Oil: At A High Point?


No commodity took the 2014 fiscal year on the chin quite like crude oil.  The sticky black energy source lost some thirty percent of its total value last year, a financial vortex that not only wrecked havoc on American and Canadian energy businesses but also created instability on one of the world's largest markets.  The drop in oil prices continued into 2015, furthermore, indicating a longer road to recovery than investors may be willing to stomach.  Yet April saw oil reach new highs on the year, flirting with $70 per barrel and launching gasoline prices back above $2.50 per gallon.  Has oil finally churned back into a bull market, or is the current price climb merely a precursor to more loss?

Between Up and Down

As the world continues to guzzle down petroleum, there's no question that demand for crude oil remains (and will remain for the foreseeable future) quite high.  While the US and EU consumed slightly less crude, with the EU shaving off a million gallons per day compared to its usage from 2008, overall world consumption rose from 91 to 92 million barrels per day.  With oil consumption enjoying consistent market growth, therefore, the finger of blame may be pointed squarely at supply rather than demand.  With the United States taking on all comers to become the world's largest producer of oil at the same time that the greater OPEC collective steadfastly refuses to sit on their supply, customers benefit from a cheap buffet line of oil instead of an expensive one-course meal.  The factors that keep supply high without affecting demand cannot remain in place indefinitely, however.  As oil drops below $50 per gallon, profits vanish and force companies operating on tighter budgets to go belly-up; the latest casualty came in the form of WBH Energy, who filed for bankruptcy in January with assets of only $50 million.  It's not just the smaller companies that are hurting, either.  The BG Group (BG on the London Stock Exchange, trading at £1190) announced they reaped only $240 million in profit during 2014 compared to over one billion in profit the year prior.  Such economic pruning gave oil a reprieve by May, reaching a 2015 high-water mark of $68 per barrel.  Today, crude stands at a crossroads -- we could see more fish creep into the pond again to depreciate prices, while we could also see oil climb on the back of factors like a summer heat wave.

Labor and Energy

One major factor that will cause oil to rise or fall in May and throughout summer will be the release of employment data by the Federal Reserve marking the conclusion of Q1.  The Fed utilizes job figures in order to set the necessary inflation rates, or lack thereof, on US currency.  Oil futures have climbed steadily on speculation that the jobs report doesn't appear as promising as hoped, meaning that oil (and gold) will climb at the expense of the dollar.  With a lower dollar and a better price on oil, furthermore, many more American energy producers will begin to ramp up their production lines.  The Gulf Coast oil rigs in particular will benefit from poor jobs data since they represent the most expensive drilling operations in the country and depend on a razor thin profit threshold to remain active, with a floating rig costing a company around three million dollars per day.  Strong jobs data, a rising dollar, and depressed oil prices, by contrast, could be the knockout to smaller energy concerns. 

Just Lying Around

As oil prices steadily rise, the global stockpiles of energy drop as it becomes more expensive to have spare oil on hand.  The US Department of Energy noted that May saw the first drop in crude stockpiles (down 4 million barrels, or about ten days' worth of oil, from the stockpile of about half a billion barrels) in four months, a timeline that goes hand in hand with crude stocks rising for sixteen straight weeks.  China stockpiled a huge quantity of cheap oil at the end of the 2014 year and into 2015, doubling their strategic reserve to hold around 125 million barrels of oil.  It's expected that the Chinese have done better than hit their stockpile capacity and will import much less oil throughout 2015 than they did in 2014, even as they remain the leading consumer of OPEC oil and the second-largest oil consumers overall.  Oil stockpiles indicate that supply and output are remaining high even as the commodity loses half its value in the span of just six months and as an estimated one million barrels per day represent global oversupply.  That makes oil a unique bet to grow: since major corporations and conglomerates aren't tightening their belts, why should investors do the same?

Where Do We Go Now

In April, Again Capital, a New York based energy hedge fund, issued a memo to shareholders that the rapid gains in oil prices could result in a rapid return to the days of oversupply and recommended that care be taken to understand that oil cannot surge forever.  That's good advice, but it appears short-sighted to believe that oil won't regain more and more of the value it's enjoyed for five years running prior to the price crash.  Investors can't make as much money if they get into oil today as they would have if they had bought in at the commodity's nadir back in December, but oil today is only $20 higher than it was at the lowest point.  There's still a tremendous amount of value left to be regained, especially as summer weather ramps up energy demands and leads to consumption of oversupply or stockpiles or both.

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