What's Up in the Oil Markets? - Alaska Permanent Capital Management


What’s Up in the Oil Markets?

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Jeff-PantagesWe will update the goings on in the oil markets this week and then talk about the impact on the financial markets, especially the banks, next week. But first, a few headlines from last week.

(Bloomberg) — Global equities virtually unchanged in wild first quarter. (Equity markets roared back after a sharp sell-off early in the year. The S&P 500 was up 6.8% in March and 1.4% in the first quarter.)

(Bloomberg) — Yellen says caution in raising rates is “especially warranted.” (The Fed Chair’s “dovish” speech to the Economics Club of NYC boosted the markets. The Fed seems to be paying more attention to global events than previously thought.)

(Nikkei) — Abe says economic stimulus plan coming in May. (More stimulus from policymakers in Japan and elsewhere.)

(WSJ) – U.S. employers added 215,000 jobs in March; jobless rate ticked up to 5%.  (It was a solid report; odds of a recession are low. The increase in unemployment was due to a larger labor force, not fewer jobs.)

It looks like oil may have found a bottom in early February at around $26. It had rallied to $40 by the end of March. However, the NYMEX oil futures markets and economic forecasters still have oil under $60 by 2020.

Bank Credit Analyst has called the oil market pretty well. They are more bullish than the consensus above.  Here are some quotes from their 20-page report:

  • We expect oil markets to balance in the second half of 2016 – well ahead of Energy Information Agency (EIA) predictions – with WTI and Brent prices in a range near $50 by year-end.
  • Our 2016 estimate of demand growth is 1.2 million barrels per day, in line with the International Energy Agency (IEA). Our oil price bullishness is due to larger and faster estimates of production declines, more supply contraction.
  • Barring any substantial disruption in oil production, high levels of oil in commercial storage should blunt oil prices from shooting much higher than $50 in the near term.
  • Deep corporate spending cuts and capital markets’ “hangover” will be more difficult to reverse than appreciated, delaying U.S. shale’s return to growth into late 2017 or early 2018.
  • Massive cancelations and indefinite postponement of large-scale long-term investments will result in anemic new production additions in 2017-2020. Non-OPEC production declines following these blockages will extend through the end of the decade, despite 2018+ growth from U.S. shale producers.
  • In 2016, OPEC’s growth will be below expectations as Iran’s production resurgence will be hampered by logistical difficulties and partially offset by declines in other OPEC nations. Iran will see a greater surge in production in 2017+.
  • Potential for unexpected production outages skew price risk to the upside.

While higher oil prices are good news for Alaska, it’s not enough to solve our long term fiscal problem and current $4.1 billion budget deficit. We need $115 oil to balance today’s budget. The Department of Revenue is using $60 over the next five years, resulting in large forecasted deficits. Spending cuts, tax hikes, and dipping into the Permanent Fund are on the table. It’s gotta be a combination of all three. There are no easy answers.

Jeff Pantages, CFA®
Chief Investment Officer

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