Ty’s Take for The Week of July 18-23, 2016

What was interesting this week was the market’s overall non-reaction to some news but overreaction (in my opinion) to other news. WTI opened at $46.12 and closed at $45.24 on Monday. By lunch Thursday it was around $45.00 per barrel. This is despite news reports over the weekend of a purported coup in Turkey, a NATO member. Granted, that issue had been largely resolved before American markets opened, but even Brent failed to see a significant change. While Turkey may be low on reserves (estimated as of January 01, 2015 as 296 million barrels), it serves as a central hub for distribution.

In addition, markets moved relatively little on the inventory data. Perhaps that has more to do with the fact that the news was, at best, bittersweet. Yes, there was a higher than expected inventory draw for crude oil; but that was tempered by the larger than expected build for gasoline. The U.S. Dollar Index opened at 96.59 and, as of lunch on Thursday, was at 97.00, thereby indicating the dollar is gaining strength against a basket of foreign currencies. Because of the current oversupply, it will be very difficult for higher oil prices to find support if the U.S. Dollar strengthens.

Yet, as of this week, I remain bullish on the price of oil. This EIA chart shows it all:

To see the chart and other data, click here: https://www.eia.gov/forecasts/steo/report/global_oil.cfm

What I found extremely positive this week for our Industry was the consensus amoungst major OEM CEOs that we have reached bottom or are reaching bottom. If you read the article this week on earnings, and the forward looking statements contained therein, it seems we have some consensus with Halliburton outright saying we are turning, and Schlumberger appearing to concur – so much so that they are publicly announcing their intent to renegotiate pricing concessions given during the downturn.   The CEO of FMC basically said that prices cannot stay depressed given the reduction in CAPEX and thus pricing will correct and rig counts will rise as cash flows and confidence improves. GE was a bit harder to understand – but if I understand their point correctly, they believe they will receive orders in the Second Half of the Year that will build backlog for 2017.

Additionally, while CAPEX issues concern me, as discussed in an earlier article, I view those as overall positive. Notice the convergence of supply and demand later this year according to the EIA. All of this tells me that we should see a positive upturn if the market continues to correct itself. And I still remain of the opinion that markets might be overcorrecting. Unfortunately, current inventories, and in particular the build in gasoline inventories (especially when coupled with a strengthening U.S. Dollar), continued to bog down the price of oil. This most negative aspect I saw this week was the market’s reaction (in my opinion overreaction). Let’s hope everyone takes out their cars and drives a long way for vacation this summer.

As always, please feel free to email me your comments and thoughts. I would love to hear from all of you.

Ty Chapman
Twitter: @FSM_Ty

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