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Why the Oil Price Market Remains



In 2013, I warned of the risk of oil prices because of persistent imbalances between global supply and demand. These warnings fell on deaf ears, believing that "oil prices could only rise higher from here."

It was not long before these predictions worked their way through. In May 2014, I wrote:

"Although the price of oil could probably be somewhat depressed by the decline in the US dollar, it will ultimately rely on fundamentals in the longer term. It is clear that the speculative rise in oil prices has reached its inglorious but anticipated conclusion due to the "fracking miracle". It is obvious that some teachings are simply never learned. "

Of course, as with all things, especially commodities, it will not be long before speculation recovers and prices rise in the short term, despite the long-term fundamental problems that still exist.

In September 201

7, I wrote an article about these basics.

"I have recently received a tremendous number of e-mails asking if the recent rally in oil prices and related energy stocks is sustainable or is it another" trap "as we have seen before.

As regular readers know, we gave up our oil and gas reserves in mid-2014 and left the sector for technical and fundamental reasons. Although there have been some opportunistic trade adjustments, the technical background has clearly remained bearish.

The conclusion was not what most people hoped for.

"Although there is hope, production cuts will continue until 2018. The current price gain is probably already priced in. With oil prices being overbought on a monthly basis, the risk of disappointment is high. "

Well, we finish in 2018 and the prices of both energy and oil stocks were disappointing.

The expected decline in oil prices is more important than just the relative decline in stock prices of energy-related stocks. As I wrote earlier, energy prices correlate strongly with economic activity. To put it:

"Oil is a very sensitive indicator in terms of expansion or contraction of the economy. Since oil is consumed in virtually every aspect of our lives, from the food we eat to the products and services we buy, the demand side of the equation is an indicator of economic strength or weakness. Related Topics: UBS: Expect $ 80 Brent Next Year

The chart below summarizes interest rates, inflation, and GDP in a composite indicator to allow a clearer comparison of oil prices. A key note is that oil tends to trade along a fairly defined trend … until it does not. Since the oil industry is very production and production intensive, price disruption disruptions tend to trigger liquidation events that negatively impact production and CapEx spending affect the GDP calculation. "

" (Click

"Therefore, it is not surprising that the sharp decline in oil prices coincides with a decline in economic activity, a decline in inflation and a subsequent decline in interest rates."

The price of oil has continued to fall as global economic weakness gains in importance Despite occasional rallies, it is difficult to see that the outlook for oil is encouraging at both a fundamental and technical level: the charts for WTI remain bearish, while the Fundamentals remain essentially unchanged: "Economics 101: too much supply, too little demand." The parallel to 2014 is there, if you want to see it.

(Click to enlarge)

The Current supply levels may lead to a longer-term price disruption worldwide, especially given weaker global demo demand graphic development, energy efficiency and debt.

Many argue for THE Crash 2008 example of why oil prices will rise in the near future. The clear topic remains the offer, since it refers to the price of a product. Due to the currently expanding drilling in the Permian Basin, any "cuts" made by OPEC have already been offset by increased domestic production. As I said earlier, an increase in oil prices above 55 USD / barrel would probably make the OPEC cuts very short-lived, which in fact turned out to be the case.

As indicated in the above table The difference between 2008 and today is that the world previously feared that oil could run out and worries about an oil spill today. The questions of supply and price become clearer as we continue to look back in history until the last slump in commodity prices, which triggered an extremely long period of oil price suppression as supply fell.

(Click to enlarge))

The problem of the recent rise in oil prices was that it was driven by a speculative surplus. As I noted in "Everyone's on the Same Side of the Boat:"

"Of course, the cycle of rising oil prices is fueling an increasing optimism that expresses bullish bets on oil. But it is also the exuberance that spreads repeatedly next fall. As shown below, betting on crude oil prices is near the record highs and is significantly higher than at the peak of oil prices before 2008 and 2014. "

(Click to enlarge)) [19659002] When I wrote that it was written in May of this year (2018), it received a lot of criticism about my misunderstanding about global demand and explanations why oil prices could only rise.

It did not take long

The headwind for oil remains

In 2008, when prices plummeted, supply in the market had reached an all-time low, while global demand was high. Keep in mind that fears of peak oil are rampant in the headlines and on the financial markets. Of course, the financial crisis has prevailed and prices have quickly adjusted to demand.

(Click to enlarge)

Of course, the imbalance between supply and demand coupled with the suppressed commodity prices in 2008 was the perfect cocktail for a price hike as the "fracking miracle" in the Focus has moved. The increase in supply eased the fears of the oil companies, and investors plunged back into energy-related companies to "feast" on the buffet of accelerating profitability into the infinite future.

The problem that has not yet been fully realized The imbalance between supply and demand has once again reversed. With supply now at its highest-ever level and global demand growth weak due to an ongoing debt-cycle-induced global deflationary cycle, the momentum for a repeat of pre-2008 price increases is unlikely.

19659002] [Click to enlarge]

The supply-demand problem is unlikely to be solved even in a few months. The current dynamics of financial markets, global economies and current supply levels are more similar to those of the early 1980s. Even if OPEC continues to reduce production, it will still not be enough to offset the increase in slate field production.

[Click to enlarge]

Ever since oil exploration at any price As the bulk of energy companies' revenues go hand in hand with them, they are unlikely to drastically curtail their production in the short term. The important background is that the mining of slate is becoming cheaper and more efficient. This, in turn, lowers the price at which production becomes viable and increases the supply on the market.
Then there is the demand side of the equation. Related: $ 50 Will Not Kill US Slate

For example, my friend Jill Mislinski discussed the issue of a weak economic backdrop.

"Apart from gasoline, there are profound behavioral issues that affect the miles covered. These include the demographic evolution of an aging population in which older people drive less, persistently high unemployment, the ever-increasing ability to remotely work in the age of the Internet, and the use of ever-expanding communication technologies as a partial replacement for the face. Face-to-face interaction.

(Click to enlarge)

The problem of falling demand is, of course, the potential for creating a "supply glut" that leads to prolonged repression

The headwind to higher oil prices from the Demand side has several forms:
• Weak global economic growth in the last decade that will remain weak in the future
• Slow and stable growth of renewable / alternative energy sources
• Technological improvements in power generation and storage and – Transmission and
• A rapidly aging global demographic evolution

One of the topics that will be introduced in the next few years is EVERY major carmaker will continue to introduce more efficient automobiles, including larger ranges of hybrid and all-electric vehicles.

All this amounts to a long-term, secular and structurally bearish story.

In terms of investors, this may be argued The oil price is likely to have reached a long-term low in the $ 40 range. However, the fundamental tailwind for significantly higher prices is still pending. OPEC will not constantly restrict production, the global economy will remain weak and efficiency will depress demand.

Given the duration of current economic expansion, the beginning of the next recession is likely to be closer than not. A recession will have a negative impact on oil prices (driven by commodity traders) and energy investments, as the proverbial "baby is thrown out of the water".

Here we are looking for long-term bargains in space.

By Real Investment Advice

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