We asked traders if crude is riding the bull

June 2, 2015 02:21 PM

Carl Larry @oiloutlooks

I had a friend once relay some great philosophy to me, “You are where you are supposed to be.”  Herein I believe is where oil lies.

I wouldn’t say we oversold the market, but we did overhype the fall to where we are. It’s a lot like The Bachelorette—it all seems good leading up to the goal, but once you get there, it’s likely it won’t last. We’re busy trying to figure out what crude oil is worth when supply is high and demand is a lot higher. We’ve entered into this way of thinking where U.S. WTI is our crude and Brent crude is their crude. The two are now independent of each other and so are the fundamentals surrounding it.

We should see WTI prices continue to climb as we see more consistent draws in what’s shaping up to be a record refining season. We’re also soon going to see the fallacy of oil production maintained at $60. The falling rig count and a lack of credit as hedges expire will take a bigger toll than most are thinking. We’re heading back to $70, but that’s still not going to be enough as we will need WTI above $80 to leave enough room in case we fall once again.

For the Econo-heads out there that are trying to figure out break even in U.S. oil production, don’t forget to take into account the eventual rate hike and the higher cost of credit. Credit may be easier, but it’s going to be hard to find lenders that are willing to loan out money unless the curve can yield a lot more than $70. Back in 2011-2014 banks were tight with credit, but most hedges were put on when the curve was an accommodating $90 or more (2011-2014 average WTI $95…2015 avg so far $51).

Carl Larry is a director and business development consultant for oil and gas at Frost & Sullivan. He provides daily oil market guesstimates with a dose of pop culture.

Image via flickr

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