Crude oil gave back its gains from yesterday’s rally. Volatility has picked up once again in the oil patch as traders attempt assess whether there will be enough global demand to cut into the historical surplus that has tankers just sitting off the coast unable to unload its oil.
With Crude Oil (USO, quote) hovering around 6 year lows on part due to new technology allowing increase production in U.S. shale production has actually now come full circle putting the hurt on these same companies.
It is curious that we have the largest global (not just the U.S.) supply of crude oil in modern times and yet the futures are in contango. Another words the further out dated futures are priced higher the current futures contract suggesting an increase in oil at the end of the year. Currently Crude Oil’s current contract (NOV15) is trading at $45.59 while the December contract is trading at 46.13 and the February contract is trading at 47.33. Crude traders will be watching the tomorrow’s Energy Information Administration (EIA) supply report scheduled for 10:30 release. In order to support higher future prices in Crude Oil we need to start to see the supply being used. The International Energy Agency is calling for bullish forecast for end of the year time period as well.
Even though there are reports circulating that U.S. Shale production has been cut by 500,000 barrels per day. Traders are pointing to China’s (FXI, quote) slowing demand. Not to mention the U.S. Federal Reserve’s hesitation on a rate hike adds uncertainty to U.S. demand.
The one thing that is for certain right now is we will have uncertainty for the time being. Which brings me full circle where to invest in the space. I still like the MLPs as I see pipelines as the outer fringe of the oil patch and will be one of first places to recover (long term play) but for right now the one place that has great demand and with that demand comes top dollar rates are the tankers. With all the storage on land filled oil producers are forced to hold oil off shore.