The price of oil is so important to global economies because it impacts economic sectors outside of the energy space. For example, in 2015, the US had record car and truck sales (17.7 million vehicles sold versus 17.1 million in 2000).
Lower fuel prices, along with the recovering economy, contributed to that manufacturing boon. Therefore, when prices are volatile (low or high) they deserve scrutiny. Back in 2008, when we had the highest prices of crude oil ever—topping out at $147 a barrel in July—I raised concerns about excessive speculation in oil. Supply was stagnant, some even said weak, and demand was constant. However, prices went from around $90 a barrel in January to that record (still a record) high. What I saw going on in markets was that “long-only” speculators (hedge funds, pension funds and others) were going long on oil—buying for several years. Their trading strategy was fairly price insensitive to oils daily, weekly or monthly fluctuations.
They were in it for years. This made some sense as several respected analysist had suggested we could see $150 oil. In fact, one bank research arm suggested $200 oil! These long-only traders would simply buy and hold. I termed them “Massive Passives” and it became a frequently used term of art for a period of time. Today, the Massive Passives are again considering if they should get into markets. And by the way, there is nothing wrong with the Massive Passives strategy, and being a part of markets is a good thing, generally.
But, with prices hovering at decade-plus lows (2003 was the last time oil prices were so low), investors are again considering when to get into the oil market. At this point, it takes some guts—perhaps even a “leap of faith” as The Boss might say—but there is a potential glory upside! Complicating the oil markets is the circumstance is Iran which, due to the lifting of sanctions (which began in 2012), is increasing oil production again. The theocracy-run nation produced 2.6 million barrels per day in 2011, prior to the sanctions, but due to sanctions, in 2014 the production had dwindled to 1.4 million barrels per day.
In December of 2015, Iran had already ramped up production to 2.7 million barrels per day—much of it being held on floating storage (tankers). As I noted on Bloomberg, key dates to watch for are the Iranian elections on February 26th and the next scheduled OPEC meeting which is set to take place on June 2nd. In the meantime, oil markets will hopefully stabilize. Barring some geopolitical event, however, it is hard to see a swift upswing of any significance in the near term.