Understanding Oil Prices

[imoldernu]

One of the most complicated subjects ever. Trying to understand the reasons why crude oil could drop 45% in less than 6 months is a mind bending exercise.
There are so many factors that influence the barrel price that any five or six that you could pick, would be only a beginning.
Worldwide economic situations on a by-country basis are just a part of the overall price fall, though indicative of the shaky GDP in the largest nations.
While the low price is being touted as a chance to grow the US GDP, the offset in job loss may prove a cure worse than the disease.
China, Russia, OPEC, Venezuela and a score of other countries are in the middle of this change.

This article mentions some of the individual factors:
Ten Reasons Why A Sustained Drop In Oil Prices Could Be Catastrophic

Following the pundits on TV and in the financial media only adds to the confusion. This week, so far, the VIX is up 56%... confirming the uncertainty.

And so we're left to wonder if the $15 we'll save at the pump will be worth it. The noise factor suggests a new $1/gal tax to pay for infrastructure. At the same time, is the worry about leaving the oil in the ground would leave a return to higher prices with higher taxes.

Has anyone here seen a comprehensive explanation that makes sense?

... and yes, I know that there are other threads on the subject of investment in oil stocks. The future of oil as a factor in international economic stability will be extremely important in the near term.

[Walt34]

Oh, horsefeathers. The only catastrophe will be that the oilmen won't be getting their usual income and the rest of the population will have more money to spend (or save) for what they do want.

It makes as much sense as an article on why investing in low-cost index funds is bad because doing so reduces income for the financial management industry.

[audreyh1]

Quote:

Originally Posted by imoldernu One of the most complicated subjects ever. Trying to understand the reasons why crude oil could drop 45% in less than 6 months is a mind bending exercise. There are so many factors that influence the barrel price that any five or six that you could pick, would be only a beginning. Worldwide economic situations on a by-country basis are just a part of the overall price fall, though indicative of the shaky GDP in the largest nations. While the low price is being touted as a chance to grow the US GDP, the offset in job loss may prove a cure worse than the disease. China, Russia, OPEC, Venezuela and a score of other countries are in the middle of this change. This article mentions some of the individual factors: Ten Reasons Why A Sustained Drop In Oil Prices Could Be Catastrophic Following the pundits on TV and in the financial media only adds to the confusion. This week, so far, the VIX is up 56%... confirming the uncertainty. And so we're left to wonder if the $15 we'll save at the pump will be worth it. The noise factor suggests a new $1/gal tax to pay for infrastructure. At the same time, is the worry about leaving the oil in the ground would leave a return to higher prices with higher taxes. Has anyone here seen a comprehensive explanation that makes sense? ... and yes, I know that there are other threads on the subject of investment in oil stocks. The future of oil as a factor in international economic stability will be extremely important in the near term.

Trying to understand…….

only if you didn't realize the price had been propped up for the last year!

We have lots of supply coming on line the past few years. Prices stayed stubbornly high for some reason - that was the mystery. Now finally collapsed.

[Travelwanted]

I see it as this:

1-increased supply in US
2-Saudi Arabia will not decrease production - the stated reason is other countries cheat.

Result:
1-fracking becomes less profitable. decreases new investment.
2-hurts the economies of other oil producers (saudis are sunni, iran is shiite)

I think it will be temporary. I consider oil stocks "on sale" and have been buying on this massive drop.

[rbmrtn]

I think it is mostly Saudi manipulation trying to squeeze out US shale. They could send the price back up overnight by cutting back production. The problem they have is other OPEC members are completely dependent on oil for income whereas the Saudis can wait it out. The Saudis played this same hand back in '86 OPEC - Wikipedia, the free encyclopedia

In order to combat falling revenues, Saudi Arabia pushed for production quotas to limit production and boost prices. When other OPEC nations failed to comply, Saudi Arabia slashed production from 10 million barrels daily in 1980 to just one-quarter of that level in 1985. When this proved ineffective, Saudi Arabia reversed course and flooded the market with cheap oil, causing prices to fall to under ten dollars a barrel. The result was that high price production zones in areas such as the North Sea became too expensive. Countries in OPEC that had previously failed to comply to quotas began to limit production in order to shore up prices

I recall a couple years ago when shale was coming on there an issue as to the sustainability of shale production. There was concern that the wells after being brought online depleted rapidly. I don't know if that has turned out be the case, the production seems to still be increasing.

[Sunset]

This drop certainly lends credibility to the reports about 6 months ago of oil tankers just drifting in the ocean full of oil. Had nowhere to offload it.

As for the supply and demand thing, I think once oil surpasses demand, the extra tanker is worthless, nobody wants it, all their tanks are full. So if you own the last tanker you are willing to sell at any price cheap.

I imagine there will be layoffs and shutdowns of expensive wells.

Which is really ok with me as it means more of the oil in the ground will stay there for later withdrawal while we burn OPEC oil at cheap prices.

As soon as OPEC tries to raise the price too high, some of those shutdown wells will come back online and press down the price.

I think natural greed by the oil industry will end up allowing the price to float up to $80/bbl for a few years, this will allow consumers to buy v8 engines (again) and then get hammered when oil spikes up due to the higher demand (again).

[EastWest Gal]

This is going to hit the economies of some parts of the country hard, and help others. In PA there will be job losses, as well as in Texas and North Dakota. But on the flip side, the truckers will see more take home pay, the airlines are going to be ecstatic.

Some pundits are saying the Prius is no longer the car to have and sales will be hit. They say Prius owners are going to be unhappy they spent extra for their hybrid car. Since I bought mine 5 years ago, I've probably bought 1200+ less gallons of gas. The pundits keep having to come up with something to write, whether it makes any sense at all.

Leaving the oil in the ground is not a bad thing in the very long term anyway.

The media got upset when oil went over $100/barrel now they're upset that the price is falling. There's no news in saying that things are going well.

[Mulligan]

Quote:

Originally Posted by Walt34 Oh, horsefeathers. The only catastrophe will be that the oilmen won't be getting their usual income and the rest of the population will have more money to spend (or save) for what they do want. It makes as much sense as an article on why investing in low-cost index funds is bad because doing so reduces income for the financial management industry.

Joe 6 pack unless getting layed off from direct involvement in oil industry isn't going to be hurt by any of this and will be thrilled for the extra $50 in his wallet each month, tax free. What is good for Main Street isn't always good for Wall Street. The little man scores a small victory!


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[Koolau]

I got A's in micro- and macro- economics (40+ years ago, heh, heh.) What I learned back then was that the price is determined by the supply (all the other stuff is 2nd order - e.g., WHY is there more supply?) If this country (or the world for that matter) had an actual energy strategy and (perhaps policies to carry out said strategies) we could stabilize prices to some extent. Stable prices are important to new technologies and stable job growth. I could be wrong so YMMV.

[imoldernu]

Maybe it's that simple... but I wonder...

Alternate energy: Solar and wind... The companies that have leveraged their assets to to borrow for product that won't be completed as need is reduced.

Ethanol: The plants that were built and are shutting down, and those that were funded with investor $$$ that will never be built. The corn prices that rose to $8+ and now hover around $3.60.

Fracking: The more expensive means of providing oil and gas. Plans and monies that will be put on the shelf if prices remain down.

...and among this, the projected growth of jobs which may not materialize..

Almost got drummed out ER a while back because of gloom and doom, but curiosity keeps me going... Just another case of overthinking..


Hey!... what goes down, must come up, eh?

[Lsbcal]

Makes sense that the Saudis are squeezing the Iranians to get a nuclear deal done. Collateral damage to US fracr's and Russians is an added benefit for them.

I don't have a clue if this will be a net + or - for equities.

[Car-Guy]

Quote:

Originally Posted by imoldernu And so we're left to wonder if the $15 we'll save at the pump will be worth it. The noise factor suggests a new $1/gal tax to pay for infrastructure. At the same time, is the worry about leaving the oil in the ground would leave a return to higher prices with higher taxes.

I'm sure if (I'm sorry, when) the government adds "another" tax to gas, they'll remove it when gas prices start to rise again. Average gas taxes in the US is around 50 cents a gallon now. (Lowest tax is about 26 cents a gallon and highest is about 70 cents a gallon - as of 2012) (Diesel taxes are even higher)

[Dash man]

The drop in oil prices may exacerbate the deflationary pressures in Japan and Europe. This will be a drag on the US economy, likely keeping interest rates low for a longer period of time.


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[imoldernu]

Running Man does a great job in explaining the leveraged development loans in this post :

http://www.early-retirement.org/foru...ml#post1528197

Today's news about the rollback of parts of the Dodd Frank bill per the budget compromise, should ease the potential crisis. "Swaps" will be legal again. Won't affect me too much.

[Fermion]

All I know is my index funds today "lost" more money in one day than I spend on gasoline in an entire year and that drop was blamed on falling oil.

[dallas27]

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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[audreyh1]

Quote:

Originally Posted by dallas27 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. Sent from my iPhone using Early Retirement Forum

But clearly the sudden changes show that the oil market is not that efficient, because there was some serious mispricing.

[audreyh1]

Remember that a lot of market volatility in December can be due to people repositioning before the end of the year. Both for tax harvesting, and for fund "window-dressing".

[imoldernu]

Quote:

Originally Posted by dallas27 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.

A re-read of the article linked in the OP might help.

The market in Oil is slightly different than the supply/demand in corn, where a good crop will cause a price drop and a poor crop causes price increases.

[tryan]

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.