Crude: What it is, what it was and what it shall be
Lucky for me, I was able to get Miss Cleo’s crystal ball at her estate sale. When I take the time to dial into my psychic hotline, there’s a lot for me to see. Hit up yesterday to put into context the upcoming OPEC meeting and President Trump’s vision of the SPR sale in his new budget, I have many thoughts. Of course, the teeming millions know that what I’m about to throw down will be coming from outside the box. It will be mocked or even laughed at, but in the end, it will be revered. OK, probably more likely to be forgotten, but I have faith in the faithful.
This isn’t going to need any singled out explanation because they are well connected. The idea about selling U.S. SPR oil into this market is something that most might think is not only bearish because of the oversupply, but a bit of needling of OPEC. On the contrary, it’s the farthest from that. It’s actually quite brilliant. The idea that the U.S. is going to sell SPR crude (or even announce it) right when OPEC is ready to extend their production cuts is smart. OPEC’s cuts will push oil prices higher (see rally past few days), but it now puts a cap on it getting too far away ($55-$58 WTI). OPEC can live with that for the next 9 months. Where OPEC really gets the payback for playing along is in the months/years following this cut. By then, the U.S. will be working with about 50% less of a safety net in crude oil (and gasoline). That will mean that any type of production hiccup will adversely affect the market but in a 2008 kind of way. With only half of the SPR around to help us out, commercial crude will only follow the rules of a free market; higher demand, demands higher prices.
I’ll tell everyone what really struck me as uber-bullish yesterday in that budget proposal; economic growth. The way President Trump’s plan is being laid out is that we’re looking at 3% growth over the next few years. Not that I don’t think it’s possible, I actually think it could. The thing here is that if we do see relative growth in the U.S. at a 3% clip, demand for oil and fuel is going to reflect that growth. Don’t let those pesky “demand peak” theorists get under your aluminum foil hats. Demand has plenty of room to grow and a stronger economy is the perfect catalyst to make that a reality. OK, we’re not going to stop with America. See, the way these things work in modern economic theory is that if the U.S. is doing well, the rest of the world kinda does pretty well too. Now we’re talking about increasing demand for oil on a global scale and considering the lack of investment into production for conventional crude the past few years, that’s going to get ugly. Then there’s the capacity constraint around the U.S. refining system that is finding a way this year to run close to capacity without being in the heart of Summer. It’s been a boon for U.S. refiners to handle not only domestic demand but also supply a higher export demand too. If all of that increases across the board, it’s not clear where we’re going to see the production of those refined products supplying the market. We all want to see better growth, better economies, better spending. Now we’ll see if we can handle the truth.