In case you did not know, the US is at war. Okay, in actuality, it is the US oil producers producing soil in the US that are at war. It is an economic war, for sure, but it is war and the “enemy” is vowing to take no prisoners.
- Representatives of Saudi Arabia, the United Arab Emirates and Kuwait stressed a dozen times in the past six weeks that the group won’t curb output to halt the biggest drop in crude since 2008.
- Qatar’s estimate for the global oversupply is among the biggest of any producing country.
- These countries actually want — and are achieving — further price declines as part of an attempt to hasten cutbacks by U.S. shale drillers, according to Barclays Plc and Commerzbank AG.
Okay, so the above is nothing new, really. Had one been following this, one would have known the OPEC members were serious. In fact, they are so intent on halting US oil production they are shooting their own members to get at the US producers. Just ask Venezuela and Russia if they support the actions of the Middle East members.
In the meantime, the US producers are not showing any sign of giving up production. True, some of the smaller independents will fall away, but the big dogs are using sophisticated weaponry to deal with the Middle East monopolists – hedging.
- Oil prices would need to fall at least another $20 a barrel to choke off the U.S. energy boom, industry experts say, though some smaller American producers would face serious problems from a more modest decline.
In fact, they are making so much money on the hedging right now there is no compelling reason to give into the hard push from the Middle East.
- Bakken shale oil pioneer Continental Resources pocketed $433 million by liquidating its hedges in September.
- On Tuesday, tiny firm American Eagle Energy announced that it sold off its 414,000 barrels of oil hedged at $89.59 a barrel through last December for a profit of $13 million to improve its liquidity – even as the firm said it would have to stop drilling until prices improved.
The second point above “appears to be the effect that OPEC is looking for, although thus far it is the exception rather than the rule.”
In any case, the war will go on for a while, so the attribution of today’s market drop to the further drop in oil seems, well, not quite right.
- Stocks decline Friday as a drop in oil prices accelerates.
The market is going backwards because the comeback of the last two days was too big and too fast. The market is simply rebalancing and the need of the talking heads and the breathless to find reasons other than that is painfully clear. At best, oil dropping in price is an excuse to sell; it is not a fundamental reason for the market to drop.
Just so you know, RBOB, the futures price of gasoline in the US is now flirting with the $1.20 zone. I just read an article the other day that suggested both Brent and WTI crude could drop down into the $20 zone and then range between that and $50 right through 2016. How nice would that be, especially if employment keeps heading in the direction it is, given the numbers that came out today.
Trade in the day; invest in your life …
