Dan Hassey: Good news: Several signs indicate that oil may finally be finding a bottom.
In bear markets, the bears are in charge by definition. Normally, bottoms and basing are a fight between the bulls and the bears. We also see fights and divergences between speculators and investors and see this in the oil futures markets and energy stocks.
Plus, the futures market is dominated by speculators. Energy stocks are dominated by investors, though there are some speculators.
It’s no wonder, really. The oil futures market is short-term in nature and traders have been focused on news that has been bearish.
However, we are now seeing news reports and headlines that are both bullish and bearish for oil.
Could oil be about to shift back into the bulls’ favor … and will a wave of speculators’ dollars follow?
To better understand the fight between the bulls and the bears, please click here to read the December 2013 article about the difference between speculators, investors and gamblers.
Bearish News for Oil
Late last week, the Wall Street Journal ran an article with the headline, “Oil Drops as Supplies Surge.” Here is a chart from that article:
Of course, if the U.S. really had a “glut,” would we have to import oil?
For the last few years, U.S. demand has been close to 20 million barrels per day (mbpd) — this means we have about 20 days’ worth of inventory (400 million barrels current inventory divided by 20 mbpd).
The lowest inventory number in the chart was about 360 million barrels, or 18 days.
In addition, U.S. oil producers’ supply is close to 10 mbpd along with nearly three mbpd of natural gas liquids that helps the country meet its demand.
In turn, this means the U.S. needs to import oil to meet the rest of our needs. So, the term “glut” is misleading.
Consider that some of this stockpiled oil is from global producers who refine their oil at U.S. refineries where it is then shipped out.
Other reasons include:
• Seasonality. Oil demand is usually lower during the fall and winter months, but picks up by summer.
• Iraqis are producing more oil.
• Most energy analysts believe oil production will stay high for the next few months.
Though all of the above is true, oil prices are highly oversold. The bearish news above is clearly reflected in oil prices.