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Old 12-11-2014, 12:02 PM   #21
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I keep reminding myself that I do not have to understand oil prices. That pump price is emotional only.

Here is a chart of the sp500 (red) versus a popular commodity index (blue). I'm much more interested in the red one. Do you see a correlation between these two? I don't.

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Old 12-11-2014, 12:08 PM   #22
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No, not particularly. Occasionally an inverse.
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Old 12-11-2014, 12:08 PM   #23
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But clearly the sudden changes show that the oil market is not that efficient, because there was some serious mispricing.

I'd have to disagree. Demand is dropping while supplies are rising, especially in the US. Prices are falling. Buyers are expecting cheaper prices in the future, so they are delaying purchases, dropping futures even more. Sudden changes are just a reflection of changes in future expectations of both demand and supply. In the last months the world econony started shrinking while opec stated they will purposely over produce. A price shock is EXACTLY what should happen.


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Old 12-11-2014, 12:25 PM   #24
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The referenced article is like asking the baker why falling bread prices is bad .... oil is trading where it was 5 years ago.

Wasn't a problem then .... not seeing the problem now.
I didn't see the problem with house prices falling back to reasonable levels but everyone panicked about that, money was stuffed in by the government and now you have markets inflated again.

If wages fall back 5 years and also healthcare costs, then I could see a valid reason for oil to fall back to what it was 5 years ago.
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Old 12-11-2014, 12:27 PM   #25
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I dont get the OPs post. Commodities, by definition, are mostly homogeneous goods where prices follow the supply/demand model more ideally than almost any other type of good.




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Me too.

How much of the S&P consists of oil industry companies?

One talking head says it'll help small and mid caps because lower gas prices are good for domestic economy, which mostly the small and mid cap companies are dependent on (because they don't have an much international revenues as bigger companies).

Then another blames the plunge in the Russell 2000 yesterday to smaller oil producers being hit by the falling oil prices.


Problem is that there are a lot of people who make money on volatility, not on the market going up. So they will manipulate trading to their advantage.

The oil prices are 5-year lows. Did the market and the economy suffer when the prices were at these levels back then?

US economy is not that dependent on oil production. It is not Russia or Venezuela. Supposedly 2/3 of the GDP is consumption. So why would lower energy prices hurt the overall economy?

Today the market is back up, because of good economic news, with some prognostications of 5% GDP.

Someone is getting rich off these wild swings.
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Old 12-11-2014, 12:32 PM   #26
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I think it will be temporary. I consider oil stocks "on sale" and have been buying on this massive drop.
Ditto....
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Old 12-11-2014, 12:51 PM   #27
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We need to make up the loss of oil production by US workers/companies with some other export or the drop in price of oil is a net negative long term (unless the export of US dollars can continue if the world appetite for them remains strong).
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Old 12-11-2014, 01:22 PM   #28
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Maybe I linked to the wrong article or something like that. It appears that no one thinks that even one of the 10 points would have any effect on the economy. The basis for the article was a five+ year oil price decline.

So if solar, shale, wind and ethanol go by the boards, and the billions of dollars spent to explore and initiate building long term sustainability of alternate energy, and the new jobs that were created disappear... the effect on the economy will not be serious.

Supply and demand? I hope you're right.

Much more here about international factors that suggest long term low rates.

http://www.theage.com.au/business/mi...11-1252iz.html
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Old 12-11-2014, 01:32 PM   #29
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I'd have to disagree. Demand is dropping while supplies are rising, especially in the US. Prices are falling. Buyers are expecting cheaper prices in the future, so they are delaying purchases, dropping futures even more. Sudden changes are just a reflection of changes in future expectations of both demand and supply. In the last months the world econony started shrinking while opec stated they will purposely over produce. A price shock is EXACTLY what should happen.


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But the process should have started a year ago, causing a more gradual decline. Not this sudden stair step. A lot of the information - particularly supply, was obvious a year ago. The high oil prices earlier this year made no sense.
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Old 12-11-2014, 01:35 PM   #30
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What happens if the price of oil remains down for a few years?

Maybe the marginal producers and exploration companies goes away but the rest of the economy, including the global economy, does better.

It sounds like the "shale revolution" was more about money than national security, energy independence, etc.
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Understanding Oil Prices
Old 12-11-2014, 01:42 PM   #31
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Understanding Oil Prices

Not true(audreyh1), the expectation was that opec will adjust supply it maximize profits and support higher prices, like any good monopoly would. They chose to enter a price war by oversupplying the market. Essentially they are purposely driving prices down to the cost of production or below to drive out / bankrupt competitors. When they took that tact, the market reacted strongly as they should. Opec signaled more and more strongly to the world they are serious and are going to ride this to the bottom to hurt others. I promise the long game is to maximize profits. Whether it works, is another story.

This is black oil friday, these deals won't last. It not any companies interest to maintain this level.



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Old 12-12-2014, 09:32 AM   #32
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Yeah, there would be a REAL opportunity in oil futures ... if only we knew how low it will go.

Hmmmm ...
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Old 12-12-2014, 09:46 AM   #33
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It sounds like the "shale revolution" was more about money than national security, energy independence, etc.
It was about the oil companies developing and perfecting horizontal drilling and more efficient ways to fracture tight formations to produce X20 the amount of hydrocarbons they traditionally got from vertical wells.

It's a game changer for oil companies and has nothing to do with national security, energy independence or any of that flag flying stuff.

Remember, oil companies cutting back on drilling and production results in keeping the hydrocarbons in the formations. Once prices are high enough to sustain lifting costs and profits, they will be back at it.
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Old 12-12-2014, 10:18 AM   #34
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...(snip)...

Remember, oil companies cutting back on drilling and production results in keeping the hydrocarbons in the formations. Once prices are high enough to sustain lifting costs and profits, they will be back at it.
Thanks for confirming my guess on this.

So I guess we can say that the US frackers are putting a ceiling on how high oil might go in the future? When it goes incrementally higher, more supply will become available?
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Old 12-12-2014, 10:21 AM   #35
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The oil prices are 5-year lows. Did the market and the economy suffer when the prices were at these levels back then?
Yes, I'd say the economy was hurting pretty badly in 2009. But the oil price collapse then was the result of a crashing economy, not the other way around.

"This time it's different." This seems more like a replay of 1985, when the world economy was coming out of a serious recession, but expanding. The oil glut that followed gave consumers more spending power and stoked the economic engine that relies so heavily on the middle class.

The thing that puzzles me is, why are the Saudis pushing production now when they really don't have to? The country is the 800-lb gorilla of OPEC, and it has ample cash reserves. It doesn't need to maximize cash flow at the expense of other cartel members.

Is it possible that King Fahd agreed to boost oil production in the 1980s to destabilize the Soviet Union, which was fighting mujahadeen in Afghanistan and under increasing Cold War pressure from the United States? Perhaps the Saudis used their oil weapon at the behest of the US back then ... and, perhaps, now?

Vladimir Putin seems to think that's the case. He's seen this movie before too, through Russian eyes.
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Old 12-12-2014, 10:29 AM   #36
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"Once prices are high enough to sustain lifting costs and profits, they will be back at it." In a New York minute.
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Old 12-12-2014, 10:29 AM   #37
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Is it possible that King Fahd agreed to boost oil production in the 1980s to destabilize the Soviet Union, which was fighting mujahadeen in Afghanistan and under increasing Cold War pressure from the United States? Perhaps the Saudis used their oil weapon at the behest of the US back then ... and, perhaps, now?

Vladimir Putin seems to think that's the case. He's seen this movie before too, through Russian eyes.
Makes me wonder if Russia may find some Russian citizens in Saudi Arabia who are getting oppressed and need Russian intervention.
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Old 12-12-2014, 10:53 AM   #38
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Old 12-12-2014, 10:54 AM   #39
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Makes me wonder if Russia may find some Russian citizens in Saudi Arabia who are getting oppressed and need Russian intervention.
The Persian Gulf is bristling with weapons. Plus the Russians know what's likely to happen if they put a military force in the country that is home to Mecca -- we did that, and got 9-11.

If the 1980s repeat themselves, though, oil will remain in the basement for several years, until Russia undergoes economic collapse and regime change.
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Old 12-12-2014, 10:57 AM   #40
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Thanks for confirming my guess on this.

So I guess we can say that the US frackers are putting a ceiling on how high oil might go in the future? When it goes incrementally higher, more supply will become available?
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"Once prices are high enough to sustain lifting costs and profits, they will be back at it." In a New York minute.
Note Ed's answer above....(highlight be me)
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