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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