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Oil Prices Rebound…but not a True Recovery
Nathan McDonald for Sprott Money
Three consecutive days of oil prices rising and suddenly all is well again. This is the extremely short sightedness that the markets possess. The bottom callers have come out in droves, screaming that prices will only move higher from here, but will they?
There is a possibility that oil prices may of hit a near term low, and will likely stabilize in the $40 to $45 per barrel range. However, the reasons for the recent rise in oil prices that market pundits have been expressing are simply not true.
Reality cannot be ignored. The economy is not getting better and this year continues to go from bad to worse. Low oil prices are taking a heavy toll on the shale industry in the United States. It has decimated the Russian economy, and now the Canadian economy is showing signs of extreme stress, especially in its overpriced housing sector.
Oil prices rebounding in the short-term, as with any market in the short term, means little to nothing. The long-term effect is what matters.
Regardless of this rebound, I do believe that oil prices will ultimately move much higher. Perhaps not anytime soon to the inflated levels previously seen, but nonetheless higher.
This won’t be driven by a recovering economy, which is still reeling from the same sickness brought on by the 2008 economic crisis. There is too much debt. The one thing and one thing alone will move oil prices higher…is low prices.
As I’ve stated before, the best cure for low prices in the commodities market is low prices. Low prices force shutdowns and closures of mines, pumps, drilling, you name it. A company will not simply extract a valuable commodity from the ground, just to sell it at a loss.
OPEC knows this. They also know that by depressing prices to these extreme lows, companies will be forced to stop production, layoffs will commence and companies will take many years before they dive back into costly projects with both feet.
OPEC appears to be taking a lesson right out of the Chinese playbook, when it decimated the rare earth market, crashing prices and destroying companies in the process. This enabled them to accumulate a purported 97% dominance in the industry.
OPEC officials are confident that we haven’t seen the lowest of lows yet, stating that prices could drop to the $30-$35 per barrel range, before moving higher. Although this price would hurt the wallets of OPEC participants themselves, in the end it will help them achieve their end goal of thinning out the herd in the oil industry.
In a recent Reuters interview, one OPEC official had the following to say:
“The general feeling is that prices will still remain lower than what we all want because of the excess of supply in the market. The expectation is that these stocks will not decrease before the first half of the year.”
“There are a number of good signs, for example the shutdown of some production in the U.S. and Canada. So it means that the policy decision made in the last meeting was the correct one, it’ll be slow, painful for some more than others but in the end effective,”
One country this official fails to mention is Russia, which I’ve maintained is the main target in this oil price takedown. I still believe that the United States has taken this assault on one of their only booming industries, with little resistance from the Russians.
Regardless of this omission, the facts remain. Oil prices will only move higher once supply has been drastically reduced by a wide-scale shutdown of costly oil producers, which will result in an economy weakened by layoffs, loss of income, and an industry that will take many years to fully recover.
OPEC and those companies large enough to weather the storm, will then be the direct beneficiaries of an industry that has less competition and steadily increasing prices. A win-win scenario for them, and lose-lose situation for us.
Nathan McDonald for Sprott Money
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Won't WW III make oil skyrocket?
Judging by the headlines today, this week, this month, the new war will take care of any problem with oil prices. Sigh.
Just picked up a hiliarious story on Brian Williams .....RED BANK – A long-time borough restaurateur doesn’t believe embattled NBC anchorman Brian Williams’s claim that he was robbed at gunpoint in Red Bank sometime in the late ’70s while selling Christmas trees from the back of a truck.“To be robbed in front of a church? Red Bank just wasn’t like that,” said Daniel Murphy Jr., 71, who owns Danny’s Steakhouse and has lived in the borough since his family moved there in 1949. “It was the kind of town where as a kid I’d leave the house in the morning and not come back until 8, 9 o’clock at night and you never worried about safety.”
Rebound signals recovery only when the fundamentals confirm this. Otherwise it's just so much kinetic energy stored in a rubber band. You get one good snapback, and it's over. Better be quick, my friends...
A new gas tax takes effect this year. i heard as much as 3 dollars a gallon. Dont worry just as we get better gas prices with the over glut of gas. The US Government decides to take all those savings for us and suck them all up for them. We need a revolution!
3 bills already sponsored in the House by Democrats to raise gas taxes. Not 3 $, but anything sucks.
I remember 1 dollar gas in the early 2000's. What happened to that ? "Obama?
Nope. Greenspan
From Ransquawk - "SandRidge Energy reducing their rig number by 75%, according to a document". You know the oil shorters are desperate when they resort to quoting 'documents' rather than 'people'.
The author of this must have learned about 'supply and demand' from a college textbook, The notion that supply and demand have ANYTHING to do with prices in a big bank manipulated central bank controlled world is almost funny.
The Russian economy is not decimated, in fact it is doing really good from where I sit. Who write this stuff?
Make a wild guess and bet on it. After all, what could go wrong?
Yeppers. Sell USO now via put. Sell in April. Buy USO Call. Sell in December. Easy enuff. Gimme my effing commission.
USO is extremely over sold right now. I bought some short terms calls last week. Ill sell when the MACD signals a sell...right now its screaming hold. we'll see if it works out. Two sides to every trade.
Two dollar gas? I hardly knew ye.
I expect to pump $3.00+ gas by the Fourth of July.
Merkel has re-buked Obama on a shooting war with Russia, so the Saudis are not going to follow the Obama playbook much longer.