Sunday, April 24, 2016

Oil prices have bottomed and we will be higher at year end

Some analysts think we will be at $85 a barrel by year end.



The rig count continues lower and so does production in the US. The fact that no one is really talking about is that gasoline demand is entering its seasonal sweet spot and we will begin to see inventories of crude oil come down. The low prices cure low prices mantra does in fact work.

I was early last year in my call to get into oil stocks and I got burned. However, with demand up and supply trending down I have been slowly accumulating oil stocks. In this vein I mentioned EOG Resources last week.

What is interesting to watch is the scoffing by the CNBC host. That is a great contrary indicator. Those shills have never been right on anything ever. Anytime you can get on the other side of the canoe from no nothings you are probably thinking correctly.

At the bottom of a market there is so much pessimism that no one thinks things can turn around. I have removed the emotion because I understand how the oil market works. Oil is the lifeblood of civilization and without oil everything will grind to a halt. There has been a low price environment for a couple of years therefore capital investment has been cut back massively. This is simple to understand as no one is going to increase production at a loss.

Conversely demand is relentless as the frontier and emerging economies urbanize and use more oil per person. Depletion is also not mentioned very often. The average depletion rate each and every year is around  6%. With almost 96 million barrels of daily demand the industry must replace around 5 million barrels of production every year. That requires hundreds of billions of dollars of continued investment. That has not happened and now we will see the result of that under investment, higher prices.





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