Crowd Behavior and Oil Markets
The fundamentals in the oil market are simply horrible and based on them it appears that their oil prices are destined to march lower. However, we need to remember that fundamentals are not forward-looking; they provide a rearview look at the situation. When oil was trading north of $100, every Tom, Dick and Harry was proclaiming higher prices and using fundamentals to justify their nonsense. Now, these so-called experts are taking the opposite stance.
Crude oil Fundamentals
Saudi Arabia, one of the world’s largest producers, is pumping north of 10.6 million barrels a day, and they are refusing to cut supplies. In fact, they have continued to pump more and more oil, contributing to the steep decline in prices.
Russia pumped a record 534 million tons of crude oil in 2016, and the country’s oil and gas condensate production increased by 1.4% year-on-year. Bloomberg noted that Russia’s oil production was poised to challenge its post-soviet record in the last of week of 2015 and surge to 10.86 million barrels per day. On the same token
U.S Crude oil inventories rose more than expected heading towards the last of December 2015; crude oil stockpiles increased by 2.6 million barrels to 487.4 million barrels.
The two charts below from the IEA, illustrate that while demand is expected to decline in 2016, and that supplies are still set to exceed demand.
IEA states that oil demand for 2016 is expected to remain almost unchanged from 2015. In 2015, it stood at 96.43 million barrels per day (Mb/d) and in 2016, it is expected to be 96.49 Mb/d.
The IEA expects supplies to drop from 96.97 Mb/d to 96.88 Mb/d; the IEA is generally notorious for missing its projections. We are not sure that the current projections fully factor in the new supply of Iranian oil set to hit the markets. Furthermore, Russia has stated that they have no intention of cutting down oil supplies and the same holds true for Saudi.
Crowd Behavior and Crude oil prices
Mass psychology states that when the masses are panicking or gloomy that a bottom is not too far in the making. Most experts are sitting in the doom and gloom corner of the room. They expect oil to continue to trading lower, and some have even stated that it could trade down to $10.00. These very same experts were the ones calling for $200-$300 oil prices a few years. Now they are marching to a different drumbeat and when oil bottoms they will change their tune again.
There is also a saying that the cure for low prices is lower prices and vice versa. As the outlook is rather gloomy, we expect oil to bottom in 2016 and then slowly start to trend upwards. Fundamentals provide a rearview look at what is taking place and are useless in offering any actionable data regarding what to expect in the future. It is time to start looking at some of the strongest plays in the sector. Don’ jump in yet, but start to monitor them, the time to buy is near; here are some examples of the strongest plays in this sector. BAK, TOT, XOM, CVX and PZE is a good contrarian play; it’s making a nice comeback.
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