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May 25, 2015

Why Is Exxon Staying Unnervingly Quiet?

Forecasts from the IEA and Goldman Sachs this week are trying to say that crude barrels are still overpriced – but the market isn’t listening.  I’ve been convinced that crude prices above $60 are counterproductive as Goldman said in their recent note – but other factors are continuing to help push prices higher.

Let’s take a closer look and see what’s going on – and what might go on in the near future.
Some short-term fundamentals continue to push traders into long positions in oil.  I’ve been among the first to point out the large outflows of capital from just about every other asset class, save for energy stocks and commodities.  This isn’t particularly smart analysis, but clearly money managers and institutional investors are looking for ‘value’ in a very hot market – and oil stocks and commodities look just too low to them.  For these ‘value searchers’, it’s damn the fundamentals – full speed ahead, and oil catches a bid with every, even small bullish indication.

As appears to be the case with Chinese demand, which has incrementally picked up in recent months.  But it’s not like Chinese imports aren’t being met for the most part – they are finding more oil now than ever before in their history.  And imported oil is not being used.  Several reports have Chinese oil stockpiles growing for the last 7 weeks – an obvious way for China to hoard oil that they think is going to get more expensive later.

US stockpiles have come slightly down in the last few EIA reports – a surprise for many who believed that storage would increase throughout the summer.  Many are extrapolating that this drop in stockpiles is a harbinger of slower production from slashed numbers of rig counts, but this may be very premature. With the summer driving season scheduling underway, there is a seasonal drop in stockpiles this time every year, and even a disaster in overproduction couldn’t stop that historical trend this year.

On the other side of a range-bound market is Goldman’s correct call of ‘self-destructive’ prices – the whittling away of the ‘fracklog’ of idled rigs should prices again approach $70. The International Energy Agency IEA seems to agree. Add to that the several dozen oil companies who would love to financially hedge oil near $65 and there are tons of good reasons why we’re likely near the upper end of our ‘bust cycle’ range.

EOG Resources (EOG) and Whiting Petroleum (WLL) were quick to point out the opportunities that would emerge with oil that stabilizes above $65.  Those two were the most vocal in the oil patch, but certainly not alone – Continental (CLR) and Hess (HES) have dozens of idled wells that would come back online as well at $65 oil, adding to an already historic glut.

Goldman Sachs and I agree that there needs to be a market clearing event, marked by far more consolidation, and outright destructive bankruptcy of smaller market participants before we can call this downturn in oil officially over. I do not believe that a meandering price above $60 a barrel will do that – it will ultimately cause a secondary drop in price and an even more dire response from the oil patch. Notice, for example, how badly the market has received the first two large restructuring events: the Shell (RDS) buy of BG Group (BG) and the Noble (NBL) buy of Rosetta Resources (ROSE). Both of these represented overpaying of assets in a market that had not yet been brought to heel – and both acquirers have been punished in share price because of it.

Exxon Mobil (XOM), in the best possible position to make a monster acquisition, is staying unnervingly quiet. They know prices here do not represent value – and they do not want to make the same mistake they made by buying an overpriced XTO Energy in 2010. I will watch for their move. They want to make one, and I believe they will, when the time is right. It isn’t, yet. 

Courtesy Dan Dicker, Oil & Energy Insider via Wolf Street

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle
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