A word to the wise on oil

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 together.

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 debt ratings.

3) Too much oil is controlled by governments. Venezuela MUST sell oil. So must Saudi Arabia. These countries need money to maintain their political control.

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.


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