We could see a collapse in the price of oil the likes of which
we haven’t seen since Ronald Reagan convinced King Fahad to let the oil price fall.
A word to the wise on oil.
The perfect storm for oil is from a number of factors coming
1) A major recession is brewing where all of the excess demand
is coming from. Asia.
2) Too much oil is on a foundation of debt. Heavily indebted
suppliers have to sell, even if they are selling at a loss to maintain their
3) Too much oil is controlled by governments. Venezuela MUST
sell oil. So must Saudi Arabia. These countries need money to maintain their
4) The US breakeven price is still below the current market
price. This means US producers have no incentive to cut supply.
5) Too many countries have to import. Were India to cut back
on imports of energy, they would have a depression reminiscent to what happened
during WW2. The same is true in China.
China has a one to one ratio of energy demand to GDP growth.
The same is true for Iran. They have to go outside the spot
markets which mean deep discounts. This will also cause extreme volatility in
the prices of OTC-traded oil. That is, API gravities where the bid-ask spreads are
calculated by Platts.
To summarize, there are way too many non-market factors in the
world to make the supply-demand characteristics of the oil pricing mechanism
work. In fact, the markets are already bogus. Venezuela is selling its oil at a
$10-20 discount to WTI and Brent.