Fed Chair Janet Yellen became a friend to the commodity markets as she was just dovish enough to inspire a rally. Her comment yesterday that central bankers will, “proceed cautiously” in raising interest rates because the global economy presents heightened risks, was enough to get the complex going. After Yellen spoke, the dollar fell and the euro rose and commodities like gold and silver started to rise. Crude oil, of course, was a little reluctant because of fears of the ongoing oil glut but after the American Petroleum Institute (API) supply report, it was not as bad as feared.
The API reported that crude supply increased by 2.6 million barrels, which was less that the 3-million-barrels-plus the market was looking for. In the all important delivery point in Cushing Oklahoma, supply actually fell for the second week in a row. The bulk of oil is ending up in the Gulf Coast where there is plenty of storage and plenty of refining and export options available.
The report also suggested that the spectacular demand for gasoline is continuing. The API reported that gasoline supply fell by 1.94 million barrels. Distillate inventories fell by 95,000 barrels as agricultural demand will soon kick into high gear as farmers start to plant our nations crop.
The outlook for a production freeze by OPEC and non-Opec members improved when it was reported that Iran would attend the April meeting in Doha. Now Libya is the only major player that is not attending and while no one expects that Iran will join a freeze, the country may agree to a number that they will cap output at.
The Iranian nuclear deal on the other hand may not be going as smoothly as President Obama had hoped. It seems that on Friday the President will meet with the group that helped create the deal, the so named P5+1 group. It seems that there are concerns that Iran is not complying with the deal and Obama wants to see if there is the will to do anything about it as this deal is becoming another major embarrassment for his administration. Iran earlier this month test-fired two ballistic missiles, one of them with the phrase, "Israel should be wiped off the earth" written on it in Hebrew.
Despite the recent weakness in price, we still feel we are at a historic bottom in the crude oil price. April traditionally is a very strong month for oil as we start gearing up for the summer driving season. But the larger point that I have been trying to get across is the historic nature of the retrenchment in the oil and gas industry and the longer term ramifications. The mantra that everything in the oil patch is going to be fixed if oil prices rise by 5 bucks is wrong.
Once again a story in the Wall Street Journal is touching on one of the many facets of this historic bust cycle that is creating a potential long term bottom in prices.
The Wall Street Journal reports that oil explorers are facing challenges to secure financing as oil prices fall. They warn that banks are growing concerned about the growing debt taken on by oil companies with little or no profits. The Journal, in a must read, says, “Just a few years ago, when oil sold for about $100 a barrel, banks here were lining up to give international oil explorers access to billions of dollars to finance new drilling and projects. But as oil prices stay mired in a funk, the money is drying up.”
Senior executives from companies such as Tullow Oil (LON:TLW) and Cairn Energy (LON:CNE) have been meeting with their bankers for a biannual review of the loans that allow them to keep drilling and building out projects. For many European companies, it has been a nail-biting experience, as banks worry about the growing pile of debt taken on by oil companies with little or no profits. Several companies said they expect their ability to tap credit lines to be diminished after the reviews. The Journal writes that reviews of these loans have high stakes. If a bank decides a company has already borrowed more than it can afford, the reviews could trigger a repayment, more cost cuts or even a fire sale of assets to raise cash.
Even future natural gas production will be at risk at a time of rising demand for gas as coal plants shut down. There is probably great value in natural gas especially down the curve. What we are seeing in the industry has happened before and the energy industry’s pain could lead to speculator gains assuming you recognize what is happening in the big picture. As the banks stop lending money, projects get canceled. Exploration and innovation stop, alternative fuels and wind and solar struggle and at some point we get behind the curve and it will take a decade or so to get caught back up. Now should be the time to start positioning for that long term move.