Oil hit a 2015 high of $60.40 (WTI) on Tuesday, what does it mean? Well…nothing. Prices go up and prices go down, it appears that the run in oil is combination of short covering and traders aggressively pumping money in the sector as they flee other sectors (ie equities) that they have run up. Nothing has changed the economics of the oil in world over the last 2 days, 30 days, or 5 months…oil is still in the ground, we still have to find it, pump it, and refine it. We have no global economic reason to expect a major shift up in demand, if anything global projections show that long term demand continues to decline.
I am a former energy commodity trader, and while I was on the trading floor I saw oil prices go from the $40s, to the $140s, to the $30s, back to the $100s, hanging out about $60. While black swan events can cause wild swings in markets, baseline supply and demand end up driving prices towards producer break-even cost when markets break outside of “typical” trading ranges.
Oil baseline break-even for the bulk of supply is in the $60-$70 range, so from both an economic and trading view we have a band above or below that $60-$70 break-even equilibrium before mid/long term changes are made (i.e. before there are shifts of the supply or demand curves). If prices raise to a point that windfall profits are to be made in the sector, more producers will enter the market (we will drill more), and consumers will purchase less. On the flip side, if prices go too far below the band suppliers will decrease production, and consumers will purchase more.
The markets continue to behave erratic, with oil and equities all over the place. In the long run it is good for the American Domestic Economy (as a whole) as oil goes down. I would expect that the run in oil over the last few months is short lived and I would expect the longs to switch back short going into the summer and see prices back in the $50s. Expect continued increases in prices of the pump of regular unleaded, and oil gently to pull back, until the equity markets take a stand this fall. If we continue to see a rally in oil it will be a tell sign that the equities will likely have a significant pull back towards the end of the year.
For now continue to enjoy low oil, but as always be prepared to see oil and other commodities get swung around as we digest domestic economic data and the world braces for continued global economic issues. It is unlikely that we have yet to see the 2015 high in oil, and don’t be surprised if the 2015 low is yet to be reached as well.