On a webinar, a fellow subscriber asked for our opinion on the state of the oil market and if we saw buying opportunities, as of yet.
In short, the answer was no…
Given recent developments between OPEC, oil super majors, and interesting developments at sea, we see no reason to change our bearish stance.
OPEC is getting desperate
Despite a 59% decline in oil prices, OPEC is at it again, offering insight that is sure to attract new buyers.
But as we’ve learned over the years, OPEC can’t be trusted.
Nine months after telling us “oil prices have hit bottom,” OPEC Secretary-General Abdullah al-Badri believes 2016 will be a year for positive momentum in oil markets.
But as oil super majors will tell you, it’s not true.
“I’m not sure we will exit from low prices before many months,” noted Patrick Pouyanne, CEO of super major oil firm, Total at a conference in Abu Dhabi.
Total’s response shouldn’t come as a shock to any of us, especially to those of us that know of OPEC’s self-serving agenda.
Of course, there are those that will continue to chase hope, as always.
But as we’ve often noted, investors learn the hard way.
In fact, about a week ago, we highlighted a series of new bets in the sector.
For example, after investing $379.4 million into the U.S. Oil Fund, investors watched the fund sink 14% off the highs. Insiders bought Exxon Mobil only to watch it fall about 7% from the November highs, as well.
And they continue to forget the one key element of lower prices.
There’s still too much supply…
Surplus oil inventories are at their highest levels in at least a decade thanks to an increase in global production, according to the OPEC Monthly Oil Market Report.
That tells us it’s still too early to call for a bottom in oil prices.
If you chase hope, you will lose.
Investors, insiders, trusted multi-million dollar funds have all learned this the hard way several times since December 2014.
There’s still too much supply, and not enough demand. In fact, as we’ve noted, there are 20 million barrels of oil sitting just off the Gulf of Mexico.
More than 50 commercial vessels are parked in the waters by Texas. More than 40 were tankers. Normally, there are 30 to 40.
Then, there’s Iraq.
Iraq just loaded up to 10 tankers for delivery to the U.S. by this month. There are 19 million barrels, which would mark the biggest delivery from Iraq since 2012.
Then, there’s China.
China has run out of places to store oil. In fact, Reuters recently reported that there are four million barrels of crude that have been sitting in two tankers for about two months now because of a lack of space.
Off the shores of the United States, there are 100 million barrels of crude being held on ships. In fact, as The Financial Times recently advised, the amount of oil at sea is at least double the levels seen earlier this year…
And is equivalent to more than a day of global oil supply.
That is a very clear sign that a bottom is not in place. The glut of supply, the lack of demand is only getting worse, forcing oil prices lower.
If you want to chase headlines and hope of a bottom, be my guest…
But if you’re smart – and I know you are – you will wait for supply and demand to balance out. When – and if – that happens, we’ll buy undervalued oil names.
Right now, though, investors are foolishly throwing money away at a bad bet.