A surprising, large drawdown in crude inventories has taken everyone by surprise, causing a rally in oil and in dramatically oversold energy stocks. Many shale and exploration & production (E&P) names are up 2 percent to 5 percent.
And yet, there is scant belief that we are in for some sustained rally in oil stocks.
Partly, this is because trader sentiment is very negative after huge losses trying to buy the bottom in energy stocks January and March. Traders bought under the theory that a 50 percent drop in oil in the past was always followed by a comeback six months later.
Under this "V" recovery in oil, West Texas Intermediate should have been about $75 by the end of June.
That, obviously, did not happen. Worse, the trend went in the other direction: from $58 to back below $50.
What killed the "V" recovery hope was the combination of weak global demand (particularly China) and the tenacious will of the Saudis, who stuck to their stated intentions of pumping as much oil as they could to maintain market share, price be damned, and put pressure on U.S. shale producers.
They have stuck to their guns, though at a huge financial cost to them. But surprisingly, U.S. producers are still pumping oil at a brisk pace.
As a result, the "V" recovery hope has now given way to the "long slog" hypothesis, the idea that oil will indeed recover but it will be a process that will take a year or more, with no agreement on where we will be by then, though many talk wishfully about oil between $75 and $90.
Along the way, as hedges have come off, we have heard a lot about lower capital expenditures.
For example, BP spent $25 billion in 2013, then went to $24 in 2014, and will likely be $19 billion this year. That's a drop of about 20 percent from 2014 to 2015. And they are saying it will be $19 billion again in 2016.
It's the same with other big oil companies. The industry average drop in capital expenditures is about 39% from 2014 to 2015, according to Oppenheimer.
On Friday, we will be hear about ExxonMobil's plans.
You get the point. Capital expenditures are dropping. In theory, this should lead to a huge drop in oil production. But the companies are saying they can continue to pump the same amount of oil with lower expenditures.
How? They are learning to operate fewer rigs with fewer employees. Because of better technology and improving efficiency, oil companies are discovering that they can pump almost the same oil with fewer rigs.
That is contributing to the oil glut.
Predictably, now that we have ONE modest bullish signal, this is reviving talk about a bottom. "Buy when nobody wants them," one energy trader told me this morning.
But nobody think this is going to be the quick rally that was expected in the first quarter. The talk is to buy now, and hold. For a while. Like, a year or two.
That will greatly limit the number of people that will hop on that bandwagon. Too many have seen this movie before.
Would anything change this "long slog" scenario? Yes, if demand suddenly shot up, or if the Saudis said they were going to pull back production.
Funny you should mention that. Dow Jones has just run a headline mid-afternoon: "Saudi Arabia to Pull Back Production After Summer." Another small blip up in oil. And energy stocks.
Do you believe the Saudis will unilaterally cut production, essentially giving up the position they have held all year? Really?