I have an idea – let’s talk oil. Aside from Greece and Ukraine, it is one of the hot market topics of the, day, uh … week, no, month, year? In any case, oil is hot, and with the current uptick in prices, one has to ask – is the fall in prices over?
Me? Well, you know my position. Oil has become subject to fundamentals, generally speaking. Now, having said that, the current uptick in prices has nothing to do with fundamentals; it is purely speculative. Okay, so what am I saying, exactly? Truth is, speculation can drive price (duh!), and it has driven the price through the roof before, but this time it is different.
Currently, there is an oil war going on and the stakes are deadly for more than a few folks other than the big companies/countries that run the oil industry. The point of OPEC’s oil war is to drive US production down, to force companies out of business so OPEC (Saudi Arabia) can, once again, dominate the global oil market.
- Last year, about 198,000 workers were employed in oil and gas extraction, the most since 1987. Another 325,500 were working in the industry’s support services, the most since the Labor Department began tracking those figures in 1990. Combined, some 523,500 were on company payrolls in 2014, more than twice the number a decade earlier.
Yes, there has been and still is a boom in US oil production. However, the current oil war is taking a toll, as all wars do.
- A report last week from global outplacement firm Challenger, Gray & Christmas showed 20,193, or 38 percent, of the 53,041 announced job cuts in January were in the energy industry. Oilfield service company Schlumberger last month said it will eliminate 9,000 jobs; Baker Hughes and Halliburton have said they expect to cut 7,000 and 1,000 positions, respectively.
Seems fairly dire, right? Well, it might not be as bad as it seems. In other words, it appears OPEC is making headway in its efforts to drive US oil production down, but is that monopolistic enterprise going to win the war?
- Not all of those will occur in the U.S., and the Challenger announcements have to be taken with a grain of salt because they include foreign affiliates of American companies. Also, many job cuts are carried out through early retirement and some may not even occur at all.
Here is one clue that might suggest OPEC will not only lose the war, but they might actually destroy the cartel in the effort to decimate US oil producers.
- Despite global declines in spending that have driven up oil prices in recent weeks, oil production in the U.S. is still rising, wrote Edward Morse, Citigroup’s global head of commodity research. Brazil and Russia are pumping oil at record levels, and Saudi Arabia, Iraq and Iran have been fighting to maintain their market share by cutting prices to Asia. The market is oversupplied, and storage tanks are topping out.
Yup … Back to the fundamentals. And with the global economy sputtering right now, there is no immediate demand surplus to combat the supply surplus. This would suggest the fundamentals are playing a more powerful role than speculation in defining long-term oil prices.
- A pullback in production isn’t likely until the third quarter, Morse said. In the meantime, West Texas Intermediate Crude, which currently trades at around $52 a barrel, could fall to the $20 range “for a while,” according to the report. The U.S. shale-oil revolution has broken OPEC’s ability to manipulate prices and maximize profits for oil-producing countries.
Thar would be something – oil at $20 per barrel. Yes, it would be trip down memory lane, back to a time when Saudi Arabia had no control over the price of oil, a time when the fundamentals and the fundamentals only set the price of oil. Could we get back there?
Trade in the day; invest in your life …
