Crude Oil Collapse?

Crude Oil Collapse?

A sustained collapse of crude oil is too early to call.  This is speaking from the one who is not shy to call crude oil collapse – Front Page USA Today March 10, 1998.  The dynamics are different than it was back in 1998.  Right now we are entering a shoulder period of oil demand where you have reduced driving and limited oil demand for heating purpose.   Add to this the global economic concerns; you have the perfect recipe for driving the oil prices down.   The key difference from 1998, which still has limited discussions from oil pundits, is monetary policy.  I noted this concern back in 2012 in my CERAWeek 2012 summary.  There is a fine balance between correlation and causation.   The strengthening of the US dollar of recent is occurring simultaneously with a fall in oil prices.  In 1998, the US dollar index was much higher than it is now and was not declining during the collapse.

The monetary strength of US dollars is important as the buying and selling of crude oil is typically done in US dollars.   Therefore the ability to buy global widgets, if you are a producer, will be a function of where the currency is going.  The OPEC members are seeing a loss in revenue as crude oil falls, but their ability to purchase the same amount of widgets is being buffered with a strengthening US dollar.

The global race to negative currency continues as the US experience documented that a printing of currency can actually lead to recovery.  Now with the US stock market heading down, will the US policy of leaving no investor behind force another round of the very successful quantitative easing (sarcasm – see my article on Quantitative Easing and Climate Change)?  If we do see a FED reaction to the strengthening of the dollar, I suspect we will see a rise in oil prices as a natural rebalance or in the form OPEC reacting to a drop in widget purchase capability.

Clearly, fundamentals of supply and demand of crude oil should and will dominate the crude oil price.  But, I believe monetary policy deserves some more discussions as a strong influence to oil pricing.  The supply /demand trend does show potential for a significant weakening, but it is not the best time to do ones balance as fall and spring season can result in wild oil demand swing.  The oil markets given the growth of various alternatives of fuels (e.g. electric, ethanol, natural gas) will result in increasing demand volatility producing significant inter-year price swings.  Storage will increase in value as selling in shoulder months will likely worsen in price versus peak periods of oil demand.

Planning to be in Houston the week of the 27th.  Please let me know if you are interested to discuss the energy markets- send me an email and we can schedule a time to meet – dkb@allenergyconsulting.com

Your Keeping an Eye on the Oil Markets Energy Analyst,

David

David K. Bellman
All Energy Consulting LLC- “Independent analysis and opinions without a bias.”
614-356-0484
dkb@allenergyconsulting.com
@AECDKB
blog:  http://allenergyconsulting.com/blog/category/market-insights/

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