Weakening economic data continues to undermine the case for a 2015 US rate hike (despite naive hopes of the Fed). The U$ rally (underway since 2008) has responded with consolidation over the past couple of weeks. This on top of Middle East/Russian tension has given commodity shorts a reason to cover, and the energy sector has staged a dramatic bounce off recent lows. But this is all financial market jostling. In the real economy each oil spike is self-defeating, as higher prices spur a resurgence of output on to a market drowning in supply and wanting in demand…and storage.
As explained by Goldman analyst Currie (below), in the aftermath of over-production booms where easy credit has spurred wild-eyed speculation, durable price bottoms are not reached until ‘believers’ capitulate, throw in the towel on rebound bets, and finally move whatever capital they have left to the sidelines or other sectors. We have not seen this yet in energy. Every rally to date has brought another burst of hope–and production.
“The risk of $20 is driven by what we call a breach in storage capacity, meaning that you have supply above demand, you fill every storage tank on planet earth and then you have nowhere to put it,” Jeff Currie, head of commodity research at Goldman told CNBC from the annual Oil & Money conference in London.”(Then) supply has to come down in line with demand. The only way you get that correction is prices crash down to cash costs, which for a U.S. producer, is somewhere around $20 a barrel.” Jeff Currie, global head of commodities research at Goldman Sachs, says the risk of crude oil reaching $20 a barrel is driven by “breaching storage capacity. Here is a direct video link.