With a long list of culprits.
The price of oil plunged nearly 5% today. West Texas intermediate is now at $45.41, down $2.41 per barrel. It has been a wild ride since April 12, when it still traded at $53 and the industry was talking about $60. Over the past three weeks, it has plunged 15%. It is now at the lowest level since November 30, when OPEC agreed to cut production.
This chart shows the plunge over the past three weeks in five-hour increments:
And look what happened in February and March when WTI plunged from the $54-range to about $47.50, only to rebound and regain most but not all of it very quickly… only to hit that lower high and plunge again.
Note the three big moves in this daily chart going back to the beginning of the year: on March 7, April 18, and today:
Today, the price simply crashed through the technical support levels of just above $47 a barrel, without even taking a breath, which is not a propitious sign.
There are a slew of culprits for the plunge…
OPEC delegates downplayed today the chances of further output cuts by OPEC members when they meet again on May 25. It’s funny how the entire industry keeps praying at the altar of OPEC.
Non-OPEC producers that had been cooperating with OPEC, such as Russia, are unlikely to make further production cuts.
In fact, no one has much of an appetite for production cuts when the US drillers are doing the opposite and are ramping up production, with the effect of grabbing more market share at the expense of those making the cuts. The way they see it, US drillers would benefit from the higher price that production cuts by others were supposed to create.
US production has been re-surging, particularly in the Permian basin in West Texas, where a new boom is under way. Private equity firms have raised vast sums of new money to deploy in that new oil boom.
Energy junk bonds, even the riskiest ones rated CCC or below that once – namely in February 2016 – traded at yields of over 20% are now trading at a yield of around 10%. Investors in this paper have made a massive ton of money over the past year, and so it is an appetizing proposition for new money to try to pick up what might be pennies in front of the steamroller. And companies are able to issue more junk bonds. They’re crucial in fueling the fracking boom.
Production has allegedly gotten so much more efficient, according to the hype presented to investors, that it has pushed costs down so far that the break-even point has been cut in half, allegedly. So profit nirvana. Hence the new money flowing into it.
This comes on top of an inventory glut in the US. Storage levels are still at record highs for this week of the year and well above the record highs at the same week last year. The glut has moved downstream into a gasoline glut.
Demand in the US isn’t hot, and there are signs that, “unexpectedly,” demand in China might not be hot either, with growth in services and manufacturing slowing.
Surely, the price of oil is going to bounce off on the theory that nothing goes to heck in a straight line. But with the resurging drilling boom in the US, and the big money flooding into it, there are not a whole lot of reasons out there to be bullish about the price of oil at the moment.
And now we have a gasoline glut as we enter the “summer driving season.” Read… What Crack Spreads Say about Oil Prices
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Let’s hope the robots drive to work.
” Let’s hope the robots drive to work. ”
I had a good laugh at that.
Tell me do robots still need their moving parts oiled ? If so that should surely soak up some of the excess.
The Jetsons this is not.
Good luck with that since the high tech robots are made by tech companies who are also the most likely users and investors of alternative energy. AFAIK at least Apple is already close to using 100% renewables for their operations.
I try to time the price and fill up yesterday at 2.33 a gallon. I should have put in ten gallons and waited lol
Yet you would never know oil dropped 15% by looking at the pump prices on the corner.
“Production has allegedly gotten so much more efficient, according to the hype presented to investors, that it has pushed costs down so far that the break-even point has been cut in half, allegedly. So profit nirvana. Hence the new money flowing into it.”
I wonder how much of the reduction in those unspecified “costs” is related to the recent regime change in D.C., — real or perceived.
Yeah, the price here in Oz is still A$1.379 a litre – a whopping 2 cent fall since the end of the Easter holiday.
We price off Tapis crude in Singapore and I’ll be darned if I can find a place to get regular quotes on it.
Wonder if we’ll ever see sub A$1 a litre prices here again? It seems that there is little relationship between the POC and the price of the retail product in Australia even when adjusting for changes in the value of the A$.
Yeah, Vancouver Island (north) 125.9 cdn/litre…and 1/2 our production is sold to the States! Sure, our dollar is low right now, but still…….
Oh well, I just put the bike on the road for the next 5 months. I drive to town once per week for $8.00 return. Nice ride of 75 km each way full of twisty turns and beautiful scenery. It’s a nice way to shop for staples. My pickup (Toyota) is about $27 return. No brainer.
Oil has been one of the pillars which have kept US and Canada’s economy up. If this goes down, expect a lot of bubbles to deflate in the short run, but to pop if oil stays down for long.
Not China’s!
China is deleveraging, and raising rates. Most commodities have fallen out of bed in the past few days. I suspect China.
Food for thought: the Home Capital Group debacle in Canada was “insiders” front running the drop in Crude, probably to test the 42 handle in WTI Crude….Now you see the commodity crash in China the next day(much of the Chinese shadow banking system loans is backed by commodity contracts)..With all the Chinese hot money thats flowed in to Canada RE theres got to be some connection….
As Crude drops and liquidity vaporize in Canada Subprime watch the Loonie/USD hit 1.50 and fast….
Interesting thought. The cad might as well go up if the real estate deflates as cad will be sought after to pay debts. Historically cad exchange rate is tied to price of oil but oil in cad economy is insignificant contributor, go figure…at this point I think chances are 50/50 for cad to go up or down but if it ever hits 1.50 I am a big buyer of cad. Jmho.
A few years ago, goofballs who regarded themselves as investment pros considered high and rising oil prices as a good thing because it meant the economy was expanding. These are the same people who charge a lot of money to manage OPM.
In the past, low commodity prices were a positive because it meant costs were lower and the difference could be spent elsewhere.
To me, this means those who support gouging and a short limited view define those who manage money. Or, they’re really stupid.
If the Brick & Oil Countries getting crushed even more in the months to come, I guessed the US dollar will have another boost for a flight to safety and Trump will have another reason to complain about manufacturing being gutted
If the price goes down, governments should up the taxes to fund alt energy. Keep the retail price up so that it encourages conservation and NOT the move from cars to SUVs and trucks. The US is insane in its subsidization of oil and the car economy – at the world’s expense. (Note: oil producers are getting oil for essentially free, afterall they did not have to “make it”. They just happened to stumble upon what it took nature 500 million years to make and now they think they can have it for nothing with no ill effects.) Gas at $6-8/gallon would be a start.
Oh yeah, gee I’d like to know those oil companies ‘just stumble’ to find oil on wells that cost hundreds of millions to drill, then millions more to transport in either ships or pipelines, and then billions more to refine…………
Yeah, that’s right, to paraphrase a line from a famous dolt, “You didn’t make that oil”.
I guess some peeeeeeple just dodn’t have a clue.
I also think that the climate where oil is found, for example, Alaska and Canada must have been just a few degrees warmer way back when. Liberation of those fossil fuels is just returning the Earth to its natural state before humans showed up.
… of course, there’s no reason why the ‘natural state’ of the Earth ‘before humans showed up’ would be amenable to the survival of 7 billion and counting humans. but yeah, good luck with turning India and China back into a desert – ‘I guess some peeeeeeple’, etc
Bingo. But it’ll never happen. I remember Ross Perot calling for a 50 cent gas tax. That was the real end of him.
Americans have proven they will kill and destroy for cheap gas. They will destroy a habitable planet, but that’s what’ll happen.
Great timing for Cenovus- an Alberta based Canadian outfit that just spent 17 billion buying oil sands from foreign cos that want out. Its share price has dropped double digits and shocked shareholders are unhappy. It needs oil well over 50 to do much more than break even.
It appears those 93.5 million people “not in the work force” but not counted as unemployed aren’t doing much driving. Or spending for that matter.
My diesel rate at the pump now is still almost the same as when crude was $100+.
And the “but-but-but cheap crude will make people use more” oil industry wonders why the demand is still sluggish.
You hit it right on target. Last month I got a $50 off anything coupon for the Neiman Marcus outlet store and it expired unused. The store is about an hour away and I have to pay for parking, but it was still a good offer. I just didn’t have enough extra to use it. This week I haven’t even left the house.
I never liked playing the oil stocks. You never know how much supply there really is, and there usually is no explanation for price moves. Plus, you have a few players like OPEC that can move the market at will. No thanks.
As I read this right now, oil is getting whacked another 3%, down $1.75.
Wolf… when was it that the “Hacienda Hedge” members were set to peg their hedge price? May be front running ; )
All told, what did anyone expect the US wildcatters to do but open the wells again when OPEC decided to cut production. You could just hear the creditors in the background telling them ” pump some oil and gas, throw us a bone, and we’ll both look good”.
North American Oil & Gas Rig Count is up over 100% YOY, 32% YTD, when the OPEC reductions took effect. And I believe just today OPEC wanted to extend the cuts through the end of 2017 (was supposed to end in June).
The opaque derivatives market, which is about ten times bigger than all the other markets combined, will sometimes blow out into the real world markets.
Probably what we are seeing here.
It’s a stupid system, but there you go.
You have all of the countries cutting, then you have a few countries increasing production. Demand increases too even if it’s less than expected. Oil should be closer to $60 at this point.
I’ve read the large oil fields are expected to lose 1.2 million barrels this year, 1.2 million next year, and 1.7 million in 2019. Rather than OPEC cutting production intentionally, it may be unintentional. They’re finding a lot less oil these days too. I mean a lot less. Gluts don’t carry on forever.
The price of oil ‘should’ be what it sells for on the spot market. Central planners would disagree, but the black or grey market makes the necessary adjustment for that.
World light vehicles sales have doubled since 1980 and we still have a glut, (for now anyway), though the inflation-adjusted price of gasoline is probably half what it was in 1981, and a quarter of what it was in 1918.
Gluts definitely do not go on forever – the oil business has been notorious for cyclical booms and busts of production and prices since the 1860s. The old saying goes: the cure for high prices is high prices – and vice versa.
I suggest that all read the excellent article on Crack spreads.
Worldwide storage levels are the key to crude oil prices..Simply put, storage levels are the net result of supply and demand.If supply is greater than demand, storage levels will increase ;if demand is greater than supply storage levels will go lower.Last year there were numerous rumors that the Chinese were buying large amounts of crude to fill newly constructed storage facilities.
Complicating these storage level numbers is the amount of refined products,( gasoline ,distillates etc) in storage. The total value of these refined products minus their crude oil cost is the so called crack spread or a rough measure of refining profitability.Currently there has been a build up of gasoline in storage.This can be a result of either overproduction of gasoline by refiners or poor demand by consumers.
While the US is the largest consumer of oil,it is China and India which have increased consumption the fastest.So any slowdown in the economies of these countries is integral to the trend of oil and refined products prices
On the supply side ,OPEC,Russia ,US and Canada are the biggest producers.The OPEC countries plus Russia have had agreements to reduce oil production in the past.Every time such agreements have disintegrated due to cheating by one or more countries..The US has been able to maintain its production levels primarily because of new technologies(fracking) and discoveries of oil in the Bakken area of North Dakota and the Permian basin in Texas.There are large differences in the required break even price in various areas of the US,but some areas of the Permian basin require only $40 or less to break even.
Given these new discoveries of oil in the Permian basin and the need for many of the largest oil producers to pump in order to finance their social programs,lower oil prices will be an inevitable result of slowdown in demand from China and India.
This past month a test was conducted using blockchain technology which allowed a tanker of oil to be sold and resold, while in route, multiple times. What made these sales unique was the blockchain. It was able to update the necessary documentation in hours instead of weeks. This cut the time for authentication of the transaction and the associated costs.
Usually the options markets allow for the serial sale of commodities. But once the buyer has physical delivery, international sales take a lot of paperwork and time. The new blockchain platform is being sold as a way to cut back on the inefficiencies.
If this system takes hold, you can expect the cost of trading commodities to drop and the business of international settlement to change. The arbitrage associated with holding or withholding commodities will also change.
Sounds like another Bitcoin scheme for specs. Usually a spec would just trade futures or options – and never book delivery unless they’re users.
If this system takes off it will increase the volatility around the expiration date. This will definitely separate the men from the boys.
It would increase volatility for the shipment in question, but actual shipments represent a miniscule portion of the futures exchange markets, which are driven by and relative to spot. The shipment price would probably be a function of the exchange price, which fluctuates in microseconds, and/or negotiation based on the exchange prices.
The blockchain trade seems to involve transferring ownership of the cargo in transit, too slow, capital intensive, and unnecessary for specs, but useful to takers of bulk crude or brokers who sell to users, or users who want to redirect a shipment based on their fluctuating throughput requirements.
It seems more a method to streamline and reduce the use of paperwork rather than a speculative or pricing vehicle.
robt,
I was only referring to the options which will become more volatile around the expiration date, because faster selling of physical shipments extends the arbitrage. You might get a better price later rather than sooner, so no need to pay for the option.
As I understand it, the blockchain functions as a digital signature of a transaction, and nothing to do with bitcoin etc.. The legal framework will surely follow.
They used a digital currency, Etereum I think, works like Bitcoin but a different token. You need to own the Etereum coins in order to pay for the use of the document system.
Maybe a silly question, but is there a legal framework backing such transactions, or is it trust?
I don’t think there is any legal framework other than the users agreeing to the representations made by the documents on the system. Anybody following bitcoin knows about the exchanges that have gone bust and the millions in missing bitcoins. This system is based on the same technology.
The banks like the block chain because it is a no recourse system. If your documents get hijacked, changed, or your account stolen, you are out of luck. They think if they control the system they will always be on the winning side. That remains to be seen in my opinion.
The executive summary of this article is: cheap oil producers vie for market with the cheap fiat producer.
– Too much conspiracy theory/theories flying around.
– The COT (Commitment Of Traders) report showed that before the two oil price drops (in April & May 2017) traders had build a (very) large “long” position in oil. And when the oil price didn’t rise (more) and even started to drop all those “long” positions caused a “long-squeeze” (not a “short-squeeze”). Hence the (sharp) drop in oil.
– Correction: it should have been “in March through May 2017”.