Slippery Oil Prices Plunge Over Cliff into Bear Market

By: David Haggith | Mon, Aug 1, 2016
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Leaking oil barrels

Oil today plunged quickly below $40 per barrel, taking oil prices down more than 20% from their high a little over a month ago. That officially defines a bear market in oil. As of today, oil has also moved below its 50-day, 100-day and 200-day moving averages. July has again turned out to be a huge disappointment for oil producers who mistakenly thought price recovery had come to stay.

In addition to the dark clouds I presented last week, here is a list of newly developing reasons and ways that oil prices are continuing to slide toward $30 per barrel ... as I've predicted all along:

"Coming out of the summer, these tanks will still be full," Mark Benigno, co-director of energy trading at INTL FCStone Inc. ~ Oilprice.com

Here's what gasoline stockpiles did this year compared to what stockpiles did last year:

US Gasoline stockpiles
Growth in oversupply in US gasoline stockpiles for 2016 compared against 2015.

Stockpiles of crude and gasoline are now at their highest summer level in two decades.

"The rise in supplies will add more downward pressure," said Michael Corcelli, chief investment officer at Alexander Alternative Capital LLC, a Miami-based hedge fund. "It will be a long time before we can drain the excess." ~ Bloomberg


The downward oil price trend continues its impact on the global oil industry

There is a lot of price support -- both psychological and on the charts -- at $40, so that's tough resistance to break. I wouldn't be surprised, then, if oil prices bounce back upward as people buy the dip; but that speculative reaction is not likely to overcome the greater forces outlined above. If oil prices crash easily through the $40 floor, as just happened today, and they sustain that breakthrough, the trip down should accelerate. Below $36 per barrel there is no support all the way down to $26.

The current oil price rally is over
Points of major price support based on recent history of oil prices.

"The bottom line is the street has gotten it wrong as far as the oil markets achieving supply-demand balance this year.... We will likely break through the $40 levels in days and weeks to come," said Tariq Zahir, crude trader and portfolio manager at Tyche Capital Advisors in New York. ~ Reuters

That was last Wednesday. Now we can say, "been there, done that, on our way to thirty." When I stated $30, prices were at $43, and $40 oil just seemed like too easy of a bar to clear in spite of its price support on the charts.

But the importance of all of this is its extreme impact:

Exxon, Chevron, Valero, BP, Royal Dutch Shell have all reported falling profits or even losses that disappointed the expectations of economists. (Chevron reported its largest quarterly loss in fifteen years. Exxon reported a 59% drop from last year. Shell, a 72% plunge, missing the estimates of the experts by over a billion dollars.) And this was the good quarter when oil prices were recovering.

"This is a very big surprise from Shell," Brendan Warn, a managing director at BMO Capital Markets, told Bloomberg in an interview. "Things are not looking up in the third quarter either, with weakness in the industry's refining environment and Shell's oil production still under pressure." ~ Oilprice.com

All the big economists and oil analysts were predicting that a rebalancing of the oil market would be firmly in place by the second half of 2016. Now they are all revising their predictions to align with those that I continuously stated against the odds when prices kept rising.

2016 had such a promising start. Whether you listened to government agencies, banks, analysts, oil companies, or the oil-producing countries you would have heard the same message -- the market will begin to rebalance in the second half and inventories will start to fall as rising demand overtakes dwindling supply.... It hasn't quite worked like that. Demand has not surged as producers had hoped, and supply has proven more resilient than expected. Demand growth is slowing from its lofty levels earlier this year, dashing hopes that the supply will get soaked up quickly. But the real story is the supply outlook. There's little cause for optimism here, at least in the short term.... We're still seeing additional supplies from projects that were sanctioned in an era of much higher prices.... The result is a delay in the start of a long-waited rebalancing. The pickup in prices to above $50 a barrel in June looks to have been a false dawn. The price recovery is not yet here. So, if not now, when? Russian oil minister Alexander Novak suggests the market may now reach balance by mid-2017. ~ Newsmax

And the importance of all of that is its impact on banks an on the general economy.

As I said last week, something dark this way comes from the oil sands and tar pits.

 


 

David Haggith

Author: David Haggith

David Haggith
The Great Recession Blog

David Haggith

My path to writing this blog began as a personal journey. Prior to the start of this so-called "Great Recession," my ex-wife had a family home that was an inheritance from her mother. I worked as a property manger at the time, and near the end of 2007, I could tell from rumblings in the industry that the U.S. housing market was on the verge of catastrophic collapse. I urged her to press her brothers to sell the family home before prices dropped. The house went on the market and sold right away -- and just three months before Bear-Stearns and others crashed, taking the U.S. housing market down for the tumble. Her family sold at the peak of the market.

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