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(July 26, 2016) The Price of Gloom

Oils closed below $44.00 a barrel suggesting there are underlying weakness not only in the energy sector but in the global economy. It is becoming more clear the Brexit vote was just enough to slow demand from a path of market balance to the perception of continued over supply. The break that may put oil on a path to test $40.00 a barrel will also put more pain on the oil sector that is now going to be forced to make more cuts in spending and reduce our long term future supply even further.

We saw that pain played out in BP earnings that saw their profits plunge by 45% as reefing margins, last year's saving grace for big oil, hit the lowest level since 2010. The drop in earnings is impacting the rest of the oil companies that are scheduled to report and may struggle to find profitability in a world that is seeing near record supplies of oil product when demand may be faltering.

The difference between over supply of oil and a balanced market is a very thin line. Since the beginning of the year I have said time and time again that the biggest threat to the oil market recovery was the Brexit vote. That now is being seen as the top of the market and we are seeing global markets this morning go to a risk off mode.

The Japanese yen is soar as we now are starting to believe the story that Japan will not give us anymore helicopter money. Gold is perking up and oil is just giving into seasonal and demand worries. Oil also saw other concerns about supply develop when Genscape, the private oil intelligence agency, reported that supply in Cushing, Oklahoma increased by 1.1 million barrels.

At this point crude oil will need some help. And that help may have to come from the Federal reserve which starts its 2 day meeting today. The Fed statement will be closely watched as to the Fed intentions about raising interest rates this year. Of course with recent stress in the global economy, it may not be wise for the Fed to signal a rate increase because they do not want a one sided trade that could affect bonds. It could be the most important Fed meeting in a while.

Natural gas started strong but gave into sector weakness in the energy complex. Strong imports from Canada are masking a drop in U.S. natural gas production as demand should be close to a record. While the market still feels comfortable with the fact that supplies are 20.6 percent above the five year average, but that should get tighter with this week's report.

The India Times reports that India has discovered a large, highly enriched accumulation of natural gas hydrates in the Bay of Bengal that has the potential to be tapped, a top U.S. agency which helped in this major discovery has said. "Advances like the Bay of Bengal discovery will help unlock the global energy resource potential of gas hydrates as well help define the technology needed to safely produce them," said Walter Guidroz, coordinator of the US Geological Survey (USGS) Energy Resources. This is a big deal as India will need a lot of natural gas in the coming years to meet what will be rapid natural gas demand growth.

The short term gloom in the energy sector will lead to long term doom for future supply. With earnings getting hit in the energy sector the search for supply will grind to a halt. And when the decline rates set in and the demand starts to rise we will see a price spike down the road. Use the weakness to put on long term strategies with options. In the short term call for the latest trade levels for that given day.

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