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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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Fri, 08/21/2015 - 11:45 | 6451744 cougar_w
cougar_w's picture

You just described 98% of retirement fund managers.

Fri, 08/21/2015 - 11:38 | 6451701 shankster
shankster's picture

$2.45 a gallon n Texas the 'oil state'. The illegals here can't even afford to buy that.

Fri, 08/21/2015 - 11:49 | 6451758 cougar_w
cougar_w's picture

They cannot afford it but they buy it anyway, because that's how it is. And that is why the price will go up a bit more.

When they cannot buy it they will go back to Mexico, where ironically enough people can still live sustainable lives that don't depend on freeway access, 24/7 WalMart and $2/gal fuel.

Hope you enjoy mowing your own lawn.

Fri, 08/21/2015 - 11:55 | 6451797 Never One Roach
Never One Roach's picture

$2.16 in many parts of Texas my cousin tells me and the gas stations and roads and mawls empty.

 

Veyr robust.

Fri, 08/21/2015 - 12:28 | 6451958 flysofree
flysofree's picture

Why do you repeat this nonsense. The price of oil is not set at the margin--where the highest producers sets the price--that only occurs when commodity speculators can exploit rising demand( Jimmy Rodgers). It's becoming obvious like it usually is with commodity producers that they're trapped and MUST sell at any price, that's the reversion to what commodity pricing should be in a normal cycle.

Fri, 08/21/2015 - 12:30 | 6451973 cougar_w
cougar_w's picture

The price of gasoline is not tracking well with the price of oil. Is the point. Oil will drop to $20/bbl and fuel will still be $3.75 at my local service station.

Fri, 08/21/2015 - 13:38 | 6452274 83_vf_1100_c
83_vf_1100_c's picture

"Hope you enjoy mowing your own lawn."

 

Actually I do. Jap made Kubota ZTR is almost too quick. Only way I can get some alone thinking time is on the mower or tractor.

Sat, 08/22/2015 - 07:59 | 6454996 Adahy
Adahy's picture

"Hope you enjoy mowing your own lawn."

A lawn.  What a waste.
Fill that fucker with vegetables and fruit trees.  Much easier to keep the grass down if there isn't much place for it to grow.
People should depend less on wage-slave labor and more on themselves and their neighbors.

Fri, 08/21/2015 - 12:10 | 6451882 fel.temp.reparatio
fel.temp.reparatio's picture

...$1.33 a litre in metro Sydney.

Fri, 08/21/2015 - 12:22 | 6451929 cougar_w
cougar_w's picture

So did they use the revenue to build out mass transit? Because if they did, you're fine.

And if they didn't then hang the filthy, money-grubibng mutherfuckers for being pirates.

Fri, 08/21/2015 - 11:43 | 6451730 ejmoosa
ejmoosa's picture

Central planners who pushed electric vehicles to the tune of 8,000 dollar tax credits and forcing fuel standards higher and higher despite the cost are baffled by the drop in oil demand.

 

 

Fri, 08/21/2015 - 11:43 | 6451733 katchum
katchum's picture

Negative commodity prices, my new job would be to get paid to use gasoline. Then go on vacation.

Fri, 08/21/2015 - 11:51 | 6451778 cougar_w
cougar_w's picture

The "negative" thing will apply to industrial materials. But yeah if you want to open a factory there will be an iron monger in Australia will pay you to take that rusty load of rebar that's been sittling on a barge for 5 years off San Diego.

Fri, 08/21/2015 - 11:45 | 6451742 wstrub
wstrub's picture

ALL commodities down in advance of the coming GREAT CURRENCY RESET.  It is all a game......we are the pawns getting moved around the board before the final checkmate.

Fri, 08/21/2015 - 11:45 | 6451743 roadhazard
roadhazard's picture

Oh good, the writer finally gets it.

Fri, 08/21/2015 - 11:57 | 6451813 Chuck Knoblauch
Chuck Knoblauch's picture

 PMI is trending down, demand for oil is not there.

Fri, 08/21/2015 - 11:57 | 6451814 pebblewriter
pebblewriter's picture

Don't know why people are arguing the supply/demand issue.  Sure, there's less demand as economic activity has slowed.  But, it was allowed to finally correct from last year's highs because Japan needed it to in order to stomach the continuining debasement of the yen.

The yen went from 75 to 125 vs dollar since 2011.  It makes oil (priced in USD) ridiculously expensive -- all while they've sidelined their nukes.  The only way to get them to keep the yen carry trade alive was to crash oil.  Lots of side benefits for US and EZ, too.

First figured this out back in March, and it's played out perfectly since then.  http://pebblewriter.com/those-wacky-central-bankers/

Fri, 08/21/2015 - 12:10 | 6451880 Breaker
Breaker's picture

In California, "for the roads" means they will fix one pothole and then spend the rest on pedestrian and bike paths, and of course the bullet train.

Fri, 08/21/2015 - 12:27 | 6451951 cougar_w
cougar_w's picture

Not quite. Can't get a bike path built for all the retailers bitching that it slows traffic for their fat drive-thru customers in SUVs. You should listen to them, sound like farmers.

California is 98% car-based -- freeways left and right, service stations on all four corners, lax traffic enforcement -- and that isn't about to change.

Fri, 08/21/2015 - 12:21 | 6451926 bmr22
bmr22's picture

Been holding steady at about 2.19 for a week or so now South West Virginia here

Fri, 08/21/2015 - 12:25 | 6451942 nobodysfool
nobodysfool's picture

Anybody see Chart 6?

Fri, 08/21/2015 - 13:47 | 6452320 Turdy Brown
Turdy Brown's picture

Last time I was in Tripoli (Libya)(2011) price of gas was 11 cents per liter!

Fri, 08/21/2015 - 13:55 | 6452354 Pasadena Phil
Pasadena Phil's picture

Makes the case for the US to push for oil independence whatever happens to prices on the way. With US oil inventories declining, domestic production steady and imports rising, there is no sign of US demand declining. US shale oil producers are the only ones producing oil profitably at these prices. Uncap those wells! We are so close! Let the rest of the world worry about OPEC and their terror-funding oil sheiks! It would stabilize oil prices and make the world safer for long-term investment were the biggest oil consumer also be the biggest oil producer rather than 3rd world cavemen who want to destroy the world while still riding camels.

Fri, 08/21/2015 - 14:05 | 6452389 SFopolis
SFopolis's picture

It's called bumping.  Us Peak oilers have predicted this for over a decade.  :)

 

Fri, 08/21/2015 - 14:23 | 6452458 _SILENCER
_SILENCER's picture

Sub 40.00 oil and 91 octane was $3.86 this morning. What does that mean, fuck-all if I know. Once the big red reset button is thrown it's going to be all blue mondays for awhile.

Stack 'em high and rack your slides.

Fri, 08/21/2015 - 14:35 | 6452495 atlasRocked
atlasRocked's picture

Investors won't pool their money together without higher interest rates being offered, so no investor-led recovyer can happpen without higher interest rates.

 A fake socialist credit based "GDP increase" - not intrinsic private sector growth - will be the result of more ZIRP.  

The relapse after interest rates rise will be the effect of a catastrophic crash in gov't bonds, which will by rendered bad debt, and the reduction of deficit spending which must follow.  Much of the GDP is simply deficit spending, and deficit spending "juices" the GDP with artificially counted "growth". 

http://www.amazon.com/Atlas-Shouts-Modern-Patriot-Action/dp/1458217566 

Fri, 08/21/2015 - 14:44 | 6452521 rsnoble
rsnoble's picture

I can see it now.  Negative oil prices and $15gallon gas at the pump.  And shortages on top of it.

Fri, 08/21/2015 - 18:57 | 6453841 Steve556
Steve556's picture

This article is bulls....  Zerohedge has really degraded this year. 

Fri, 08/21/2015 - 19:11 | 6453885 Westcoastliberal
Westcoastliberal's picture

Regulas gas is about $3.56 here in Socal if you shop around. Not for long though, the legislature just increased our tax another 10 cents a gallon.

Tue, 08/25/2015 - 10:34 | 6454512 RMolineaux
RMolineaux's picture

In my opinion, it is more than a little silly to claim that increasing the Fed funds rate from 0.25 to 0.50 represents any kind of a "tightening."  What with commercial bank excess reserves sloshing around in the hundreds of billions, we will be in relaxed monetary condition for many months to come.  Altogether too much is being made of this overdue correction.

Sat, 08/22/2015 - 00:03 | 6454642 yogibear
yogibear's picture

And 10,000 baby-boomers retire daily. Less driving by them Cutting back on expenses,

Fewer living-wage jobs.

Sat, 08/22/2015 - 05:18 | 6454894 SystemOfaDrown
SystemOfaDrown's picture

What "Daily" panic chart are you?

Sat, 08/22/2015 - 08:03 | 6455007 22winmag
22winmag's picture

Regular is $2.27 where I reside and my 1976 Delta 88 Royale is pleased!

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