Much has been made of the 40% rebound in crude oil that dragged energy stocks higher through the beginning of the month.
Consumers, who’ve watched prices at the pump drift higher, will be pleased to hear rally could soon be cut down. Doubts are growing about the moves sustainability in the face of still high inventory levels, high U.S. production, and now, reports that Saudi Arabia is increasing production in a belief that its “won” the showdown with high-cost American shale drillers.
Data shows production out of the Bakken shale in North Dakota rose in March for the first time this year. A recent article in the National Post highlighted a “fracklog” of drilled-but-untapped wells (totaling 4,731 in the U.S.) that are just waiting to come online should prices keep rising. A similar dynamic is in play in Canada as well.
According to Citigroup, stocks in Cushing, Oklahoma are only about 10 million barrels away from the working storage capacity of roughly 70 million barrels. Spare capacity could be tested this autumn as refineries shut down for seasonal maintenance and the surge of demand from the summer driving season ends.
If tanks top out, oil could very well push to fresh lows — complicating the Federal Reserve’s planned interest rate hikes, pulling down corporate earnings further and continuing the drag on GDP growth via capital expenditure cuts.
It’s no surprise that equity traders are already moving. The Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) tested below its 50-day moving average on Wednesday for the first time since early April.
Analysts at Barclays Capital recently warned clients that the “huge disconnect” between futures market pricing (where everything looks great) and the physical market (where indicators are signaling oversupply) cannot last.
Barclays believes that without a rapid improvement in the supply versus demand fundamentals, energy prices will slide and lists three reasons to be cautious about this happening:
- China still looks fragile (soft industrial production)
- Oil supply still exceeds consumption
- The oil price recovery may encourage more U.S.-based producers to restart drilling operations
For now, all three factors are still in play.
Research: Anthony Mirhaydari
Jon Markman writes a daily trading newsletter, Trader’s Advantage, and CounterPoint Options, a service geared towards helping individual traders make steady, consistent profits with the VIX. Check out his Top Stock for 2015 here.
