Regular readers of my ramblings will be aware that I don’t believe that this drop in oil will be of any long term significance. It is understandable, for sure, as the focus is on supply figures and inventories that indicate that U.S. shale producers are back in business and at least making up for the OPEC cuts. There are, however, three reasons that it is not a long term price adjustment.
Firstly, that shale production is, as we are already all too aware, extremely price sensitive. It has become the marginal source of oil and the cutoff for profitability, and therefore extraction, is starting to look like it is somewhere around $50. Secondly, as the focus of the market has been on supply there is still an improving outlook from the demand side of the equation, as tax cuts and stimulative infrastructure spending from the Trump administration are still on the cards. The prospect of cutting government revenue while launching a big infrastructure program is, I suspect, at least in part what is causing the third thing that limits the downside and makes for a bullish outlook for oil…the dollar has reversed course and is headed lower. Add all of those things up, then, and a pop back up above $52 looks likely in fairly short order.
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The last week or so has seen a parade of oil talking heads on the business channels as the drop is analyzed and the fact that the vast majority of them agree that oil could fall a lot further…