Crazy bearish on crude

February 10, 2015 08:24 AM

As crude oil prices start to stabilize there is a growing divergence of opinion on where we go next. Citi Group has gone crazy bearish calling for oil to trade on the $20 handle. Energy Aspects, a respected market letter, is also calling for a test of the lows yet OPEC and the International Energy Agency (IEA) seem to suggest that we have bottomed. In fact, the IEA says that we are near a bottom and a recovery is "inevitable." Who is right? We will find out.

The IEA says a wave of spending cuts by oil producers and a sharp decline in the number of rigs drilling for crude in the United States likely will slow the nation's oil-output growth, spurring a rebound in prices. OPEC agrees as they cut their estimate of global oil production by 400,000 barrels per day and increased their demand estimate. It seems that OPEC is also seeing that the massive cuts in capital spending and falling rig counts should help stabilize the market. The IEA says oil should stay around $55 a barrel. They say the U.S. Shale oil output "party" should continue to 2020. The United States will remain the world's top source of oil supply growth up to 2020, even after the recent collapse in prices, defying expectations of a more dramatic slowdown in shale growth. So Shale oil isn't going away. Is OPEC?

Oil products are also easing as labor negotiations between the United Steelworkers and Royal Dutch Shell resume giving hope to a resolution of the strike. Product prices on the futures markets seemed to garner some support from the fact that the Strike spread to two more refineries. BP's Whiting, Indiana, refinery and the Husky Energy in Toledo, Ohio, brought the total number of refineries on strike to 11, which at this point accounts for about 13% of total U.S. oil refining capacity. BP Sent out this letter to their customers. 

Dear BP Customer,

Friday afternoon, we received notices that the local United Steelworkers Union (USW) at the Toledo (BP-Husky) refinery and at the BP Whiting refinery will go on strike at 12:00 a.m., Sunday, Feb. 8.  BP is disappointed that USW leadership decided to call a strike.  BP has trained replacement workers comprised of current and former BP employees to operate the refinery for the duration of this strike. Presently, the refineries are operating normally. Safe and compliant operations will remain our highest priority. 

We hope these strikes will be as short as possible and for workers to return with a contract that ensures sustainable and competitive operations on the sites, as well as good wages. We feel our proposals were fair and in line with what many of our competitors already have in their agreements. We will keep you updated as the situation progresses. Should you have any questions regarding this letter, please contact your BP sales representative directly. Thank you for continued business with BP. 

Who is the biggest loser on lower energy prices? Dow Jones reports that oil production from Russia faces a perfect storm of collapsing prices, international sanctions, and currency depreciation, says IEA Executive Director Maria van der Hoeven. Russia will likely emerge as the industry's top loser, with output set to contract by 560,000 barrels per day over the period 2014 to 2020, she tells the International Petroleum week forum in London. 


About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.