Money managers betting on a rebound in crude oil, selling growth stocks.

Oil Produx v prices

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.

facebook

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.

bp

What do think, has oil hit a bottom? Should you follow Warren Buffett’s bullish bet on oil?

 

 

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4 thoughts on “Money managers betting on a rebound in crude oil, selling growth stocks.

  1. To be honest, i have no clue on what the oil price might do. I just hope it goes up so that no states or big companies default. But i fear the opposite. No one at tbe production poker table seems to be willing to lower the output s the first one… To be continued

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  2. I’m starting to think that we are heading into a recession and hope that it’s not as bad as 2008. It’s scary how countries are now facing negative interest rates, and our banks here in the U.S. will be doing a stress test to see how well they would hold up in a negative interest rate environment. Could it be that all of this monetary easing could of created a larger problem? It certainly does look as though all we did was kick the can down the road.

    In my opinion, even it oil stays down for a bit there are companies like Exxon Mobil who have built up some solid financial reserves. I think there are some great buys, but you do need to be very careful on what you are buying where some of these companies could become insolvent. Excellent post!

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    • Thanks, I think that wage growth and employment numbers in the U.S. are strong enough to avoid a recession. I have never seen a recession without unemployment going up.

      I am not worried about U.S. banks, I just found out that oil producing countries invest 48% of their funds from royalties and tax revenue into financial stocks. So countries like Saudi, Norway …etc are selling their bank stocks to finance their budgets deficits.

      I have some cash on hand to pick up some very cheap bank stocks, some U.S. regional banks have sold off even thought they have very limited exposure to the oil patch. I am waiting until summer to buy any oil stocks, waiting for oil future contracts to expiry.

      Liked by 1 person

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