Wednesday, February 4, 2015

Oil prices up 20% -- why is the market not freeking out

From $44.70 all the way to $57.15 in the space of 36 hours!

Nothing in the world has changed

  • US economy still appears to be slowing down
  • China seems to be in a recession
  • Europe is "sclerotic"  
  • The S&P is up 2% on the day -- based on the good news.

The question is what good news, what is so great, what has changed to make oil prices jump by nearly 20% -- in short nothing.  It would appear that a substantial segment of the market has decided that it was time for oil prices to rise (we are talking technical points here), so the market started rising, and the momentum trade followed through.

Every few days a new conspiracy theory emerges; these days its Saudi Arabia screwing with Siria and Russia, some will say that the world economy is doing OK and that its a small oversupply that is driving everything, in fact OPEC is to blame, because this cartel controls nearly 35% of all global oil production, so they have huge control... I would not take this to the bank.

While it is true that demand/supply imbalance is not huge the reason is that there is very limited storage capacity -- already tankers are full anchored off shore from Singapore to Kuwait waiting for prices to rise, but also simply because there is insufficient demand.

The lack of cartel control is the reason there is such oversupply.  America still believes that it is generating oil surplus (just about if the take into consideration Canadian crude).  I never bought the long term Machiavellian plan of Saudi Arabia -- after-all GW Bush pleaded with SA to increase oil production when prices were around $120/bbl (remember that?).

As in aircraft accidents its never just one thing; it would be convenient if it were the fault of the Americans, or the Chinese or again the Saudis.  But in truth, the oil market is overstuffed with supply -- because certain producers need to maximize production at these low prices, but the demand side is not doing very well either.

Europe is not in an explosion of growth, nor is China or Japan.  America is doing OK (last two quarters of 2014) but the benefits of low oil prices has acted as a way for Americans to save a bit. Wages are simply not rising in the US, finally Americans (average joe) is getting a small break on the cost of filling his SUV, and he's decided to save the difference.  There is little sensation of economic exuberance in the US, for most Americans (who have seen zero wage growth over the past decade) the economy is in standstill, there is a fear of job losses (Sears should be about ready to keel over-- as did Target in Canada).


No one knows why oil prices collapse
It would be idiotic to believe that the Saudi had some kind of evil plot -- and that it works
if this is a teaching moment for OPEC, its an expensive one for most of the participants
BTW the day after oil prices rise back to $80 on their way to $120 will be the day that new drilling will occur in the US, that Canada's oil sands re-start their R&D activities.

There is no reason for the collapse -- there are events and circumstances that coincided -- like a Venn diagram that has let the world to oil at $45 no wait, $55 no wait $52.  Ok these numbers are good for the next twenty minutes


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