Market veteran Jim Brown takes a close look at one of the most important markets in the world.

A portion of today’s note from legend Art Cashin:  Going Through The Numbers On Crude – My friend and fellow market veteran, Jim Brown over at Option Investor gave some perspective to the recent oil weakness by running through the numbers. Here’s a bit of what he wrote: 

Crude prices dipped to $42.75 ahead of the July futures expiration at the close. That is a 7-month low and down from the $55 high in February. Besides the obvious problem of the futures expiration, news from Libya and Nigeria about rising production put additional pressure on excess global supplies. Production in Libya has risen from 260,000 bpd to nearly 900,000 bpd over the last few months after they worked out a revenue sharing agreement with militias holding and guarding the fields and ports. Libya has the capability of producing 1.6 million bpd once they repair the damage from the civil war. 

Nigeria’s production rose 50,000 bpd to 885,000 after Shell ended a force majeure on Bonny Light crude several weeks ago. The pipelines damaged by militants in the long running confrontation with the government, are being repaired and production is expected to continue rising. 

U.S. production has rebounded from 8.428 million bpd in July of last year to 9.330 million bpd last week. The recent peak was 9.61 million bpd in June 2015. Current is only about 280,000 bpd below the peak and represents a whopping 902,000 bpd increase in just the last year. Analysts expect U.S. production to rise to 10.0 million bpd by the end of 2017. 

If you add the increase in production from the US, Libya and Nigeria over the last year you get 1.792 million bpd and that almost exactly offsets the 1.8 million bpd that OPEC began cutting on January 1st to offset rising supplies. That means global inventories are declining slower than previously expected and prices may not rise as OPEC expected. The June/July/August period is peak oil demand in the US and Europe. Unfortunately, despite the low gasoline prices, oil demand has flat lined and not rising as in prior years. 

This is due to the new ability to export ultra light shale oil to Europe. This was approved last year and exports are now up to more than one million bpd. Before we could export WTI, refiners used that oil here to refine into gasoline and diesel and that was exported to Europe. Gasoline exports are down significantly and therefore oil demand in the US is also weak. One million bpd is 7 million barrels a weak in reduced refinery demand. 

On the positive side, analysts believe oil has either reached its low or that $40 will be the bottom. Since many shale drillers cannot make a profit under $45 per share, this means fewer rigs will be activated and the pace of the production increases will slow. 

After the bell, the API Inventory report showed a -2.7 million-barrel decline for the week ended on Friday. Inventories at Cushing declined -1.27 million barrels and that is the 11th consecutive weekly decline. If the EIA inventories on Wednesday morning also show a significant decline, we could see an oil rebound begin and energy equities should follow. 

Overnight And Overseas – In Asia, markets are somewhat mixed. Hong Kong, Japan and India all saw modest losses. Shanghai had a gain after MSCI decision to include some China equities. 

In Europe, stocks on the continent got dinged, a little of which may be catch-up to the late selling in New York on Tuesday. London is seeing muted losses as the Queen outlines the government’s plans for the year ahead. 

Gold is up a bit and crude is basically unchanged at 43.50. The euro is a touch firmer against the dollar and yields are down a smidge. 

Consensus – A big focal point will be the 10:30 release of crude inventories. Away from that the bulls need to hold onto the remainder of Monday’s gains. Stay wary, alert and very, very nimble.

***ALSO JUST RELEASED: Look At What Has Rapidly Plunged And Just Entered A Bear Market CLICK HERE.


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