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Leonard Brecken

Leonard Brecken

Leonard is a former portfolio manager and principal at Brecken Capital LLC, a hedge fund focused on domestic equities. You can reach Leonard on Twitter.

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The Oil Glut is Not Real

The Oil Glut is Not Real

As it appears GDP will be seasonally adjusted again, I find myself wondering just one thing: why?

Earlier GDP figures showed the US economy on the brink of recession for the first two quarters of this year. Now, with more fudging going on, who knows what it will show. The government appears to be following the Hollywood mantra: if you can bend perception enough, it will become reality. Look no further than the Federal Reserve, which continues to raise expectations of higher interest rates in the second half of this year, in hopes of inducing faster growth. Related: Is This The Efficiency Breakthrough Solar Has Been Waiting For?

Of course, the age of propaganda is now upon us; where perception trumps the truth, until that is, the house of cards burns and falls, which it always does. The US consumer responded to lower gas prices not by spending but by saving, despite predictions from investment banks and the Fed. They saw through the ruse and continue to feel the effects of 6 years of Keynesian money printing where the standard of living is falling. Inflation, while abated short term, won’t stay low forever. Nor will gas prices.

Goldman Sachs (GS) continued its streak of bearish calls on oil right at a time when the dollar took off (just by coincidence), based on the notion that $60 oil was good enough to increase drilling activity. That too will prove to be dead wrong just like every other piece of propaganda spewed from that bank. After hearing most of the major E&P earnings calls, I did not come away with any impression that the magic price to increase capital expenditures was $60 per barrel, or even $70 for that matter.

I could be wrong, and may have missed something, but what I heard was merely that one or two firms, when asked at what price they would start adding rigs, responded by saying roughly around $70 per barrel. But they did not say that the spigot would be turned on by a huge amount. The market appears to buy into the perception that supply greatly exceeds demand. But I disagree with that analysis completely.

Capital spending was, lo and behold, also dramatically revised higher in previous months, fully consistent with the pending “revised” quarterly GDP data for the first half of this year. With such blatant data manipulation going on, why shouldn’t we question the extent of stated “glut” in oil? After all, as stated here before almost every cry for this “glut,” – from Cushing overflowing to production increasing by 900,000 barrels per day in the US – turned out to be wrong. Related: A New Giant Among Oil Traders

This is why prices have recovered from lows, as the end of the world for oil never came. Production has flattened, and is now poised to fall, while inventories are declining. This is the opposite of what was perceived months ago.

The longer perception is distorted to create a false reality, the worse things will get in the end. We saw this before in 1999/2000 with the internet bubble and in 2008/2009 with the housing bubble, and it will not end well. In equity bubbles, false realities can last for longer, which we are seeing now in other assets. In commodities it’s harder because they are physical, are consumed and, eventually, will be measured correctly. I have maintained that the supply/demand imbalance won’t be nearly as great as portrayed as numbers get revised.

Even the US consumer sees through this. According to Goldman Sachs’ own retail sales statistics for the week ending on May 23 sales growth remained subdued at 1.8% pace. The rig count has not increased even with oil at the $60 level. It won’t increase for some time and when that reality sets in, the numbers will no longer be fudged as the supply of oil here in the US will dry up as existing wells deplete. What will result is a snap back to prices above the normalized price of $70 and that won’t be pretty for the US consumer. Related: Oil Still At Risk Of Geopolitical Turmoil

If producers are dumb enough to get roped in to turning the spigot on when oil does rise then, once again, prices won’t hold. By 2016, I fully expect that low cost oil will be depleted and prices will need to rise to spur more activity as costs rise. In the short term, expect producers to consolidate assets through M&A activity, which will accelerate as we move through 2015.


By Leonard Brecken of Oilprice.com

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  • Karl Yong on May 27 2015 said:
    Take this is into consideration, it just seem perfect timing that we are having oil glut, just as when sanctions and war affecting most of the keep producer, like Russia, Iran and Iraq. US shale came into play in such a big way. Do anyone see the picture?
    I really believe Saudi and the rest of Middle East oil producers are the biggest suckers in this. Typically in view of the above, oil price would sky rocket to USD200 per barrel. If US has so much oil, they can simply stop importing. Yet they remain as the world biggest importer. US had corner itself into a position with our handling of world affair, the only solution is to get Opec into a price war and have them pumping like there is no tomorrow. As it is the only, cheapest and most viable solution, as anyone in oil will know that once the infrastructures are in place for fossil fuel, cost is minimum. The rest of the sources in term of cost of producing is too high, slow and low quality (produced less fuel per barrel).
    Oil Glut? If I am in the position of OPEC and Iran, stop pumping for 3-6 months, see where the oil the oil price, I estimate at least USD 250 to 280 per barrel. For all the failures of Obama, I believe the oil situation creat by US is simply brilliant, except China benefitted most with Russia and Middle East.
  • avenger 426 on May 27 2015 said:
    Oil will not go to 200 to 250 a barrel, that is absurd. High oil equals continued depression. The is no scenario where high oil will spur a recovery or be good for the economy. You oil guys can keep fooling yourselves, but you are the reason that the economy crashed and the world fell into the current denial depression. Until oil goes down and stays down and the world experiences true and meaningful DEFLATION, the depression will continue. Greed does not re-write basic economics.
  • Propaganda Pessimist on May 27 2015 said:
    It intrigues me that readers and investors listen to the likes of US major banking investment firms that come out with shocking new statements only on the most vulnerable days of commodity weakness.
    Listen up folks these investment firms purposely talk the markets down scarring investors to sell and then scoop up the left over pebbles only to make huge profits based on their unlawfully induced propaganda antics.
    Investment firms should be barred from this practice of publically scarring the markets down and held accountable under $$ penalty for making technically unsupported claims.
    Take note of when the next bad news story comes out from JPM or GS – it won’t be on the profit taking upside!
  • Mike Dedmonton on May 27 2015 said:

    Please don't worry that there won't be enough oil. Bloomberg just indicated that OPEC has 500 million barrels in transit right now. I am sure they can help cover any long position your fund may have.
  • klem kaddidlehopper on May 28 2015 said:
    "may have missed something"

    I think you have, because the world is seeing the glut. Our inventories are sky high, there are May West Africa loads still not sold, even as June is getting started, and Iraq is about unleash a "tidal wave" of June loadings on the market, to use Bloomberg's words. Sounds like a glut to me. The only bullish news in the markets is the wildfires in Alberta.
  • Amerigo on May 28 2015 said:
    The world uses ~2.8 billion barrels per month for fuel and other uses. That amount grows by ~100,000 every month. Meanwhile current supply from existing wells decreases by ~380,000 every month. A deficit of ~480,000 barrels is created every month without further drilling. These are averages.

    ~1.5 billion barrels of oil are currently held in storage. Enough to last for 17 days.

    The "glut" is equal to an inventory that sells in 17 days.
  • dr on June 26 2015 said:
    I own and E & P company. I have my ears directly in the channel of frac companies, etc. Spoke to one of the largest suppliers of industrial filtration media to the frac companies - they use these bags by the millions to run all their equipment. He said the phones stopped ringing in January, then started briefly in early March for a few weeks, but then dropped off and never came back as of today. He said Halliburton, Schlumberger, and others told him they did not change suppliers, they are just not fracking much. Take it or leave it, but US production is going to decline very very rapidly and soon, IMO. You don't lose 67% of your rigs and see production hold.
  • The Future on January 12 2016 said:
    "By 2016, I fully expect that low cost oil will be depleted and prices will need to rise to spur more activity as costs rise." - Bwahahahaha

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