Oil slide continues - does it matter?
OIL SLIDES – WHAT & WHY
Oil is now in a critical zone: nearing $50. This figure changes weekly and a recent cold front could push prices up. In response to the deep slide in oil prices (15%+ in 3 weeks) Saudi Arabia is doing….nothing.
The key questions to ask are: what is causing this, will it change, and how does it affect our stocks?
CAUSES
There are two causes: the perceived glut of oil in the US and a move away from commodity stocks. In the minds of investors, both are tied to a US economic slowdown. Only proof of shortages will change things: either because of OPEC supply changes or demand outpacing supply.
WILL IT CHANGE?
The only thing that will bring hedge funds back is strong signals that demand is outpacing supply. Current and forecasted demand/supply suggests that demand will outstrip supply…eventually. That could change overnight if Iraq or Iran get into wars. So the biggest signal for hedge funds is if Saudi Arabia or OPEC cut production.
The SA non-action is very telling. Given cheating by other OPEC members, it fell to SA to make the cuts (they are the biggest producer) to bring about a slight supply shortage. Now comes the second guessing. Why is SA okay with $50 a barrel?
It could be that they know cheaper gas eventually drives more consumption. It could be that thy want the US economy to strengthen and cheap energy helps – and a strong US economy is a good customer. And it undermines the attractiveness of alternative energy. It is noteworthy that SA & Kuwait build their budgets based on $50 oil, so they are doing fine still. Also, a lower oil price helps SA get the other countries to behave better – SA can afford the lower price a lot longer than other OPC members can. It gives them a big stick, something that they may need to show from time to time.
Indeed, another interesting geopolitical spin is that this hurts Iran greatly. The Iranian government is very dependent on oil. They are in a perpetual recession and $60 oil is a lot better than $50 oil. Iran is also creating trouble for Saudi Arabia – both are arch enemies and Iran seems to be scoring the most points: Lebanon is about to crumble, Iran is chasing after a nuke, and Iran is meddling in Iraq. In every case, SA is the immediate and direct adversary. Iran tends to think of itself as the superior culture compared with the recent Abdullah-com-latelies in SA, until recent desert tent dwellers. It is not a surprise that the Iranian Foreign Minister just visited SA to meet with the King. Perhaps the low oil price is a way to tell Iran that they are in fact junior and subject to SA.
WHO BENEFITS: OUR STOCKS
I have been saying for a while that service and equipment companies continue to thrive. Saudi Oil Minister Ali Naimi said Wednesday that despite the recent drop in prices, OPECSEARCH
Meanwhile, Europe has seen what it means to be dependent on Russia and they don’t like it. Expect more pipeline building, more nuclear reactors, and more liquid gas storage. That means MDR, for starters.
And lower oil is good for the US economy and inflation pressure.
Oil is now in a critical zone: nearing $50. This figure changes weekly and a recent cold front could push prices up. In response to the deep slide in oil prices (15%+ in 3 weeks) Saudi Arabia is doing….nothing.
The key questions to ask are: what is causing this, will it change, and how does it affect our stocks?
CAUSES
There are two causes: the perceived glut of oil in the US and a move away from commodity stocks. In the minds of investors, both are tied to a US economic slowdown. Only proof of shortages will change things: either because of OPEC supply changes or demand outpacing supply.
WILL IT CHANGE?
The only thing that will bring hedge funds back is strong signals that demand is outpacing supply. Current and forecasted demand/supply suggests that demand will outstrip supply…eventually. That could change overnight if Iraq or Iran get into wars. So the biggest signal for hedge funds is if Saudi Arabia or OPEC cut production.
The SA non-action is very telling. Given cheating by other OPEC members, it fell to SA to make the cuts (they are the biggest producer) to bring about a slight supply shortage. Now comes the second guessing. Why is SA okay with $50 a barrel?
It could be that they know cheaper gas eventually drives more consumption. It could be that thy want the US economy to strengthen and cheap energy helps – and a strong US economy is a good customer. And it undermines the attractiveness of alternative energy. It is noteworthy that SA & Kuwait build their budgets based on $50 oil, so they are doing fine still. Also, a lower oil price helps SA get the other countries to behave better – SA can afford the lower price a lot longer than other OPC members can. It gives them a big stick, something that they may need to show from time to time.
Indeed, another interesting geopolitical spin is that this hurts Iran greatly. The Iranian government is very dependent on oil. They are in a perpetual recession and $60 oil is a lot better than $50 oil. Iran is also creating trouble for Saudi Arabia – both are arch enemies and Iran seems to be scoring the most points: Lebanon is about to crumble, Iran is chasing after a nuke, and Iran is meddling in Iraq. In every case, SA is the immediate and direct adversary. Iran tends to think of itself as the superior culture compared with the recent Abdullah-com-latelies in SA, until recent desert tent dwellers. It is not a surprise that the Iranian Foreign Minister just visited SA to meet with the King. Perhaps the low oil price is a way to tell Iran that they are in fact junior and subject to SA.
WHO BENEFITS: OUR STOCKS
I have been saying for a while that service and equipment companies continue to thrive. Saudi Oil Minister Ali Naimi said Wednesday that despite the recent drop in prices, OPECSEARCH
Meanwhile, Europe has seen what it means to be dependent on Russia and they don’t like it. Expect more pipeline building, more nuclear reactors, and more liquid gas storage. That means MDR, for starters.
And lower oil is good for the US economy and inflation pressure.
posted by Andrew at
9:18 PM
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