Oil Is Back to $40 What Does That Signal?

Mish

After dipping into negative territory crude is back ato $40. What does that mean?

Oil analyst Phil Flynn says Oil's Road Back to $40 Signals Economic and Job Snap Back.

The road back to $40-a-barrel oil was fraught with fear and uncertainty, but eclipsing that benchmark indicates the beginning of a strong recovery from the economic shutdown. The global economy crashed to a screeching halt as the coronavirus shut down the world, causing global oil demand to crater like never before.

Overthinking or Underthinking Oil?

I am not sure which Flynn did, but I am sure it's at least one of them. 

No Jobs Recovery 

Continued Unemployment Claims in 2020-06-18

There was no jobs recovery. Continuing Unemployment Claims Tell a Bleak Story.

For 7 consecutive weeks, continued unemployment claims have topped the 20 million mark.  

Historical Perspective

Continued Unemployment Claims 1970-Present 2020-06-18

Continuing claims only topped the 5 million mark in the depths of the Great Recession.

Retail Sales

On June 16, I reported Retail Sales Surge Most on Record But Number is Misleading.

  • Retail sales surged a greater than expected 17.7% in May but the numbers are still well below the pre-pandemic levels.
  • Despite the surge, sales numbers are back to levels seen in late 2015 and early 2016.

People got money and spent it, but they also skipped mortgage payments and credit card payments.

What happens when the checks run out?

Manufacturing Tells the Same Story as Claims

The Fed's Industrial Production and Capacity Utilization puts a big negative spotlight on the emerging V-shaped recovery thesis.

The Myth of the V-Shaped Recovery in One Chart

Industrial Production, Manufacturing, Motor Vehicles

For discussion, please see The Myth of the V-Shaped Recovery in One Chart.

Housing Starts

Housing Starts, Permits, Completions May 2020

Comparisons

  • In January of 1959 there were 1,657,000 housing starts.
  • In May of 2020 housing starts rebounded to 974,000.
  • The number of housing starts in May 2020 were 41.8% below the level in January 1959.
  • The recessions in 1960, 1970, and 1980 had better numbers. 

For details and more charts, please see Housing Recovery Not Much to Crow About.

What's Really Happening?

  1. Fed's New Facility Will Buy Junk Bonds With 7-1 Leverage
  2. ZeroHedge reports Hedge Funds Go "All In" As Net Leverage Hits 99%

Biggest Speculative Bubble in History

The Fed has unleashed the biggest speculative bubble in history. There no true price discovery on stocks, junk bonds, or oil. 

In regards to that latter, some 20 million people of work and not driving to jobs they do not have. Still more working from home.

Industrial production and air traffic represent two more non-recovery oil usages. 

US Oil Production

US Weekly Crude Poduction 2020-06-10

US Oil Production March-June 2020

US Oil Production March-June 2020

Data from EIA, US Energy Information.

Why is the Price of Oil Up?

  1. Speculation is Up
  2. Production is Down

 US oil production has fallen for 13 weeks since the peak on March 13. 

Production has declined from 13,100 thousands of barrels per day to 10,500 thousands of barrels per day. 

That is a decline of 19.8%. 

The price of oil can stay high as long as production does not exceed storage capacity. 

Overthinking or Underthinking?

How about overthinking the recovery and underthinking production. 

Mish

Comments (40)
No. 1-13
Mish
Mish

Editor

oil production down 30%

Herkie
Herkie

Supply and demand simply are not what is dictating this market with supply GROSSLY out of equilibrium to demand, what the higher price is signalling is that the sheer tsunami of money is a dollar devaluation and prices for everything are going higher, inflation!

anoop
anoop

It's not signaling anything. It just means that some people made a fortune on the way down, and again on the way up, and it probably wasn't one of us.

mkestrel
mkestrel

I have driven to work every day since the shelter at home order here in the bay area. The traffic is easily back up to 60% to 70% of normal. So the demand use side is increasing.

Tony Bennett
Tony Bennett

"The Fed has unleashed the biggest speculative bubble in history. There no true price discovery on stocks, junk bonds, or oil."

...

End of story.

Next

Mish
Mish

Editor

Why so U.S. centric

Good point
Global demand is in the shitter
Even China not fully recovered

truthseeker
truthseeker

Another thing to consider is that out in the Permian Basin, as I referenced way before the pandemic, there are many wells that have been drilled and completed and are shut in because of the huge logistics problems operators face in trying to get crude to the market, so there is more storage here that I haven’t seen anybody talk about yet. On the other hand, not to be a conspiracy theorist, I really do think that the Chinese government may want to figure out how a way to help Vladimir Putin who has really been hurt by all this, so that crude in the Middle East is something that will be made extremely unreliable as the Strait of Hormuz is yet not just 50 miles
wide, but ONLY 2 miles wide where the tankers are able to able to move crude oil cargos to all world markets including America.

Casual_Observer
Casual_Observer

This is a Fed induced reflation. Like the stock market. Pension funds love oil companies that pay dividends. The reflation story is all about saving pension funds.

Bam_Man
Bam_Man

All equity/bond/commodities "markets" are now nothing more than a Central Bank parlor trick.

The "price signals" they are displaying are meaningless. Actually, a lot worse than meaningless, because they are deliberately manipulated to reflect what is in fact the OPPOSITE of reality.

My bold prediction - Five years from now, there will be no Federal Reserve.

Realist
Realist

Hi Bam.

Sorry. There will still be a Fed in 5 years.

The good news will be that the CV19 pandemic will be under control in 5 years because of a series of available vaccines, allowing the economy to recover to some degree.

However, the price of fossil fuels will most likely be significantly higher because I suspect most countries will be implementing large carbon taxes by then.

The last 5 years have been the warmest since we started recording temperatures. And the next 5 years will continue the trend. This will result in most countries bringing in a number of measures to try to slow the increase, including carbon taxes.

Sadly, these measures will likely be both too little and too late.

Not an optimist. Not a pessimist. Just a realist.

Casual_Observer
Casual_Observer

The Harvard paper was from 2016. Long before Trump was even thought of as a legitimate candidate. It isnt Chinas fault. It is simply reality that the middle class in the first world has been sold out to the developing world. The Harvard paper was written by a Croatian immigrant.

Casual_Observer
Casual_Observer

China isnt getting wealthier. Wealth is actually limited in China to the top 1% and communist party. Wuhan is one of the poorest places in the world. The reason covid started there is because people are too poor so they have to smuggle in the animal trade and eat things one couldn't imagine.


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