U.S. crude prices have soared 19% since the Organization of the Petroleum Exporting Countries agreed on Nov. 30 to its first supply reduction since 2008.
"U.S. crude prices have soared 19% since the Organization of the Petroleum Exporting Countries agreed on Nov. 30 to its first supply reduction since 2008. Other non-OPEC producers signed on to the output cut, which amounts to almost 2% of global daily oil production, aimed at shrinking a global glut that has weighed on prices for two years.
Investors are now more bullish on oil prices than they’ve been since the summer of 2014, the last time oil prices were over $100 a barrel.
Since just before the OPEC deal, money managers have increased the number of positions on rising crude prices by 7%, bringing the total number of bets to 358,573. That figure is seven times the number of bets on the price falling, according to data from the Commodity Futures Trading Commission."
January 5, 2017, Wall Street Journal, 10:38 PM EST
I placed the somewhat lengthy quote above from today’s Wall Street Journal And I did so to re-visit the message of my September 16, 2016 column, Why Things Happen The Way They Do.
Conventional wisdom has it that oil prices rise and fall on supply and demand. This is the classic macro economic idea that more supply lowers price or that increased demand may well raise the price. This assumption, which is held by 99% of the energy reporting media, that oil is in fact solely an economic good. Which is to say the price moves just as the price for eggs, avocados, or plywood.
And again, the vast majority of articles are reporting to readers that oil prices are rising due to promised cutbacks at OPEC and in Russia. But we pointed out that OPEC has little history of enforcement, lots of cheating on quotas, and Russia had really only agreed to hold output at its now recently increased levels.
The first paragraph seems to parrot just this idea that restricted supply has raised prices.
The three paragraphs appear in the same order as they did in the WSJ report. But really, the second paragraph should follow what is now the third. Bear with me, I am going somewhere with this. The third paragraph begins, pay attention now, just before the OPEC deal, money managers increased positions by 7%. And there you have it in print, oil is not solely an economic good, it is a financial good!Now, given the lack of enforcement in the past, how could money managers have known what OPEC would do? The answer is, they had no idea. Instead, positive mood towards oil prices preceded the news event. And the expansion of positive bets on an oil price increase (7%) caused the news to in fact validate an event that took place on the futures exchanges rather than in Vienna!
My point being if you want to follow or predict oil prices, the best way would be to track expanding or contracting volume bets on the direction of oil prices, rather than OPEC announcements. And the second paragraph, indeed, sets the tone for what we are liable to see in 2017.
Which is, investors are the most bullish on oil prices since the summer of 2014. Again, the social mood towards higher oil prices preceded the announcement of supply cutbacks, not the other way round. Unconscious social mood, unremembered from the past, drives social action. And there is no better laboratory for this idea than international oil futures.
Mood was overly optimistic at $110 in 2014. Then mod changed, supply after all had been abundant for years. It was the change in mood that drove prices below production cost to $25 in February, 2016. Then mood changed literally in a day’s time, doubling prices to $50+ in a matter of weeks. My guess is that real production costs are about $45. Now positive mood via expanding bets on the price of oil, is liable to drive prices higher.
Confirmation in higher price of energy and service stocks echoes this idea. Collective shares sold over the last two years are now valued at $14 billion more than their offering prices. So investors who bet big early last year have been rewarded.
Don’t doubt me. I am reading yet another article about how US production could reach 9.6 million barrels per day by the end of 2017, and that could offset the OPEC cuts.
To which I say "oh balderdash." If fund mangers keep expanding the number of futures and option bets on higher prices, it won’t matter what production does or does not do. More bets on higher prices beget, now you got it, higher prices for oil.
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