Before we dissect yesterday’s DOE report we want to comment on the recent strength in the energies.
We want to be clear on this matter… we do not believe in it. We are unconvinced that the bulls have the staying power to keep it up as it were… in the long-term that is. In the short-term anything is possible.
That is why we have had to switch our bias in our shorter views.
We did not want to do it, but the market forced our hand. In fact, we had to take a shower after we switched. And, we are not talking a normal shower, but rather, the kind of shower you take after you have been exposed to the Ebola virus or a leak at a nuclear power plant. As discussed in today’s issue of The Schork Report, once again the DOE hardly provided any ammo for the bulls, nor did anyone who spoke to the industry last week in Vienna at OPEC’s International Seminar.
Near term fundamentals are bearish. It is that simple.
In this regard, there is a perverted sort of logic taking hold in the market. We all know that in economics low prices are the cure for low prices. Thus, the current low price environment in the short run is discouraging investment in supply and therefore setting the table for significantly higher prices in the long run. The problem is, some pundits are taking these long-run supply destruction scenarios and compressing them into the short-run in order to spin a bullish case for buying energy and sucker even more buyers into this market. Just like they did last year at this time.
In the long run, i.e. once demand to this market returns and the U.S. administration has failed to turn the world’s biggest economy from one based on hydrocarbons to one based on tofu, price will act accordingly.
However, for now, with global demand in the doldrums and the world swimming in oil, the current price run in oil is an aberration.
We do not think it will last… in a logical world. However, in illogical world, i.e. Wall Street, there is no telling how long it can last. After all, yesterday’s give back notwithstanding, there is no denying the bullish riptide, whether we are talking commodities or equities. People are in a buying mood.
The Schork Group recently moved into new offices, and although we do not have all of the accouterments of the self-important Wall Street types… an antique commode on legs, a shoeshine stand manned by an affable elderly gentleman (who looks like a heavier version of Wilfred Brimley) and a commissioned mural of the Last Supper (with Mr. Schork replacing John to the right of Jesus)… we do have lots of televisions. We have never had that before. It has been an eye opening experience for us. As Yogi would say, you can observe a lot by watching.
That is, when we are not watching sports or porn, we are usually watching CNBC, et al. Apropos the current strength in the market, the common refrain amongst traders and analysts interviewed on these shows goes something like this… I don’t believe in this market’s strength, but I want to participate while it lasts.
Got that? Traders are so desperate that they are now buying, not on fundamentals, but rather on fear of missing out before this market heads back into the toilet.
Our concern is this: with each passing session it appears more traders are encouraged to “participate”, hence, the market keeps moving higher. That happens enough times and soon you have $100 oil and Matt Simmons all over the tube alleging the Saudis are doctoring their books and that Petrobras and ExxonMobil didn’t just find all of that oil in Brazil.
Then, just like we saw last spring, when the price path of the market decouples from the fundamentals, perception trumps reality and high prices become the justification for higher prices. All because the smart money [sic] doesn’t want to “miss out”. So go ahead, buy. We would not want to deprive anyone from missing out.
Just beware. Sooner or later we are going to walk into our offices and this market will be locklimit down.
Bottom line, it was a bearish report. Transportation fuels fell along seasonal metrics, heating Btus were essentially unchanged and stocks of commercial and government crude oil surged. All told, total stocks of crude oil and petroleum products rose for a fourth straight report, up 0.3 percent to 1.76 billion (x109) barrels, a two-and-a-half year high.
Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.