U.S. oil production continues to defy forecasts because it hasn’t declined. Refiners are processing as much of the stuff as they can, the glut of oil, gasoline and diesel fuel keeps growing. The U.S. has now stockpiled 1.2 billion barrels of crude. The growing supply in Cushing, Oklahoma and elsewhere has analysts concerned that oil will start becoming difficult to store.
Another factor driving oil prices higher was speculation that OPEC members may strike a deal with Russia to cut production. Analysts reviewing the possibility of the deal are doubtful that such a meeting could take place but some argue that Russia’s options for tackling a deteriorating economy are running out.
The Russian economy, along with other less stable oil producing nations, are under major strain with economists predicting further contraction in 2016. It looks like Russia could be facing a second year in recession. The Kremlin is now in a difficult position where it has to choose between further spending cuts or drawing down its sovereign wealth funds.
U.S. ratings agency Fitch said the Russian government has asked ministries to identify 700 billion rubles ($9 billion) of cuts, which will help with the deficit but will also likely dent demand in an economy weakened by lower oil prices and rouble volatility.
Several analysts agree that Russia is trying to talk up the oil markets by hinting at the possibility of production cuts and its willingness to holding meetings. A OPEC deal is unlikely, given the fact that Iran is just now returning to market.
“Genscape reports that a first shipload of oil left Iran for South Korea as sanctions against Iran were lifted. The tanker, Serena, left Iran on Jan. 15 and docked at Fujairah before setting a course for South Korea on Jan. 20.
“The ship had been moored for a year, and Iran is estimated to have about 40 million to 50 million barrels of crude or condensates in storage on tankers”, according to Genscape
The oil bulls point to the fact that Warren Buffett has recently invested a billion dollars into the oil patch by adding 12.5 million shares to his Phillips 66 stake. Berkshire now has $5.9 billion invested in the company representing around 14 percent of the outstanding shares.
Now, market sentiment has changed dramatically giving oil producers a pass when reporting poor results but hammering growth stocks. Two out of four FANG stocks beat earnings estimates but only Facebook remains in positive territory in 2016. Growth stocks like Tesla, Salesforce and LinkedIn have been pounded. The chart below is the year to date price of the FANG stocks.
On the other hand, BP reported a 91% drop in profit, Exxon’s profits dropped by 58% and Chevron lost $588 million. Now, keep in mind the average price of crude oil was around $46 a barrel in the fourth quarter and it looks like average price for first quarter will be in the $32.00 range. Next quarter earnings could look even uglier. Despite all these negative factors, the year to date chart below illustrates that money is still flowing into these stocks.
What do think, has oil hit a bottom? Should you follow Warren Buffett’s bullish bet on oil?