Ty’s Take For the Week Ending 7-29-16

Oil Fell This week and fell hard. But why? As we discussed last week, I remain bullish on the price of oil over the long-term as I believe supply and demand will converge sooner rather than later. In fact, during their earnings call the CEO of Anadarko Al Walker stated that he foresees sustained oil prices of $60/bbl for 2017, perhaps reaching that price point by Fourth Quarter 2016. And as we discussed in our earlier article Wood MacKenzie reported that 56 of the biggest oil and gas companies are cash flow neutral at U.S. $50.00 per barrel.

So, then why is oil and gas falling? First and foremost, I think it has to do with the gasoline inventories remaining so high. The announcement that refiners are moving to winter blend this early is a bit troubling. In addition, hedge funds are driving the market down by taking short positions. Overall though, oil may not be reacting as much as their negative bet would indicate. I think the market is also anticipating the typical refinery maintenance that usually starts in August and ends in October. This means that crude stockpiles may start building again and that creates some jitters in the market. Additionally, Goldman Sachs said $40-50 a barrel oil is here to stay until mid-2017. While the World Bank raised its outlook for the average 2016 price from $41 per barrel to $43 a barrel this week, it also indicated it believes oil prices will end the year low compared to current levels. These factors were negative for the price of oil.

Nevertheless, I still anticipate the convergence of the supply and demand curves. Saudi Arabia has some incentive to decrease supply ahead of the Aramco IPO. And even if they do not, a continued modest increase in demand should eat away the delta. While we may not see substantial recovery until mid next year, I do believe we will start seeing some recovery. Interestingly, this mimics the last downturn when oil did a triple dip before it started rising and continued rising. But the phrase that dominated last week, and seems to continue this week is “middle for longer”. I tend to agree with the CEOs who all say this is going to be a U shaped recovery that is going to take some time and be slow to build. I do find it a bit disconcerting that Baker Hughes did not call bottom and neither did NOV. Hang in there, we will keep you posted!

By: Ty Chapman

Five Star Metals, Inc.

Raising the Bar for Customer Service and Quality

Twitter: @FSM_TY

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