One thing I live by is the belief that “if coincidences keep happening they are no longer coincidences.”
There seem far too many coincidences to credibly believe that the oil price drop is solely tied to U.S. producers over-producing, easy money from the fed, and previously high oil prices kicking off the shale boom. That is the general belief as to why the oil crisis exists and now exceeds the price recovery time of 1986, the last time OPEC decided to withhold supply adjustments.
Just in the past few months alone we have witnessed the Iran deal, a threat to veto any Congressional action on lifting the export ban and now approval to sell oil from the SPR. All three of these events have one thing in common: they all drive oil prices lower via improving the supply. Related: Pain For Oilfield Services Will Continue Even If Oil Prices Rebound
At the same time, we have heard increasing emphasis on the climate change agenda by politicians and even the Pope. Take this and the well-documented bias of the media, Goldman Sachs, and the EIA, which all have historically supported government “initiatives,” we find ourselves thinking how much of these price movements are fundamental vs. other influences. Related: Stop Blaming OPEC For Low Prices
It is no coincidence that as soon as the Federal Reserve last summer ceased threatening the use of more QE to prop up markets, as the EU & Japan began their QE, that the U.S. dollar rose and oil along with almost every other commodity began to fall. As a reminder, we are heading into an election year where a record number (51 percent) of Americans now earn under $30,000 per year. Does anyone believe printing more money will assist them anytime soon? The answer: NO WAY. Related: U.S. Oil Imports On The Rise Once More
However, lower commodity prices will have almost an immediate positive affect on lower earners, which now form the highest majority ever. Keep in mind that the Fed has made it clear that one of QE’s objectives was to influence asset prices i.e. drive interest rates lower and equity prices higher. So why is so far-fetched to think they are now influencing commodity prices, directly or indirectly?
Investors may say commodity prices reflect weak demand from weakening economies yet they fail to explain how that could be when they are buying high beta, risky assets via technology and biotech at the same time. Are these asset classes special in that they are recession-proof?
Let me repeat; no one is saying U.S. inventories aren’t too high, but to make calls that oil will remain in the $40s basically forever or inventory will once again overflow storage (same case was proven dead wrong last spring) are not based in reality. For example, HESS announced this week that its production will fall 10 percent in 2016. Hedges are rolling off and mid $40’s oil won’t support current production, period.
By Leonard Brecken for Oilprice.com
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