$85 or Bottom!
Ok, I know it was just two weeks ago when I wrote $100 or go bust and last Friday when I wrote $90 or bust, but now I am saying that crude could be ending its slide. That is as long as $85 holds. You see it was just three weeks ago when oil was solidly above $100 a barrel. Many felt that $100 a barrel would hold, yet as I wrote on May 4, “The bullish oil price scenarios are giving way to what seems to be ever mounting supply. … so we have growing odds of a continuing price collapse.”
And when $100 fell, I wrote, “ Ok, I know it was just last Friday when I wrote “$100 or Go Bust” but because so many oil bulls expressed disbelief that oil could actually stay below $100, I should warn those people that they should stop worrying about the break below $100 and start worrying about whether $90 can hold. The West Texas Intermediate oil contract is giving way to a host of global economic worries and the weight of ever mounting supply. Yes, I know last week I wrote the bullish oil price scenarios are giving way to what seems to be ever mounting supply and that lowered demand expectations and so we have growing odds of a continuing price collapse but when you are right you are right. While oil seemed to hold $95 yesterday the fundamental outlook continues to look heavier and perhaps even heavier than it did just one week ago.
Of course $90 did fall because not only did we see US oil supply hit the highest level since 1990, again we heard from OPEC and the International Energy Agency that oil production is far exceeding demand. According to the IEA OPEC is producing 31.44 million barrels a day led by Saudi Arabia which is pumping out the most oil in about 30 years.
I spoke about the impending drop and said what we were seeing was a major unwinding of the Iranian war premium. Not only is the risk of war less likely, the market has already replaced Iran’s supply. Increased U.S. and OPEC production as well as Global Strategic Reserves filled to the brim the risk posed by the loss of Iranian oil has been negated. Add to that the UAE's strategic oil pipeline for bypassing the Strait of Hormuz is complete and we are going to see the reversal of the Seaway Pipeline to get oil out of Cushing Oklahoma to the rest of the world is another factor that will pressure price.
Yet now that $90 has fallen it is very possible that this run to the downside should slow. Technically speaking a test of just below $90 was in the cards and it is very like that oil has hit its value zone. With Iran talks being kicked again down the road until June in Moscow, and refiners getting to ramp up with better margins we should find comfort in a range from $89 to $95.
Yet what could send crude tanking is a pullout of Greece from the Eurozone. That would more than likely take us below $85 and open the door for a potential $30 drop. Yet that is unlikely as the markets have already sent a message to all the leaders in Europe that a messy exit by Greece would lead the global markets into another deflationary death spiral. So whether Greece leaves the EU or not the bottom line is that all realize that they had better be ready with the printing presses. In fact the fear of what may happen may be softening some deeply held political positions.
Bloomberg News reports, "Chancellor Angela Merkel left the door open to a compromise on debt sharing in the Eurozone as Italian Prime Minister Mario Monti said he can help bring Germany round to acting in Europe’s “common good.” Merkel’s veto on allowing Germany to underwrite joint debt issuance in the 17-nation euro region is under fire from her international partners as well as the domestic opposition. While she refused to back joint Eurozone bonds at a Brussels summit on May 23, Germany’s opposition parties wrung a concession from the chancellor on her return to Berlin yesterday to reconsider a separate proposal on common liability for sovereign debt. The blueprint, published in November by Merkel’s council of economic advisers, involves a so-called European redemption fund that would help governments scale back outstanding debt to below 60% of economic output in return for constitutional commitments on economic reform.”
As far as Iran goes, talk is good but AP is reporting, “ Diplomats say the U.N. nuclear agency has found traces of uranium at Iran's underground atomic site enriched to higher than previous levels and closer to what is needed for nuclear weapons. The diplomats say the finding by the International Atomic Energy Agency does not necessarily mean that Iran is secretly raising its enrichment threshold. They say the traces could be left during startup of enriching centrifuges until the desired level is reached. That would be a technical glitch only. But they say the agency is investigating the find because the higher the level of enrichment, the easier it is to turn uranium into nuclear warhead material. The diplomats demanded anonymity from the Associated Press because their information is confidential. They all follow the IAEA's monitoring of Iran's nuclear program.” Stay Tuned to another reason why oil may be near a bottom.