I tried to avoid this answer for many reasons.\u00a0\u00a0 My hesitancy in answering is due to my jagged edge of experience in trading commodities.\u00a0 The price of a commodity, in a fixed given time period, does not have to hold any fundamental characteristic.\u00a0 In today\u2019s world of constantly being \u201conline\u201d, traders chase the next move through any means including reading into a statements made by OPEC members.\u00a0\u00a0 As much as today\u2019s spot price of oil predicts the price of oil 6 months from now, the same applies to the futures market price (How much? \u00a0Answer: Not Much).<\/p>\n
The price now for oil, whether spot or futures, represents the condition of buying, selling, and managing internal storage with a system of risk of tomorrows price.\u00a0\u00a0 If the market believes the oil prices can go lower, you have fewer buyers as they would rather use their inventory until a point the price holds too much risk it will be higher.\u00a0\u00a0 If the market believes the oil prices will go higher you have more buyers wanting to build inventory and will buy it to the point the price holds too much risk it will be lower.\u00a0 There are losing and winning trades throughout the year.<\/p>\n
Right now you have a bunch of \u201closers\u201d who have locked in oil prices at way higher prices.\u00a0 Hedging is dangerous when your market competitors don\u2019t and your prices for your service\/product can be eroded by competition.\u00a0\u00a0 There is not much intelligence when one hedges all your volumes at once.\u00a0\u00a0 A balanced hedging program should step into the changing markets.\u00a0 An effective oil hedging program would have allowed the market to fall while gradually adding to the hedge over time.\u00a0\u00a0 Calling the bottom of the oil price would be as lucky as trying to catch the handle on a sharp falling knife from a 10 story building.\u00a0 It is possible, but not likely.\u00a0 An effective hedging program would let the knife fall and realize you won\u2019t catch the bottom, but you won\u2019t ignore it either.<\/p>\n
The bottom price of oil will likely not occur without an event.\u00a0\u00a0 Traders need to see the market is responding before stopping the momentum of a falling knife.\u00a0\u00a0\u00a0 Unfortunately, the oil markets are operating on sunk cost investments.\u00a0 A reaction on drilling and production will take time.\u00a0\u00a0 I believe one of the first signals for a slowdown of production will not come from the physical production declines, but from the insistence of the debt holders to quantify what they own.\u00a0\u00a0 The operating company management team will likely go ahead and produce whatever they can \u2013 the debt holders will want them to stop so they quantify the volumes and use those volumes to payback the debt.\u00a0 This will take time to play out via bankruptcy.\u00a0\u00a0 The other reaction to low prices will come from the demand side.\u00a0\u00a0 This is winter for the largest consumers of petroleum.\u00a0\u00a0 Demand can only rise so much now.\u00a0\u00a0 However, as we move into spring and summer, expect a rebound in demand.\u00a0\u00a0 The ironic statement is that the current market is not so trusting of the market to react.<\/p>\n
Oil prices can continue to fall.\u00a0 However, as a business, I would not be planning based on this market aberration.\u00a0\u00a0 The fundamentals will re-align the markets as real data and information becomes available, and actions by participants occur.\u00a0 This could take as long as 6-12 months.\u00a0 I still believe oil prices due to the global nature realign itself in 6-12 months north of $60\/bbl.\u00a0 Some have tried to compare the drop in oil to the drop in US natural gas price, which has not really rebounded.\u00a0\u00a0 However, US natural gas markets are not global \u2013 yet \u2013 and potentially never will be as LNG and GTL investments are likely being questioned with low oil prices. \u00a0The issues we discussed that will drive this market hasn’t changed –\u00a0Oil Market Doomsayer.<\/a><\/p>\n If you are dependent on oil prices and have never hedged your purchase, this could be an opportunity to develop a systematic method for hedging some of your oil needs.\u00a0 A true hedge creates a system to manage your budgets while balancing your business and energy risk.\u00a0 Hedging programs should never be constructed to make money or save money.\u00a0 If so, you are now trading, which is a valid business option if you have the appropriate experience.<\/p>\n Please consider All Energy Consulting for you energy consulting needs.\u00a0 We add insights to the energy market for your success for now and years to come.<\/p>\n Your Energy Analyst Not Interested in Catching Falling Knives,<\/p>\n David<\/p>\n David K. Bellman
\nFounder\/Principal
\nAll Energy Consulting LLC- “Adding insights to the energy markets for your success.\u201d
\n614-356-0484
\ndkb@allenergyconsulting.com
\n<\/a>@AECDKB<\/p>\n