This page has been archived and commenting is disabled.

Oil Won’t Trade This Low Forever... And The Chinese Know It!

Sprout Money's picture




 

Barrels Oil

As we all know, the oil price has plummeted to a level we haven’t seen in more than five years and this will obviously have severe consequences for both the USA and the Eurozone as major economies. At the current oil price, a lot of the shale gas oil and gas producers are nearing the territory where they become unprofitable and might have to shut down their operations. This means that a lower oil price is both a curse and a blessing for the States. A lot of people might lose their jobs if some higher cost wells will have to be abandoned but on the other hand the lower oil price might be beneficial to other sectors of the American industrial economy.

The Federal Reserve isn’t worried yet as it said that it expects the low oil price to indeed fuel the further recovery of the American economy as the input costs will go down. The central bank expects its citizens to spend the extra money they will have at the end of the month instead of saving it. That’s an interesting thought as we would be extremely surprised to see a 1 on 1 trade-off whereby the entire amount of energy savings will be used to increase the consumption pattern. Additionally, a lower oil price will reduce the inflation rate and that might be a side effect which wouldn’t make the Federal Reserve happy as it plans to increase the benchmark interest rates from next year on.

William Dudley NY Fed

William Dudley, NY Fed. Source

The Fed is also shrugging off the jobs problem stating that for now it doesn’t think the drop in the oil price will intensify and there won’t be a near-term reduction in oil and gas investment in the USA. This might be a very optimistic point of view as several companies need a higher oil price than $65 per barrel to be viable and we wouldn’t be surprised to see quite a few job cuts in 2015 if the current oil price persists.

The impact of the low oil price is much more positive for the Eurozone as all Eurozone countries are net importers of oil. However, one cannot ignore the currency exchange rate factor (see next image). The oil price might have dropped by 40% in US Dollar, but the fall in the oil price was much less when looking at the oil price in Euro as the US Dollar continued to strengthen versus the Euro. The cheaper oil will obviously influence the inflation rate as well, and this might very well be Mario Draghi’s worst nightmare as he’s desperately trying to get the inflation rate up to its desired level of 2%. However, the falling oil price will also boost the GDP of the Eurozone and according to preliminary estimates the current drop will add roughly 0.3-0.4% to the GDP in the first year after the lowered oil price and will add approximately 0.8% over the first three years.

Oil Price Chart

Source

That’s obviously very encouraging as a higher economic growth rate might be much better for the public finances of the member states of the Eurozone as well as helping those countries to keep its Debt/GDP ratio under control. It looks like the Eurozone is gearing up for a positive perfect storm. A cheaper Euro will be good for the export of goods and services whilst the lower oil price will reduce the initial production cost of several export-related goods. If you throw the lower interest rates into the mix as well, you’d almost start to think the Eurozone might be ready to benefit tremendously from the low oil price.

Another country which is taking advantage of the oil price is China. The country has stated it wanted to more than double its strategic reserves of oil inside China, and we have heard several reports from inside the sector that China is effectively stepping up the plate and is buying huge amounts of crude oil at fire sale discounts. This is clearly visible in the charter rates of oil tankers which have increased exponentially.

Per Reuters Africa:


Average VLCC earnings on the Middle East-Japan route this
year are at the highest level since 2010, said Ralph
Leszczynski, head of research at Italian shipbroker Banchero
Costa.


 "Average earnings on the Middle East-Asia route so far in
2014 are $22,000 per day, against $32,000 per day in 2010. But
this is still way better than the last three years," he told
Reuters on Friday

 

There’s a binary outcome for the current oil price. Either you panic or you try to see the advantage and opportunity of the low-cost oil. China is taking advantage of the situation and even the inflation-minded currency blocks like the USA and the Eurozone are seeing the advantages. Just like a falling gold price, a dropping oil price could be something to take advantage of during the tax loss selling season.

>>> Check Out Our Latest Gold Report!

Sprout Money offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies from Sprout Money are transformed into the Gold & Silver Report and the Technology Report.

Follow us on Twitter @SproutMoney

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sat, 12/13/2014 - 05:43 | 5547683 MarcusAurelius
MarcusAurelius's picture

Funny I have been posting on my site about the decline of Oil since about May when I told my subscribers to SELL. Of course that was when all the other talking morons were predicting oil at 120-135 a barrel as the summer months were fast approaching. Price action was saying just the opposite at the time. At 107.00 a barrel I sold. Now I must admit that I am a bit surprised to see it below 65 (now approaching 56) but I did have a 77 target in mind. (yes all provable). However deflationary effects were concerning me more than just the price collapse and I was saying then, that something a "little more sinister" might be going on. As it turns out I was correct. This is the short squeeze on the Dollar. Pretty simple when you really think about it. The Fed prints trillions. Banks rush to spread it into high yields, say like emerging markets and commodities. Leverage themselves to the "tits" because this time it it "different" with the Fed behind them. Base the recovery entirely on energy and then "BOOM" that's where the explosion occurs. What a fucking surprise??? No volume in the stocks so it doesn't matter much there but commodites. Oh ya baby. This time it really is different. It is all the TBTF and governments who will go broke this time instead of mom and pop. Except well, "we need a bailout"? Wonder what mom and pop will say this time???? 

Sat, 12/13/2014 - 09:38 | 5547834 ncdirtdigger
ncdirtdigger's picture

No intelligent person I know starts a sentence with "Funny......." Try again

Sat, 12/13/2014 - 05:14 | 5547674 cheech_wizard
cheech_wizard's picture

It took a bit of searching but I found a picture of him as an infant...

http://myfunnypics.org/main.php?g2_view=core.DownloadItem&g2_itemId=6505...

 

Fri, 12/12/2014 - 22:17 | 5547157 Augustus
Augustus's picture

Chinese cannot hoard produced oil in tanks above ground.  It has to be refined or it goes stale.

This should be their opportunity to really get in the game of owning some of the weaker shale producers.  Acquire, Acquire, Acquire.  Wait for the bankers to try to stick the pin in some of them to call loans in the crunch.  Buy the loans at discount and own the whole thing.  They have the cash to wait and profit.

Fri, 12/12/2014 - 21:17 | 5546949 yrbmegr
yrbmegr's picture

We should double the size of the SPR.  Now.

Fri, 12/12/2014 - 21:07 | 5546920 Alpha-Gama-Bullets
Alpha-Gama-Bullets's picture

wont the lower oil prices make the pm minners profitable at current spot prices now? problem solved for fiat ponza schemm? for now

Fri, 12/12/2014 - 20:11 | 5546755 falconflight
falconflight's picture

how are lower energy costs beneficial to the Fed-US Treasury if exporting US debt via the Petroldollar is to be at maximum benefit?

Fri, 12/12/2014 - 20:06 | 5546747 falconflight
falconflight's picture

That dude has periodontal disease.

Fri, 12/12/2014 - 22:10 | 5547136 r3ct1f13r
r3ct1f13r's picture

And a bridge

Sat, 12/13/2014 - 05:49 | 5547688 BeetleBailey
BeetleBailey's picture

....from sucking some serious shitter room cock through a hole....the fuck could eat corn on the cob through a picket fucking fence!

Fri, 12/12/2014 - 19:46 | 5546688 AdvancingTime
AdvancingTime's picture

 How these lower prices effect a particular nation will vary and will effect both their currency and how competitive they will be going forward. The recent decision by OPEC members to keep their production ceiling unchanged has sent crude prices into a tailspin. Dropping oil prices add a new surprising new dimension to the stability of the world financial system.

While often heralded as a godsend to the economy and the end consumer we must remember lower prices hurt both producers and those in the business of oil exploration, drilling, and sales. The shale boom has been one of the bright spots in the economy in recent years and acted as a tailwind that accounted for much of America's growth. Expect this to come to an abrupt halt and with it thousands of jobs. The article below delves deeper into the economic damage lower oil prices can foster.

http://brucewilds.blogspot.com/2014/11/dropping-oil-prices-increase-risk-to.html

Sat, 12/13/2014 - 09:53 | 5547843 slowimplosion
slowimplosion's picture

God I am tired of this meme.  How many people are involved in the production of oil?  How many consume the product?  Want to strike a ratio?

 

Saying that high oil prices are better is ludicrous.  Why not higher wheat prices, if we pay $5 for a loaf of bread a few agribusiness giants will thrive.  You could say the same thing about almost any commodity.

As for all of the bond/debt etc issues well tough shit.  People who play with fire sometimes get burned.  That is capitalism, or so I thought.  Or do you want a government imposed floor on commodity prices?

Fri, 12/12/2014 - 19:25 | 5546609 Ewtman
Ewtman's picture

"Oil won't trade this low forever..."

 

But it will trade this low for quite a while...

http://www.globaldeflationnews.com/oil-light-sweet-crudeelliott-wave-upd...

 

Fri, 12/12/2014 - 19:13 | 5546565 realWhiteNight123129
realWhiteNight123129's picture

This is a transfer from bond speculators to consumers. Good stuff..

 

Fri, 12/12/2014 - 18:53 | 5546485 LithiumWarsWAKEUP
LithiumWarsWAKEUP's picture

bounce up to 58 then go down to 56.50,,,see if i care

Fri, 12/12/2014 - 18:38 | 5546431 falak pema
falak pema's picture

Einhorn said : short France and now he is getting shorted by Saud ! 

Fri, 12/12/2014 - 18:35 | 5546420 DeficitAlchemist
DeficitAlchemist's picture

I pointed out Tanker rates yesterday.. as proof this is just a shake out shale is ineffectual and high cost and Oil will rebound strongly as value buyers (China) Hoard like they have been hoarding Gold...

 

US's geopolitical pain trick has no sustainability there is no shortage of oil but there is a shortage of $50 oil... plennty $120, 150 & 200  oil...

Sat, 12/13/2014 - 05:19 | 5547678 cheech_wizard
cheech_wizard's picture

http://www.bunkerworld.com/prices/ 

Chart porn,  upper left hand corner.

 

Fri, 12/12/2014 - 17:17 | 5546058 alexcojones
alexcojones's picture

Bill D looks like an average kinda guy. Both Bill and I have bad teeth.

The Bankster thing is what separates us.

Fri, 12/12/2014 - 18:54 | 5546495 LithiumWarsWAKEUP
LithiumWarsWAKEUP's picture

good lookin' dime you got there. you'll be alright...hang tough

Fri, 12/12/2014 - 17:33 | 5546031 Victory_Garden
Victory_Garden's picture

Aww...who givesa tuti-fruity about the mixed up criminal game of the corrupted rothchilian bankster agenda to kill off 99% of the worlds populations for profits using a myrid of slaves and puppets to kow-tow to the masters orders and eventually ending up ding-dong dead for it, prolly using food like a weapon to do most of it, and like in Soylent Green, eventually being worse than the GMO ca-ca they call food in today's last market place, the food store.

The rothschilds own all the eastern oil, most especially the saudis included.

They OWN china.

They own the usa.

They profit from your losses...your deaths.

The rockofellers own the western oil.

Where is THEIR money at these dayz?

For the un-initiated, this was an interesting and informative article.

http://www.silverdoctors.com/plummeting-oil-prices-could-destroy-the-ban...

Long food...food....food...anda good prayer book...grannys gotta gun!

Go within for for those who seek answers.

Fri, 12/12/2014 - 17:00 | 5545950 mtl4
mtl4's picture

Didn't he star as Peter Pettigrew in the Harry Potter series?!

Fri, 12/12/2014 - 16:55 | 5545919 Berspankme
Berspankme's picture

I drive as much as anybody, about 400-450 miles per week. I'm saving about $8-$10 per week. doesn't even cover the $103 per month increase in my health insurance, much less the food inflation. It's a joke really that they view this as stimulative. Most people I know drive half as much as me so their "savings" is much less.

Fuck You Bernanke

Fri, 12/12/2014 - 22:15 | 5547150 TinF0ilHat
TinF0ilHat's picture

Gas will have to be back under $1.50 for any real savings.  When I can fill my tank and drive all week on $20. Then we're talking about real savings.  But I spend $55 instead of when I first bought my car $70 to fill.  Ok I got $60 a month savings ooooh.   My food bill is up $60 since a year ago. 

Sat, 12/13/2014 - 00:36 | 5547482 MalteseFalcon
MalteseFalcon's picture

My wife and I drive 30K miles per year total.  We get 20 mpg, so we burn 1,500 gallons per year.  With gas @ 2.50 gallon we save $1.35 per gallon over last year or over $2K per year.

That's real money and now it's MY money.  Given that the FED and the banks manipulated oil to a much higher price over the past 6 years I have no trouble whatsoever over the new, hopefully permanent, state of affairs.

Fri, 12/12/2014 - 16:48 | 5545883 p00k1e
p00k1e's picture

Is UCO the only 3X Long?

 

 

Fri, 12/12/2014 - 16:39 | 5545828 herbivore
herbivore's picture

As a rough gauge of low oil price sustainability, I ask the question: How many of you would, if you could, lock in today's gasoline price for the next 20 years, even if it were in inflation adjusted dollars? I suspect 90%+ of you would.

Saudi Arabia can, with the stroke of a pen, dramatically increase the oil price overnight. Were it to do so, it would benefit to the tune of something like $50 billion in extra profit per year, at a minimum, even accounting for a reduction of one million barrels per day of production. They can sell 9 million barrels per day at $60 or 8 million at $90--- which would you choose?

 

 

Fri, 12/12/2014 - 16:02 | 5545645 buzzsaw99
buzzsaw99's picture

b dud has one funky ass smile bitchez

Fri, 12/12/2014 - 15:45 | 5545590 Creepy A. Cracker
Creepy A. Cracker's picture

Yes, "forever" is a relatively long time span.  No doubt the price will go up between now and forever.

Fri, 12/12/2014 - 15:01 | 5545389 Comte d'herblay
Comte d'herblay's picture

In Kinnygarten we would have called the economy, "Whack-A-Mole".

Oil price rises, some lose their jobs.  Oil price declines, some lose their jobs.

Hit one mole, another pops up somewhere else.

Zero sumthin.

Fri, 12/12/2014 - 15:02 | 5545385 Yen Cross
Yen Cross's picture

  Good grief, Dudley looks like he could eat an apple through a picket fence...

Fri, 12/12/2014 - 15:20 | 5545481 Usura
Usura's picture

Looks like someone punched his teeth out.  Maybe he stole their lunch money in grade school.  The bankster business is based on genetics.

Fri, 12/12/2014 - 21:03 | 5546908 lotsoffun
lotsoffun's picture

dudley might have also been trying to get the stains out by cooking socks.

 

Fri, 12/12/2014 - 19:14 | 5546562 whackedinflorida
whackedinflorida's picture

some folks got revenge

Fri, 12/12/2014 - 14:27 | 5545263 GreatUncle
GreatUncle's picture

Smack down oil in market price, generate growth, then raise interest rates to curb the inflation and just hope nobody notices.

NOTICED :-)

Fri, 12/12/2014 - 14:18 | 5545209 detached.amusement
detached.amusement's picture

jesus, that picture of dudley...at first, seeing it in my lower peripheral, I thought his face was photoshopped upside down on his head.

Fri, 12/12/2014 - 13:55 | 5545081 exartizo
exartizo's picture

oh... and horseshoes and hand grenades on world wide GDP revisions.

Fri, 12/12/2014 - 13:57 | 5545080 sprintjump
sprintjump's picture

I'm a dumbass track and field coach... how the hell do I set myself up for the future? Yes, I have physical silver already. What else should I look into?

Fri, 12/12/2014 - 22:53 | 5547240 4 wheel drift
4 wheel drift's picture

i would start by improving your self esteem....  whatever you end up deciding on what to do to improve your lot, it will help (greatly) if you have a better image of yourself....   -it goes without saying that.. no, i do not believe in the theory that 'everyone must win a medal'...   but if you start telling yourself that  you are a dumb-arse....  i don't think you are helping yourself...

somehow, (and you ought to know this since you are involved in sports)....   'visualization' of what, where, and how you want to be/become/etc....   will put you where you yourself see who you are, (or think you are)...

so my point is....   read up on successful professional athletes and emulate them....  their mental toughness has something to do with ther success....

THEN.....

in the brave new world in which we seem to be living.....   figure out a plan in which your set of skills will ALWAYS be in demand... so at the very least you have a job.... and from there....  read, read, and read some more and educate yourself as to how to accumulate basic assets and avoid debt...  (if possible)

imo we may be entering a very long deflationary period... debt will be a very negative thing to have....   self reliance ought to be part of your goal....

not easy....   but it is better than the alternatives...

as for precious metals...  well, i am not sure you ought to concentrate so much on them....  what i mean... is...  the 'principles upon which the idea of  PM would deliver the promises of 'store of valiue' have been seriously under attack by the banksters, and it appears they are winning the battle.....   so....

 

"you will NEVER win, if you are afraid to lose"

~ J.M. Fangio  

Sat, 12/13/2014 - 00:59 | 5547135 Augustus
Augustus's picture

 

Coach,

The energy infrastructure MLPs have been hammered along with the producers.  When the portfolio manager gives orders to get out of energy, everything gets sold.  I don't know where the bottom will be but we should be pretty close for that sector.  Yields are pretty good and volumes transported are going to increase with exports and power generation uses increasing.  Do a little work on selection, then buy some and just hold forever.  You will probably get a pay raise every year from them.  This is not quite yet the opportunity of 2008 and it come for entirely different reasons.  Do not expect the 2008 situation to repeat as most of the companies have much better financial structure today.  Looks for the pipes as they will be much safer than the producers.  If you want to spec on the smaller producers, be careful, very careful.

Fri, 12/12/2014 - 15:20 | 5545483 kchrisc
kchrisc's picture

"I'm a dumbass track and field coach... how the hell do I set myself up for the future? Yes, I have physical silver already. What else should I look into?"

The four G's: Gold, guns, grub, and ground.

Have, and possess, precious metals. Some hidden-shallow, and some hidden-deep.

Have guns, ammo, primers, etc. in three stashes: At-hand, hidden-shallow, hidden-deep.

Supply of food and water and meds.

A bug out place in the country.

Good luck.

An American, not US subject.

 

Remember: "Relocation is always a euphemism for robbery, slave labor, and death.

 

Fri, 12/12/2014 - 15:10 | 5545431 Comte d'herblay
Comte d'herblay's picture

Look for another career preferably with Goldman Sucks, especially if you are Jewish. 

If you can secure a government job, you will be golden, it's been the best growth industry for the last 40 years. You can parlay that job into a Consultancy or get on with a lobbying firm once you find out where the bodies are buried.  You must possess a larcenous heart to pull this off successfully.

A sex change operation to a female is also a ticket to ride.  Pretend you're gay if that's too drastic.

The future belongs to tiny minorities with enormous power to get what they want. Only a powerful tiny group like gay men could have gotten the Constitution to permit them to "marry", the most absurd, ridiculous, and meaningless law ever passed in the United States. No straight person can honestly look at a gay couple who is "marrying" and think that's a natural act.

And if you're truly dumb, low IQ, not too well informed, then nature abhors a vacuum and you are toast.

 

 

 

Sat, 12/13/2014 - 01:15 | 5547533 Buck Johnson
Buck Johnson's picture

I agree totally with you.

 

Fri, 12/12/2014 - 13:56 | 5545087 exartizo
exartizo's picture

buy long dated far out of the money AAPL puts then retire fat and happy.

Fri, 12/12/2014 - 13:53 | 5545064 exartizo
exartizo's picture

is it just me or does The DudMaster look like he's missing a few teeth on the front?

Fri, 12/12/2014 - 22:28 | 5547170 4 wheel drift
4 wheel drift's picture

does The DudMaster look like he's missing a few teeth on the front?

nope....   i think he has english genetics, hence horrendous teeth..   -g

http://images.highonscore.com/posts/2012/03/med/869a83190864d1b194904b0b...

 

Sat, 12/13/2014 - 00:28 | 5547476 MalteseFalcon
MalteseFalcon's picture

Oil is on its way to $30 or lower.  Then it will rebound and stay around $60 for 5 years per the Economist.  Yes the oil patch will get wiped out.  Yes, a lot of speculators will get wiped out.  Will the children starve, the polar bears go extinct or cats start sleeping with dogs?

No.

Fri, 12/12/2014 - 15:10 | 5545432 kchrisc
kchrisc's picture

"is it just me or does The DudMaster look like he's missing a few teeth on the front?"

Should be missing more, if you know what I mean.

An American, not US subject.

Fri, 12/12/2014 - 14:35 | 5545297 NoDecaf
NoDecaf's picture

Two big front teeth look fake, like he had the real ones knocked down his throat.

Sat, 12/13/2014 - 13:22 | 5548234 SuperRay
SuperRay's picture

He wore his teeth out giving Jamie Dimon blowjobs

Do NOT follow this link or you will be banned from the site!