The 10-day wonder of the SuperBowl oil rally has ended. Instead, we are returning to the world of the Great Unwinding, and prices are coming under pressure once more from the energy supply glut and weak demand.
But it would be wrong not to mark the coup that took Brent prices up 26% from $50/bbl to $63/bbl in just 10 days, and WTI up 22% from $45/bbl to $55/bbl.
Not only was it a remarkable move in such a short space of time. But it took place at a time when US inventories were rising to 80-year highs. Clearly, the traders who gambled and won, knew exactly what they were doing:
- It was almost certainly US-based, because few people outside the US would have known that the last 45 minutes of trading on the Friday before Superbowl weekend could provide the momentum for the coup
- It was also precisely timed – the traders had to allow time for the news agencies to report the start of the move
- This was vital as it meant the High Frequency Traders (who usually provide 50% or more of trading volume), had the necessary news feed for their algorithms to operate.
Equally, of course, the coup couldn’t start too early. If the traders had started earlier in the day, then they would have found lots of other traders still in the office – and quick to sell into the rally before it got going.
The other key factor was a ‘story’ to provide the momentum they needed. This itself was another master-stroke. The Baker-Hughes drilling rig report is published at noon Central Time every Friday – ideal for the coup’s purpose.
Of course, the drilling rig ‘story’ is completely irrelevant to today’s oil market. There is no possible link between changes in the number of operating drilling rigs, and short-term oil supply – as I noted earlier this month when discussing the start of the coup:
“How did it all happen? Traders were winding down at month-end, and leaving their offices early on the Friday afternoon ahead of the SuperBowl weekend. A record 114 million Americans were planning to watch the American football final. And large numbers were planning viewing parties for friends, family and colleagues.
“Suddenly, a flood of “buy orders” appeared in the last 45 minutes of trading. With trading volumes low, the buyers concentrated their firepower and achieved spectacular results. This was clever enough and, of course, entirely legal.
“But even cleverer was the way that suddenly “a story” was created to explain why prices needed to go higher. Most people, after all, would think that an all-time record level in inventory meant the market was very weak – particularly as the peak was taking place in January, normally a major month for consumption.
“Instead, a story appeared from nowhere that focused on the decline underway in the number of active drilling rigs in the USA. This was spun to suggest it was, as the Wall Street Journal reported, “a sign that crude production may be starting to ebb“.”
The chart above shows the historical drilling rig count for US oil (blue line) and gas rigs (orange). And the data for gas highlights the lack of even long-term linkage between a fall in the rig count and a tightening of supply:
- The gas rig count has collapsed from 1606 rigs in September 2008 to just 242 rigs last week
- This is the lowest count since June 1992
- But prices are still falling due to over-supply
- They closed at $2.88 MMBtu last night, versus the July 2008 high of $13.69 MMBtu
History will remember the SuperBowl rally as a 10 day wonder. Now, reality is about to intervene once more. Not only is the US refinery strike still growing, and reducing oil demand as a result – 19% of refining capacity is now affected. But as the Economist reports:
“Storage facilities in Europe and Asia are already 80-85% full. Much more and they will overflow. As it is, companies are renting tankers to keep oil in. If storage space runs out, prices could tumble again.”
We are, after all, still a long way from actual cash cost of production. ExxonMobil’s US cost last year was just $12.72/bbl, and the average for the US itself is probably around $20/bbl.