As I type this, the WTI front month crude oil futures on the CME Globex is trading at 54.25$ per contract. Symbol is CL, active month currently trading is January: CL 01-15.
Pretty much the whole world has watched as crude has sold off from the 100$ level to what is now a price threatening 50$. The transfer of wealth over this period has been monumental. if not historical. Moreover, the selloff represents a major shift in the economic power structure of the world, and it has only taken 6 months.
Here is the story that the media is floating as being the reasons for the selloff: https://www.msn.com/en-us/money/mutualfunds/why-oil-is-down-by-half-what-it-means-for-you/ar-BBgPQdy
I am an active futures trader, and everyday I trade Crude oil, gold, natural gas, and the mini s&p. From my vantage point, nearly every reason outlined in the story concerning the pricing of crude oil is complete BS.
Point/Counterpoint on the topic, reasons for the decline in crude oil value from the article:
1) "A drop off in Global demand". There have been no "unexpected" fluctuations in global demand for crude oil. It is true that China has been the horse pulling the wagon as far as demand goes for sometime now; and yes they are facing some tough economic times as their real estate bubble is thought to be popping, and is "expected" to be several times worse that the US real estate market failure in 2008. STILL, China's government is actively securing crude oil supplies from anyone whom will deal with them. Also, there is some drop off from some smaller players in the global consumption model, but Japan and a few European countries are easily offset by the development going on in Brazil and South America. Demand being down as a reason for global decline in crude oil pricing is complete BS.
2) "Excess Supply" This idea that there is excess "supply" hitting the market all of a sudden is also a fallacy. Supposedly the excess supply is coming mainly out of the Bakken region in the Dakotas, Eastern Montana, and central Canada as a result of Fracking operations. I have worked in the Bakken, and have seen it first hand back in 2012. Even then, it was estimated that there would be 1 million barrels per day coming out of the region by 2015. Well guess what? At last count there was 900k barrels per day being generated (if you can ever depend on an estimate of that nature), and it is nearly 2015....on par with the other fracking operations in North America. This spike in global volume was priced into the market years ago; the Bakken and central Canada shale oil is no surprise to anyone whom follows these markets, and is not the reason for the precipitous price fall in crude.
3) "The Supply/Demand Argument in General" In essence, the Supply/Demand explanations for the sell off are bedtime stories that are supposed to ease the common investor's mind. I am sorry, but we live in a new age of finance. The old models of traditional finance do not apply. It is a time of unbelievable leverage, huge pools of capital which are mutually exclusive from one another, and electronic markets that are opaque in nature; in reality it is very difficult to find out whom is doing what in the market with any sort of timeliness. Selling feeds selling......and the big boys around the world are selling crude oil.
What has happened:
1) CL has been sold off heavily in 2 phases. From 9/30 to 11/20 we moved from the 95$ range to 75$ range. From 11/21 until today we have moved from 75$ to the low $50's.
2) This selloff in CL mirrors the sell off in Gold (GC) from a few years back. Anyone remember when Gold was at 1880$ per ounce. It was sold off to 1100$ in short order, and now trades at 1200ish.
3) As with the Gold selloff, the small oil producers have taken a bath, especially in the fracking operations that are prevalent here in north America. Simply put, it is too expensive to frack....with prices currently in the 50's for a barrel of oil, it is costing the producers an all in cost of nearly 10$ per barrel OVER MARKET PRICE to bring crude out of the ground. The small guy is sunk.
4) Big oil isn't realizing the same losses. Remember that it is legal for these guys to trade their own products (in a speculative manner) in the derivatives markets. Shell, BP, Hess, Exxon....these firms can secure financing and take short positions in order to profit, and cover losses from operations. So, while it appears that anyone in the oil business is taking it hard, remember that the shorting of CL on a large scale can simply make these firms more cash heavy, and actually still profitable.
5) OPEC is also not taking it in the rear. Remember, the infrastructure in the middle eastern oil fields is old (rebuilt after gulf war 1), and largely paid for. The Saudis are huge players in our derivative energy markets. They will simply limit production, and ride the wave by shorting.
6) Russia is taking it hard. No way to sugar coat this one....energy production is the entire economy for Russia. (80% energy based). A few guys at the top will pocket any monies to cover themselves, and the workers will be left to starve....much the way it has always been in Russia.
So, WHY has this crude oil sell off taken place?
1) Institutional money is taking an intermediate term short position.
2) Individual traders around the world are pounding every technical level to the short side, nearly every day.
3) The big players in the world wide oil markets have decided that it is time to trim the fat and consolidate the market even further (the players are OPEC, Shell, BP, Exxon, Hess, Russian czars), which isn't so much behaving in a sinister fashion, as it is them protecting their own interests. This sustained selling will eliminate small drillers and producers, put the squeeze on certain eastern block countries, and may spell the end of Fracking here in north America for the near term. Basically, profits will be returning to the entities whom have always demanded them. Basic boom and bust.
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