And as storms go, this one has certainly attracted attention. The ongoing concern over supply gluts both in the United States and abroad has combined with a Chinese stock collapse to drive down the price of oil.
Now, it is true that the decision by OPEC first to keep production constant and then to increase exports has certainly put pressure on shale and tight oil producers in the United States.
Then there is the pending Iranian nuclear accord, blamed for everything from the end of the North Dakota economic boom to rising unemployment in every oil patch nationwide.
Neither of these is as advertised, of course. But the alarmist projections certainly make for a good show on TV.
This is a perfect storm only in the minds of those who created it.
Here’s my take on why this storm will soon pass…
We Have Excess Reserves
Supply excess has contributed to a downward pressure on prices, and an adjustment was certainly warranted. But not the collapse that we experienced. That was a result of opportunities exercised by short traders in pursuit of a quick buck.
There is nothing “natural” about a market in which the primary producers are deliberately overproducing only to bet against their own profit on the other end. This is all about suppressing competition and maintaining market share.
As always, this remains an equilibrium situation. Fundamentally, we are in a cyclical pattern similar to that experienced over the past several decades. Production will need to adjust with demand. But the interesting matter to keep in mind here is that, unlike during previous cycles, demand is not declining. In fact, global needs are increasing.
For the first time in more than 40 years of analyzing this market, I’m seeing the normal supply/demand equation significantly altered. One no longer has to worry about one side of the equation. We have plenty of excess reserves that can be easily brought to market.
Nonetheless, as in every instance where supply exceeds demand, there will be a rebalancing. Oil product use increases as the price remains low, thereby elevating the demand side, while production is cut, reducing supply.
Problems in Iran and China
The opportunity here is in identifying those companies that will occupy a stronger niche in production by running more efficient operations.
When it comes to Iran, here’s why there will be no upfront surge in either Iranian production or exports…
The Western sanctions will be lifted gradually in stages, and only after compliance is demonstrated. Iran’s fields are a mess and the infrastructure for increasing exports even if new production were available requires banking, insurance, tankers, and pre-contact financing.
And all of those are not simply going to be turned on once the agreement is signed. There is also opposition to the deal from both the U.S. Congress and the Iranian leadership. Nothing is happening here beyond giving short artists more leverage to play games.
But now the problems on the Chinese stock market have become the new mantra of those pushing down oil futures.
Pundits are getting in line to be the next Chicken Little from “The Sky Is Falling Brokerage Firm.” We are going to test historic lows, one talking head says. This time it will be a major blow putting crude oil prices at $40 a barrel for a considerable period of time, says another.