Is The Oil Crash A Result Of Excess Supply Or Plunging Demand: The Unpleasant Answer In One Chart

Tyler Durden's picture

One of the most vocal discussions in the past year has been whether the collapse, subsequent rebound, and recent relapse in the price of oil is due to surging supply as Saudi Arabia pumps out month after month of record production to bankrupt as many shale companies before its reserves are depleted, or tumbling demand as a result of a global economic slowdown. Naturally, the bulls have been pounding the table on the former, because if it is the later it suggests the global economy is in far worse shape than anyone but those long the 10Year have imagined.

Courtesy of the following chart by BofA, we have the answer: while for the most part of 2015, the move in the price of oil was a combination of both supply and demand, the most recent plunge has been entirely a function of what now appears to be a global economic recession, one which will get far worse if the Fed indeed hikes rates as it has repeatedly threatened as it begins to undo 7 years of ultra easy monetary policy.

Here is BofA:

Retreating global equities, bond yields and DM breakevens confirm that EM has company. Much as in late 2014, global markets are going through a significant global growth scare. To illustrate this, we update our oil price decomposition exercise, breaking down changes in crude prices into supply and demand drivers (The disinflation red-herring).

 

Chart 6 shows that, in early July, the drop in oil prices seems to have reflected primarily abundant supply (related, for example, to the Iran deal). Over the past month, however, falling oil prices have all but reflected weak demand.

BofA's conclusion:

The global outlook has indeed worsened. Our economists have recently trimmed GDP forecasts in Japan, Brazil, Mexico, Colombia and South Africa, while noting greater downside risks in Turkey due to political uncertainty. Asian exports continue to underwhelm, and capital outflows are adding to regional woes. Looking ahead, we still expect the largest DM economies to keep expanding at above-trend pace but global headwinds have intensified.

And yet, BofA's crack economist Ethan Harris still expects a September Fed rate hike. Perhaps the price of oil should turn negative (yes, just like NIRP, negative commodity prices are very possible) for the Fed to realize just how cornered it truly is.

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Budnacho's picture

Yep, Zero demand at $3.75 a Gallon for gas....

Big Corked Boots's picture

$2.15 in NJ as well. I think the only place worse to live than NJ is CA.

knukles's picture

CA's talkin' about adding another 12 cents for the roads  (It's all for the roadies, dontcha know)

Oh regional Indian's picture

There has been a marked de-growth in miles driven.... ;-)

Overfed's picture

It's running about $3 here in FEMA region X.

hedgeless_horseman's picture

 

 

Chart 6 shows that, in early July, the drop in oil prices seems to have reflected primarily abundant supply (related, for example, to the Iran deal).

Or related, for example, to the US Production of Crude Oil nearing all-time highs.

 

 

I told you so, time and again, going back to 2010... http://www.zerohedge.com/contributed/2013-11-05/hockey-sticks-day

Antifaschistische's picture

I, for one, feel much better that we have returned to depleting our natural resources at a record pace.  This will help to ensure that our children and our children's children have a bright future.   

hedgeless_horseman's picture

 

 

Based on what I see, our children's children will be plugged into the matrix, living fully-virtual lives, and will not drive anywhere.  Many sixteen year olds today don't give a shit about getting their driver's license.

Apply Force's picture

Meh - our children's children will farm or die.

Government needs you to pay taxes's picture

What with all the Cesium from Fuckushima plus the cyanide from China, Californians will all be glowing lustily. . .

Jumbotron's picture

"Meh - our children's children will farm or die."

Howard Kunstler talked about this in his book "The Long Emergency" back in 2005.  And continues to do so on his web site.

http://kunstler.com/

The "JIT" (Just In Time) model based on cheap global energy and cheap wage slave labor arbitrage is breaking down.  This is a multi-decade issue.  There will be recoveries....but each drop will see the world get, poorer, slower, and more local as the decades pass.

However, the elites of the world will try the very last trick in their bag of horrors......CASHLESS.  With a cashless, purely digital credit system, they can manipulate all they want, even to the point of doing "buy-ins" if the need arises...you know...to "save the children". 

That's when the last attempt at total control will happen.  But when there are still too many people, and not enough cheap, easily extracted and easily obtained resources for those people......shit will hit the fan none the less.  Cashless or not.

Then......war.  Global war....and the big reset to farming or dying.


malek's picture

The JIT model has exactly nothing to do with cheap energy. More like accountants telling us "we don't need to put capital into holding a stock of materials."

Debt-Is-Not-Money's picture

A direct result of governments taxing inventory, really stupid!

Jumbotron's picture

" The JIT model has exactly nothing to do with cheap energy. More like accountants telling us "we don't need to put capital into holding a stock of materials." "

 

Bull...Fucking...Shit.

Ever heard of Fed-Ex ?  Ever heard of UPS ?  Ever heard of 24/7 trucking ?  Ever heard of 24/7 rail service ?  Ever heard of Cloud Computing ?  Ever heard of Amazon ?  Ever heard of 24/7 overseas shipping ?

Ever heard of paved Interstate Highways ?  What about the Internet ?  What about all the steel mills, and the coke factories and the plastic factories and the asphalt makers......etc....etc....and fucking etc.

ALL of these, including so much more, rely SOLEY on cheap energy.

 

Go back to your magical X-Box and the comfort of your mother's basement.  And her magical microwave which just made you some magical popcorn.


NoPension's picture

There is more work contained in the gallon of gas used to get most numbnuts to a job that produces almost nothing of value.

Push that car to work, and then home. And,then, tell me how hard you worked at your yob.

Matt's picture

There's work, and there is useful work. The objective is to get the worker safely, comfortably and quickly to work. The useful thing being moved weighs maybe 200 pounds. The metal box that moves the worker is over 2000 pounds. Man, I'm going to miss gasoline once it is no longer available. 

oooBooo's picture

Just too late systems were devised as a cost shifting mechanism. They do not rely on cheap energy. The energy to get the stuff from A to B doesn't change because it's set up to be delivered just before the line needs it or a year before. It might change because of fuel cost fluctuations but not because of when it was chosen to take delivery. What it does is shift warehousing and other inventory costs on to the suppliers. Someone got a huge bonus for reducing inventory costs but all he did was push them on to the part cost ledger as vendors just wrapped up their inventory costs into the part price. Now some clever vendors could produce a net reduction for their customers through scheduling production runs just right and such but just in time is essentially a ledger exercise of pushing costs around from one category to another.

 

Beatscape's picture

Anecdotal supporting evidence, my sixteen yearold has no interest in getting her driver's license. Has me and the wife scratching our heads a bit.  She spends so much time on her smartphone and gets rides from others when needed and uses Uber.  We say fine -- one less car to buy and one less person on our auto insurance. 

Apply Force's picture

Not like when we were 16... I bought my own 1st (and 2nd, and 3rd) cars in cash that I earned working (mowing lawns/yard work) from 12 on.  I worked on my own cars, which was not so hard, and usually Dad or another in the neighborhood could help out. I paid for my own ins. and my own gas.

Not so easy to buy a used car now - way more expensive per what a child can earn prior to being driving age.  And good luck working on your own car now - way more complex, and parts are way, way more expensive.  And insurance costs are higher as well.  No need to drive to a job for a 16 year old if the wage they earn can not even pay for car maintenance - if they could even find a job to begin with!

The Age of Less is upon us - adjust accordingly!

Jumbotron's picture

BUT BUT BUT......we don't have ANY INFLATION !!!

Mr. Yellen and Mrs. Bernanke told me so.

NoPension's picture

Where do kids pop their cherries nowadays?

Umh's picture

In their room, both parents work.

ceilidh_trail's picture

Must be a regional thing? Mine and all her buds all were at the dmv the day they turned 16.That's all we heard for a good while.

Shaznardickleze the Doon's picture

No jobs, no money, no where to go, internet social life. Whats your point?
Would you pay $3 a gallon if you were paid $7 an hour? 

MalteseFalcon's picture

Friend of mine in New England powers his house and car with solar panels on his roof.  6 year payback.

New England, bitches.

Midas's picture

With or without subsidies?

MalteseFalcon's picture

There are some subsidies, just like every other energy source.  The payback would be no longer than 8 years otherwise.

You completely missed the main point: solar panels = energy independence (including transportation) = no energy companies.

Available now.

Midas's picture

How does your friend make it through the brutal New England winter with solar panels?  It must take a whole lotta batteries.  And don't tell me he is selling his power back into the grid because the main point, that I most definitely did not miss, is about energy independence.  If he is connected to the grid he is no more independant than the rest of us.  I am not trying to be argumentative.  I WANT to believe in solar panels.  I have tried to devise a system for my own homestead, but can't make the numbers work out as you claim.  I live in a sunny location, but not during the winter months.  If you could flesh out a few more details on his system it would be great.  I have been searching for economical batteries but haven't found anything.

CvlDobd's picture

Every fucking thing is subsidised but all anyone wants to bitch about is solar subsidies.

Midas's picture

Asking a question is not the same thing as bitching.

August's picture

There really is no Region like Region X.

Call me a sentimental fool....

Sages wife's picture

I really need to pick up some crayons. Those chart thingies look like they might be fun to make.

EarthHuman's picture

Imagine what price oil if we stopped subsidizing by billions of dollars the companies that are warming the planet.

Solar power is the way.

AGW is real idiots. Somebody troll me please.

cougar_w's picture

People are trapped in car-based lifestyles. It's drive, or die. THose who still have jobs to get to will buy fuel at any price, including $6/per or more.

flysofree's picture

Where have you been the past 7-years?  The whole culture is changing.

cougar_w's picture

Changing? You have got to be shitting me.

Jumbotron's picture

<chuckle>....got that right cougar_w.

The only change comes when there is no other choice but to change....or die.  And even then.........

sun tzu's picture

What gets me is that people think demand won't change if gas prices double or triple. People will carpool, take mass transit, and stop going out. That will lead to massive job losses as the economy craters and people don't have money to spend.  They will buy smaller cars and electric cars. It's called demand destruction.

laomei's picture

america doesnt have mass transit, doenst have jobs either, so i guess it all cancels out.

astoriajoe's picture

I wonder how much they'll add for water.

pound the vix's picture

Where does the other $2 of taxes (inexcess of NJ and SC) go?

BandGap's picture

$4.12 here in beautiful Chicago as the city further contemplates raising property taxes and mulls having people pay for garbage collection.

cowdiddly's picture

Its about .20 cents a pound for transportation fuel in Oklahoma. 50 bag of oats/10.79= about .20 cents.

My little dragster is a great granson of Pepe San Badger and can cover 1/8 mile in about 13.5 seconds and tops out about 42- 44 miles an hour. Might be faster if I was a better driver and was younger. (Going 45MPH on a horse is some scary shit when young much less an old man with brittle bones in a field fun of Armadillo holes)

http://www.king-ranch.com/operations/ranching/quarter-horses/

runs on about 3lb a day or .60 cents

 

BurningFuld's picture

Dude I'm in at .093 cents a pound. And it was really frickin' dry here this summer.