Break out the abacus kiddies, it’s time to play economics with crude
OK, all the hedge funds are out of the oil trade. No, let’s call this like it is; all of the deep-pocketed speculators are out of their bets on the oil market going up. For now. All of the Commitment of Traders numbers are telling us and what they aren’t telling us, plenty of these portfolio managers are. Fini. Done-zo. Over. They don’t want any part of the oil market right now because it’s getting obvious that no matter what OPEC does, it’s not going to be enough. The haters can try to pull in Libya, but that’s like asking Katy Perry if she still has a beef going on with Taylor Swift. We’ve all grown past this thing, it just doesn’t matter. For all that Libya can pump out today, is as much as we’ll care when Libya can’t pump or export tomorrow. And good for the Saudis talking up the idea of keeping oil production cuts in play and “whatever it takes” to make this cut meaningful. You know, “220, 221...whatever it takes.”
So now the debate slides over to the US and our increase in our production. Well, let’s start with that increase in production. For all those that slept through the Newsletter yesterday, the only increase in U.S. oil production since the OPEC action in January was a climb of 500K b/d. Of that, we can pretty much figure that nearly all of that production is coming from shale. So, that means that we’re just piling up more light sweet crude that is not really the favored crude of most of the American refining system. This is another one of those too true to be obvious moments because we’re actually bringing in about 300K more of crude imports this year than we averaged last. Then don’t even get me started on the way we’re bringing in more and more crude from Canada each week. It’s like there’s a Rush/Triumph/Loverboy reunion concert and everyone wants tickets.
Of course, this is only old news for the teeming millions. The big part that I’m bringing in to close the show today kiddies is all of that U.S. production is going to be coming to an end. No, it’s not the WTI under $50 that’s going to stop the show, it’s the rising interest rates that are inevitable at this point and are eyeing a move in June. For those that are not in the know, the U.S. 10-Year-Note has climbed about 10 basis points since last week and they were up a few more yesterday. That’s a sign of confidence from the other big spec macro traders that June is playing the right tune on the Zune. We get another 25bps move up in June and set the stage for another one by the end of the year and it’s goodbye cheap money for all of those U.S. oil producers. We’ve all seen a margin increase for producers on lower operation costs and higher efficiency on better technology, but there’s not that much room to play. Another $250K on another $1mm of credit is going to trim that haircut to some Sinead O’Connor levels. Add another 25bps by the end of the year and WTI under $60 and it’s all hopes and dreams and higher demand for imports. Ah, but this is all on the back of a bigger and better economic recovery. So far, so good and we haven’t even caught a whiff of President Trump’s plan to add more stimulus to the economy outside a tax cut. Keep an eye on the world’s biggest and best economy. Then watch rates take a turn.