This morning, Bloomberg reported that OPEC has been selling crude for less than $30 for the first time in years. Unfortunately for this prestigious source, readers of this column may remember that I started reporting prices below $30/bbl from OPEC members back in November.
Many have acted with surprise that the tensions between Saudi Arabia and Iran have not positively impacted oil prices… Again, this is hardly a surprise to my readers, since I argued that all of the incentives skew the other way in December. Conflict between OPEC members that don’t like each other creates an incentive to steal market share from one another – in short, instead of providing support through supply worries, it puts pressure on prices in an oversupplied market.
Here the Odessa American noted that the sales tax revenue for the region dipped again. As I have mentioned here and here, the sales tax revenue is a better proxy for unemployment statistics than many other complicated indices floated out there… The local employment market is reaching Depression era losses – you just do not hear about this on the national news because A). it’s West Texas and everyone ignores West Texas unless it involves football; B). people move from West Texas as fast as they can as soon as they lose their job – thus minimizing the visible effects of the unemployment; and C). most of these people were hired as “independent contractors” and so they do not file for unemployment benefits after they lose their jobs.
Here 24/7 Wall St. discusses that the inventory increases for gasoline stocks mean that there is even less demand for oil in the near term. Earlier this year, I explained the crack spread, and how a spike in gasoline inventories would spell doom for the oil price. This is exactly what’s playing out in the market right now: a lower price for gasoline hurts national refiners, because they cannot “crack” crude oil to produce gasoline when stocks are already high (gasoline, unlike crude, cannot be stored for long periods without breaking down). When inventories go up, refiners stop buying crude. When they stop buying, prices fall.
More recently, I’ve argued that the “lower for longer” thesis is the one to support. At this Canadian outlet, they note that the experts are already projecting sub-$50 prices through 2017. You can expect to see this timeline extend itself as each deadline for earlier predictions looms. As I’ve noted before, get ready for that impact on some of the major independent producers as their hedges roll off in the next year to two years.
Looks like my crystal ball is still crystal clear! Yay?