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Strike While The Majors Are Cheap

This big collapse in the price of oil that has occurred in the second half of this year is the result of a combination of factors. Dollar strength as other major economies, such as Japan and Europe, face problems has played a part, as has some worry about a slowing of global growth. If the numbers are to be believed, though, the single biggest factor has been the increase in supply as unconventional wells, most notably in the U.S., have come on stream. Understanding that this is principally a supply shock is important for investors as it determines strategy for next year.

The evidence is easy to find. The most recent Short Term Energy Outlook report from the U.S. Energy Information Agency estimates that the global supply of crude has increased from 90.16 million BBL/D in 2013 to 91.96 million this year, an increase of 1.8 million BBL/D, while total global consumption has increased from 90.48 million BBL/D to 91.44. Not only does this tell us that supply is increasing faster than demand, it also shows that the world as a whole has gone from a production shortfall to a surplus. It should also be noted, though, that although lagging behind the rate of supply increase, demand is still in an upward trend.

The point is though, that absent any unforeseen influence, supply distortions correct quite rapidly. The price fall stimulates demand, while supply growth is rapidly slowed as more expensive production is halted. The “invisible hand” that guides markets…




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