The oil market is stuck in a ‘Groundhog Day’ trap
While the recent rapid rise in crude oil prices has led some to forecast $60 oil, I think it is more like DejA� vu all over again. I think over the next several months the oil market will act more like the movie "Groundhog Day" where the star, and now the oil market, is caught in a time loop.
In late May 23, sweet crude oil futures on the Chicago Mercantile Exchange traded at about $48 per barrel. On Friday August 19, crude oil futures closed at $48.52. In between, there has been an OPEC meeting in June and talk of a meeting in Algeria next month to freeze production and crude has traded over $51 and under $40.
OPEC has expanded its membership to 14 with the recent addition of Indonesia and Gabon. With the Energy Information Administration reporting U.S. exports hit a record 662,000 barrels per day in May 2016, perhaps the U.S. should apply for number 15. However the high level of exports is symptomatic of a world oversupplied with oil and that continues to be the case.
The actions of oil producers speak far louder than words. Saudi Arabia is producing record amounts of oil and Iraq just announced that it will boost exports by resuming flows form Kirkuk. Now that Iran has increased production to near pre sanction levels, they may well be inclined to agree to a production freeze. But what good is a freeze if the target level is set equal to the maximum production levels of all the participants?
I like to follow the flow of crude oil to see if the market is cleaning up. It isn't. While the U.S. was exporting its light sweet crude oil off the Gulf Coast To Europe, Asia and South America, it was actually importing light sweet crude oil from Nigeria and Angola. Exports of Alaskan North Slope Crude oil are going to Asia at the same time Russian crude oil is coming into the West Coast. In Europe, Iranian crude oil is being sold into Poland at the same time that Russian crude oil heads to Asia. Ships passing in the night are a sign of an oversupplied market.
The increased oil production from the Middle East is not OPEC's only worry. It has two members, Libya and Nigeria where supply disruptions have kept a significant supply of oil off the market. Should things get better there, it only gets worse for an eventual oil price recovery. The price recovery will eventually happen as world oil demand continues to grow but I continue to look for only $50 by January 2017.
There is a lot of oil out there and it still is being moved around and stored which means that the midstream companies in this business will benefit. I like Plains All American Pipeline LP (PAA) a large midstream company focusing on crude oil. Magellan Midstream Partners (MMP) continues to build out crude oil infrastructure in the Houston area while Sunoco Logistics (SXL) has been adding more pipeline capacity out of the Permian Basin.
Even though prices for oil field services have come down, the recent increase in the rig count means more demand for frac sand (used in fracking) and that will continue to benefit Hi Crush Partners (HCLP). As aproduction companies have squeezed out more costs and improved drilling efficiency, those with large holdings in the Permian Basin stand to benefit: Occidental Petroleum (OXY), Apache (APA), Pioneer Natural Resources (PXD) and Concho Resources(CXO).
But it's going to take some time to see oil prices rise. $60 oil? Maybe 2018.