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It was only a matter of time before we received a report saying crude oil inventories declined for the week. I have been reporting that reported crude inventories have been dropping for 6 weeks prior to today's report. During the latest drop in crude prices, the Chinese were using the sell-off as an opportunity to add to their strategic reserves.
The closet idealists on CNBC were cheering the recent news, and even suggested that oil may be heading for a bear market. In a Bloomberg interview today, Jim Rogers said, " Oil will resume its march toward $100 a barrel after a ``correction.'' While in Tokyo, Rogers added, "I'm just not smart enough to know how far down it will go and how long it will stay, but I do know that within the context of the bull market, oil will go over $100. It will go over $150. Whether that is in 2009 or 2013, I don't have a clue, but I know it's going to happen.''
On January 16th, Bloomberg quoted T. Boone Pickens, who said "he was sticking to his prediction that prices will average $70 a barrel this year."
Given the 30%+ sell-off in crude, oil stocks are taking the recent bad news remarkably well. The next shoe to drop for the major integrated oils is the first year-over-year decline in earnings.
Many analysts believe that the street has discounted the oil sectors recent woes based on $46/bbl oil prices. The consensus opinion is that many of the major integrated oils are 15-20% undervalued based on $46/bbl oil.
Bill Cara (www.billcara.com) weighed in on the oil argument yesterday by saying;
"About oil, just remember that at extreme ends of the price cycle, it’s not economics or politics driving the price; it’s pro traders (mostly NYMEX) stretching the envelope. The losers are those weak traders who cannot sustain their margined positions. At the end of the day, it is always the burden of debt that breaks the back of the hopeful."
Cara also said, "The gold’s and oils are looking technically interesting and the techs have enjoyed their run. The oil stocks will likely follow Crude Light back up."
There is no doubt that declining oil prices is the favorite mantra for the financial media. This news keeps your eyes glued to the TV screens, and serves as a huge distraction from reality. The truth of the matter is that 50% of the world's oil supply will be depleted by 2010. China and India's oil consumption has risen 8% per year, and as more people begin to acquire automobiles, that figure will surely rise.
The full impact of OPEC has yet to be felt, and the recently announced production cuts are just beginning.
Oh, and one more thing, where are the major new sources of oil supply are going to come from? The fact is there hasn't been a new major oil discovery in the last 30 years. The largest oil supplies in the world are in countries in the Middle East, Russia, and Venezuela who really do not like the US government.
Lastly, if oil prices continue to fall, US oil companies will not continue to search for oil because it is not economically feasible to do so. So, I don't look at the recent sell-off in oil stocks as a longer term negative. As with past sell-offs, it is an opportunity to buy.
