Why All the Teeth Gnashing Over Low Oil Prices?

Do you remember when oil nearly hit US$150 per barrel?

That was back in July 2008, when it peaked at US$147.27. I was living in the Netherlands at the time, working in commercial real estate finance.

The cost of oil is important when you’re building and operating mega-malls and office towers. (I wasn’t doing either, mind you. Just reporting on various projects’ financial outlook to international investors.) And all the experts I spoke to were predicting the price of the finite resource would only head one way from there. Up.

High oil prices were driving up development costs and stifling growth. But according to industry pundits, the high costs were there to stay.

You know what happened next. Five months later, on 23 December 2008, West Texas Intermediate Crude (WTI) had plunged all the way to US$30.28 per barrel. And it wasn’t until March 2011 before WTI cracked the US$100 mark again.

It traded in the US$80–110 range for the next three and a half years. Right up until November 2014. By December 2014 WTI had fallen below US$60 per barrel. And it’s never managed more than a brief peek above that level since.

If you’re bullish on oil and waiting for it to do so, don’t hold your breath.

As of yesterday afternoon, WTI was trading for US$42.88. That’s its lowest level since August last year. Much of the slide has happened over the past month. Have a look at the chart below from 23 May through to 23 June.

WTI
Source: Bloomberg
[Click to enlarge]

And this is only a few months after OPEC struck a rare agreement with Russia to cut production. The major producers hoped by restricting supply, the price of black gold would rebound. The graph above shows you just how successful their plan was.

There are a number of reasons their scheme failed. But the biggest factor at play is US oil production, which is set to hit record levels. And US producers were not party to the OPEC agreement.

The Baker Hughes US drilling rig count has risen for 22 weeks in a row, now. And the US energy department predicts US oil production will hit 10 million barrels a day in 2018. That would exceed the record output levels last seen in 1970.

If you’re long oil and waiting for it to pop into the lofty US$80–100 range, keep in mind that most US oil producers are profitable above US$40 per barrel.

There’s a reason WTI hasn’t exceeded US$60 since December 2014. And that same reason should keep oil trading below that level for the foreseeable future.

There’s plenty of mainstream angst over the spillover effect onto stocks in the energy market. But since when is cheap energy bad? Unless, of course, you’ve sunk a lot of money into companies like Woodside Petroleum Limited [ASX:WPL]. The share price is down 11.65% since 23 May.

As for the rest of us, I don’t imagine many will be complaining at the pump. With stagnant wages and record debts across Australia, every extra dollar in your pocket counts.

Now let’s have a look at the week gone by…

This week in Markets & Money

Did you hear the good news? Australia’s unemployment rate fell in May to the lowest level in four years. Time to celebrate? Not according to Vern. On Monday he took a scalpel to the latest data and declared it ‘fake news’. Part time work, he reminds us, includes anything over one hour per week of paid work. That’s right, one hour. And though the ABS data indicates that there were 52,100 full time jobs created, the report makes no mention of salaries. It’s entirely possible the bulk of these new full time jobs are in lower paying service industry positons. And that they were filled by people previously earning more in jobs that have been made redundant by technology…or sent overseas. For Vern’s complete analysis — and what he calls the actual unemployment levels — you can find Monday’s Markets & Money here.

On Tuesday Jason revealed the critical price level gold must hold above before he expects it to make a sustained run upwards. In the meantime, many investors are beginning to view gold as ‘over-hyped’. This thinking could lead to a big fall for the yellow metal in the near future. So expect more turbulence in the gold market ahead. The price swings will make some traders a nice pile of money…and see others walk away with empty pockets. Go here for the full story.

Phil Anderson stepped into the recession debate on Wednesday. And he explained why he’s confident Australia will not see a recession in 2017. His confidence stems from his knowledge of the real estate clock. (If you don’t know what that is, find out here.) Australia doesn’t exist in a bubble. We’re influenced by what happens in Asia, Europe and the Americas. In the UK house prices climbed to record highs last month. The Stoxx Europe 600 Index chart also indicates Europe is in for a period of higher growth. US stocks are at record highs too. And massive infrastructure projects across Asia all point to good news for the Aussie economy in the year ahead. For Phil’s complete analysis, click here for Wednesday’s Markets & Money.

Once you’ve got too much debt in the economy … it’s incredibly difficult to get rid of it.’ So says Lord Adair Turner, Chairman of the Institute for New Economic Thinking. And in Thursday’s Markets & Money, I took a look at just how right the good lord is. Thursday marked exactly 10 years since Bear Stearns’ highly speculative investments into the US housing market began to crumble. Yet a decade later, what lessons have we learned from the debt fuelled binge that saw global markets crash? Apparently that we should all take on more debt. To the tune of US$70 trillion more in 10 years. What does this mean for you? Read the full article here.

Vern rounded off the week with a personal story. One that saw his good friends lose everything after mortgaging their house to keep their son’s floundering business afloat. It’s difficult to turn family down when they come asking for money. But at the end of the day, you’re not doing anyone any favours by throwing good money after bad. Family or no, before investing in anything, you need to be satisfied the reward exceeds the risk. Vern then shared a chapter from his book, How Much Bull Can Investors Bear? A chapter he wishes his friends had read before lending their life’s savings to their son. Click here for Friday’s Markets & Money.

That’s all for the week. Enjoy your weekend.

Cheers,

Bernd


Bernd Struben is a contribution Editor of Markets & Money. He holds a degree in Economics and is a published novelist. Bernd’s career spans multiple countries on four continents. With his diverse background, he brings unique business insight and a libertarian twist to his columns and analysis in Markets & Money.


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