On Oil Prices
This week marks yet another wild ride as prices fluctuated dramatically. Concerns on the demand side, and the possibility of a U.S. recession and a global slow down, thereby leading to less demand for oil, weighed heavily on investors minds. The news is bad enough that Deutsche Bank now gives the U.S. a 60% likelihood of entering a recession in the next twelve months, the highest probability since the great recession. (http://fortune.com/2016/07/06/deutsche-bank-recession/)
However, the wild ride didn’t stop there. The API data hit investors hard as it showed a rather dramatic, and quite unexpected increase in U.S. Inventories after most analysts predicted a decrease.
But on the positive side, markets did react well to the news out of OPEC and EIA. Writing their first report for 2017 OPEC articulated their belief that oil markets were stabilizing and supply and demand curves were converging. Similarly, EIA weighed in stating that they saw the market headed toward balance (read http://www.fsmetals.com/about-us/newsletters/more-good-news-on-long-term-outlook-for-oil-prices for more details). We also got a little bit of help from our British friends after the Bank of England decidedly unexpectedly to leave UK interest rates unchanged in the wake of the historic vote – thereby weakening the U.S. dollar.
Like most in the industry, I expected the API data to show a nice inventory draw. In fact, I would have predicted a draw of well over two million barrels, possibly even over 3 million barrels, given where we are in the summer driving season. But per last weeks note, there might be some indications refineries are cutting throughput thereby reducing demand for oil.
Overall though, I think we all need to take the long view. While OPEC and the EIA are certainly capable of being wrong, their data tends to be strong. Their timing may be off, and World circumstances may change at the blink of an eye thereby affecting the supply side or the demand side. What we do see is more and more consensus that we are heading towards recovery. The question is when. The more inventory we have, the harder that question is to answer because the further out from a recovery we are.
The article this week that I think is so important for many of our customers is on equipment standardization ) http://www.fsmetals.com/about-us/newsletters/oil-field-standardization-a-pipe-dream-or-reality). I by no means think this will happen overnight. Rather, I think it will be a slow process. And frankly, in my opinion, the slope of the recovery (long slow recovery vs. the whirlwind we historically experience) will dictate how important to our business this push by Big Oil is. Nevertheless, I think we all need to be aware the push is happening and to monitor it. The implications are huge for the entire supply chain: more standardized parts potentially means greater ability to mass produce over long lead times. It implies that we all need to look for continuing ways to do what we do more efficiently to be the quality and cost leader. Standardization will lead to greater competition on a more worldwide level because of the ability to operate with longer lead times. But it may also open opportunity for smaller competitors who can enter the marketplace with greater efficiency because of lower overhead. So while it creates risk for some, it may generate opportunity for the prudent business owner operating ahead of the curve.
Five Star Metals, Inc.
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