The Energy Bear Case Is At Odds With Falling Inventories

Despite plummeting prices for oil in recent weeks, we still don’t buy the bear case, which calls for a slower economy to rein in prices. The problem is, in the 1974, 1981, 1991 and 2001 recessions that failed to happen. We don’t see why it would this time. Meanwhile, the weakness is all about the pleasant weather we’ve been having. As Oil & Gas Journal reports:

“Weather continues to be the name of the game, as crude oil prices continue their slide from yesterday in early morning trades today,” analysts in the Houston office of Raymond James & Associates Inc. said Jan. 4. ”That said, the latest 2-week weather forecast for the US shows cold weather beginning to set into the Lower 48 states by the latter half of the month, and natural gas has rallied on the news in early morning trading. However, a warm winter till now has prompted us to take a more cautious stance on winter-ending natural gas storage and near-term North American drilling activity,” the analysts said.

The thing is, weather fluctuates. And while the weather has been far warmer than normal, inventories remain well below their historic average in terms of days of supply. What will happen when normal weather resumes?

Comments

[Georealist]

There is no real Bear case to be had...unless one starts hypothesizing a world wide severe recession/depression.
Trying to fit yesterdays perceptions into today's realities is the old square peg in a round hole. Demand is no longer US driven alone..in fact, very shortly, it won't even be PRIMARILY US driven. Weather is a factor for natural gas more than oil..but home heating oil is still a very sizeable market. The real movers, however, are geological and geoploitical...and we have hit one of those lulls when real long term, intractible issues are being masked by temporary relief and complacency. Macro oil/gas are driven by 2 800 lb gorillas...relentless depletion and unrelenting terror.

[NO DooDahs]

Might it be that the prior bull was disconnected from any *fundamentals* by large speculative positions, hence the so-called "bear" case is really an unwinding of those speculations? After all, there was nothing *fundamental* that justified $80 oil from a $20 print not too long ago. This works for copper as well. The positions can unwind and cause lower prices regardless of what happens in "the economy."

Gas and oil prices are driven by *money* changing hands at futures markets, not by the "the economy." Hardly rational, and hardly *fundamental*.

[huangjin]

The real bear case doesn't start until rig counts and exploration spending get way up. We're still below early 1980's peaks.

[Georealist]

We have seen an unwinding and beyond..of course there was something fundamental that justified $80 oil...add previous high + inflation+ the costs of providing that oil (carrier group ptotection...subsidy..... The idea that oil is driven only by futures markets is naieve...oil is driven by demand+risk+incrementa... scarcity (depletion)..Learn the market or lose.....Markets can only be disconnected from reality temporarily...Please provide..those of you who can...a real positive case for any kind of oil/gas surplu in the future????

[WilliamTrent]

There will definitely be a surplus again in the future. The question is how far in the future. Ultimately the high prices will encourage enough exploration and development, along with conservation and substitution, all of which will take place all at once and send oil prices into a 15-year bear market. My best guess is that this will be sometime around 2012-2015, but I could be way way off in either direction.

[NO DooDahs]

Greg,

The cost of oil is indeed determined by the contracts exchanged at major bourses around the world. I am not naïve, you are merely grossly mis-educated. Not only do producers and consumers buy and sell to hedge future costs, but speculators exchange contracts as well. Sometimes, but not always, these speculators are correct about trends in supply and demand. Sometimes they are incorrect. Like speculators everywhere, they are prone to irrationality.

I did not, in my previous comment, make any case for a trend in supply/demand, bearish or bullish. Quite a while ago, when I was long several stocks in the oil sector, I made a case for continued pressure on supply that would eventually lead to oversupply and demand destruction, with a timeline of 5-10 years. I still believe in that case, but I also believe that the price of oil has disconnected from the fundamentals over the past year or so.

"Learn the market or lose" – I love it!

[bhakta]

I am not an energy expert. I do believe that energy prices are in a temporary pull-back which may last a few months, or perhaps a year or more; yet in the long term the supply demand is going to increase and prices will increase too. I find most of the enrgy sector attractive at today's values and am a buyer for the long haul. I also enjoy some of the dividents which help weather the pain of the share losses.

[NO DooDahs]

The average dividend yield for major integrated oil companies is 2.7% with a max of 4.1% (Eni) and the U.S.-based ones all under 3%.

Do you think the shares have less than 3% of continued downside? Just curious ...

[WilliamTrent]

There's another way to skin that cat - do you think the alternatives have more than 3% upside? If not, you might as well go for the ones paying the dividend.

[NO DooDahs]

Yes I do.

[Malkiel]

It should be understood that the longer any "temporary" supply or production gluts last, the greater the chance that conservation measures and new technologies will quietly melt away old levels of demand. If we have 3-5 years of sideways oil price movement we may come out in the other end to an America with universal availability of multifuel automobiles, attractive tax breaks for home energy retrofits, and a compact fluorescent bulb in every socket. These are the types of quiet trends that could keep oil prices stagnant for decades, with or without a Chinese market...

[WilliamTrent]

I doubt it. Sideways oil prices would simply give consumers time to become comfortable with the price level. It will take a somewhat relentless upward price trend to force consumers out of their comfort zone enough to make significant changes to the status quo.

[Malkiel]

Doubt all you want, Bill, but Ford and GM have nothing left to lose and everything to gain now by offering up the multifuel option as a hot breakthrough innovation to put them back in the game. (all cars in Brazil are multifuel, so the technology is already mature and in the market). Europe is also seriously committed to conservation and alternative fuels and will not stop implementing alternative energy technologies during any price lull.

I grant you that a certain level of pain is required to keep the ball rolling, but from what I hear at ground level the current gas prices carrying through from last year and electric price spikes taking hold this month in the northeastern US are just painful enough that consumers aren't losing their price sensitivity yet.

[NO DooDahs]

I would say "interesting but immaterial," except that it isn't interesting. Not to me, at least. I want the trading implications.

I can read "Mother Earth News" for all the greenie stuff.