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Leonard Brecken

Leonard Brecken

Leonard is a former portfolio manager and principal at Brecken Capital LLC, a hedge fund focused on domestic equities. You can reach Leonard on Twitter.

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Policy, Coincidence Or Conspiracy: What’s Really Holding Oil Prices Down?

Policy, Coincidence Or Conspiracy: What’s Really Holding Oil Prices Down?

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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Leave a comment
  • jason on October 28 2015 said:
    Leonard, great article. We need to hear from you on CNBC. You hit the nail on the head.
  • Doug on October 29 2015 said:
    Go for it Leonard! A huge geopolitical paly as well - but nobody is listening.
  • Matt Biddick on October 29 2015 said:
    At this point, I don't think any of us have any idea what the "true" oil price should be in a free market. You reference 1986. I think it has been documented that when OPEC (read: Saudi Arabia) refused to support the previous high oil price of about $30/bbl beginning in December 1985, that was mainly to cooperate/join with Reagan, Thatcher, and JPII in an effort to crush the USSR by destroying their sole source of hard currency. However, at that time, there was also somewhere between 10-15 million bopd of excess supply when global demand was only about 60 mmbopd. Low prices ensured climbing demand, and during this time I think you could say we were experiencing the "true" price for oil, which fluctuated between $10 and $18 most of that time (excepting 1991 and the first Gulf War). Subsequently, over the next 15 to 17 years global demand caught up to supply. It started to turn around about 2002 or so and we had the last 12 years or so of pretty good times overall in the oil patch. At least some of this time, oil was at its "true" price but when the fever hit, and speculators jumped in, oil price was obviously inflated, and to some (great?) extent by QE.

    Today, depending on whose number you use, we have a global demand of around 94 mmbopd with an excess supply (again, whose number?) of 1.5 - 3 mmbopd. That is a damn tight market if you ask me. That misinformation, spin, propoganda is being used on a massive scale is obvious. The who and why has many possibilities. But I close with this thought. Global demand grew 9 mmbopd from 2009-14 (six years). The only reason that demand got met was because of the amazing innnovations of the American oil industry and $100/bbl oil. Most likely, demand will grow at about the same rate the next six years and $40 oil "ain't gonna cut it".
  • Amvet on October 29 2015 said:
    First of all, the majority of global oil is used by developing countries and the level of US oil storage is not an indicator of global oversupply.
    Secondly, two times this year the surge in US oil inventories was due to a surge in US oil IMPORTS:
    Finally, the latest hard data on global production-consumption was the BP 2015 Stastical Review which showed production 88.673 million bpd and consumption 90.096 million bpd. in 2014. Some EIA global data is from 2013.
    Punch line, massive futures trading control oil prices. Raid the big funds and banks and analyze their data.
  • mulp on October 29 2015 said:
    The conspiracy was hatched in Cheney's secret meetings with big oil in 2001 to limit increases in production to create scarcity to drive prices and profits to record highs.

    Obama and Democrats countered with lots of competition in new energy sources with many new small competitors to the big high price high profit old corporate monopolists, and now it's become clear that the high prices were not natural, but artificial consequence of crony capitalist including the Bush dynasty, Cheney representing big oil, the House of Saud and its emirati all working to centralize power over energy to create the scarcity to extract monopoly profits for Texans.
  • Rick on October 30 2015 said:
    You are a troll. Crawl back under your rock. Did you even read the article?

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