Bucking the Fundamentals, Buying the Rumor

By: Greg Gill / March 17, 2016

 

Yesterday’s statistics were ignored once again. EIA data revealed that Cushing crude inventories had a build of 1.3 million bbls, but new developments regarding the proposed “production freeze” yesterday got the bulls excited. Gains in crude oil yesterday brought WTI back above $39/bbl and Brent above $41/bbl. The rally continues today with WTI up $1.20 to $39.66 as of 11:40 a.m. ET.

Oil prices will typically rise when a certain world event takes places, but it is important to remember that the market also has the tendency to shoot up if there is an “anticipated” world event that shows some bullish sentiment (the old trading adage “buy the rumor, sell the fact). 

Yesterday’s strength on WTI was due to the anticipation of the “freeze meeting” that was recently rescheduled. Twenty oil producing nations (OPEC/non-OPEC) will meet on April 17 in Doha, Qatar. The hope is to find a solution that will once and for all rebalance the oversupplied market. 

Although it is encouraging to see world leaders rally together to try to find a solution, it is imperative to keep in mind that one of the key players (Iran) may not attend the meeting.  If little-to-nothing comes from this meeting, it is likely we could see the bears come back out of the woods.

On another bearish note, the most recent OPEC data shows that its strategy to regain market share is working, but it is happening very slowly. By year-end 2015, OPEC’s market share had increased by only 0.2% to 33.49%.

 If OPEC re-establishes itself at 2008 levels, this could be extremely bearish because there are only a couple ways of achieving this.

  1. Having prolonged sub-$40/bbl oil prices
  2. OPEC increases output even more

The question is, will OPEC be willing to sacrifice revenue to regain market share?

If we take a look back to the timeframe surrounding OPEC’s 2008 meeting, it is evident that OPEC was committed to regaining market share despite lower revenues. Prior to the 2008 meeting, OPEC’s daily revenue was at $2.6 billion while production was at 30.4 mbpd. Saudi Arabia made $820 million with an output level of 9.65 mbpd. Last month, OPEC’s daily revenue fell to $927 million and Saudi revenue was $291 million/day, with production higher at 32.276 mbpd and 10.142 mbpd, respectively.

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Greg Gill

Written by

Greg Gill

I’m passionate about fully understanding my customers’ fuel operations and the fuel markets in which they operate. I want them to view me as their fuel expert. To develop strong, trusting partnerships with customers, I have to provide them with meaningful and timely information to ease the challenges of making smart fuel decisions, allowing them to focus on their core business.


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