistent with point above, the International Energy Agency has also dropped its oil outlook consistently over the last year. The IEA has dropped its forecast four times in the last year. It now sees a surplus of approximately 400,000 barrels in 2015.
10) U.S. Storage Is At A Tipping Point – It is expected that Cushing and other U.S. repositories will be completely full by the April /May 2015 timeframe. In aggregate, U.S. storage is at an 80-year high of 417.9 million barrels, which is up 15% y-o-y.
11) OECD Storage Also Highest On Record - OECD commercial inventories totaled 2,741 million barrels at the end of 2014, which was the highest level on record and equivalent to roughly 58 days of consumption. The EIA projects these inventories to rise in 2015.
12) OPEC Spare Capacity Expected To Increase – According to the EIA, OPEC surplus crude oil production capacity, which is concentrated in Saudi Arabia, is expected to increase to an annual average of 2.3 million bbl/d in 2015 and 2.7 million bbl/d in 2016, after averaging about 2.0 million bbl/d in 2014.
So, what’s the bull case on the price of oil? Email your thesis to djones@hedgeye.com.
