Tuesday, August 11, 2015

7 thoughts on the crude oil price crash

1. Blame it on the Yankees.  

The crash is mostly caused by the rapid rise in petroleum production in the US and Canada over the past 5 years.  US output is up from 5.3 mmbopd in 2010 to 9.3 mmbopd today, whereas Canada from 2.5 mmbopd to 3.9 mmbopd.  The rapid rise – nearly double the barrels in five years – has thrown a wrench on global supply-demand dynamics, since the US has always been the largest crude oil consumer worldwide by far.

2.  It has caught everybody off guard.  

Back in 2011-12 nobody expected US production to continue rising the way it did. Remember "peak oil"? Or even "energy crisis"? Nobody is talking about these now....

From Ben Casselman: It isn’t just that experts didn’t see the shale boom coming, but they underestimated its impact at virtually every turn. First, they didn’t think natural gas could be produced from shale (it could). Then they thought production would fall quickly if natural gas prices dropped (they did, and it didn’t). They thought the techniques that worked for gas couldn’t be applied to oil (they could). They thought shale couldn’t reverse the overall decline in U.S. oil production (it did). And they thought rising U.S. oil production wouldn’t be enough to affect global oil prices (it was).

3.  Entire (centuries-old) industry dynamics have been completely upended.  

From Business Insider: "... in the past, large integrated oil companies — BP and Exxon Mobil — and state-owned companies have owned the more efficient, low-cost production while smaller oil companies faced higher barriers to entry. In the past, drilling oil necessarily required huge investments in platforms and equipment; massive balance sheets or state backing were virtually required to get into the market.
But with lower-cost fracking technology, this has changed. [...]  as a result, oil supply continues to run into the market as fracking companies are able to produce oil cheaply and shut down wells quickly when they become unusable or unprofitable.  [...] Meanwhile, large oil companies or countries that depend on oil revenue to meet spending commitments have continued pumping oil because they still need to bring in that revenue, regardless of price."

Meanwhile the Saudis also continue to pump despite the glut, partly because their national budget is 90% dependent on petroleum revenue, and also perhaps in attempt to drive out high-cost shale producers.  It hasn't worked.  OPEC is mostly defunct.

4. Africa and Latin America have been hit hard.  

Oil-rich emerging countries such as Angola and Ghana got their economies whupped through budget imbalances and asset misallocation.  Venezuela, well, it has much bigger problems than oil.

5. Russia also fell victim.  

The premise of the 2013 movie Jack Ryan: Shadow Recruit is about how Russia would launch a terror attack on the US if crude falls below US$79/barrel. Well, oil is at $50 in real life now, and surely Russia is in huge economic trouble – with oil is just a small part of the cause.  The country’s economy shrank the most since 2009, with Q2 2015 GDP contracting 4.6% yoy.  The rout on commodities markets has overshadowed the signs of stabilization by hammering the ruble and shaking a country whose budget relies on oil & gas for about 50% of its revenue. Inflation eroded consumer buying power, as sanctions over Ukraine choked access to capital markets.  The country is a bit unique, however, in the way the nation has united in its unwavering adoration for Putin despite the country's freefall towards poverty.

6.  Widespread hit on global commodities -- and countries dependent on them.  

It's not just crude oil, but it's a perfect storm of slower Chinese growth affecting all metals and mining commodities, discovery of substitutes for rare earth minerals, Greek debt crisis, and tapering of QE policies worldwide -- all at once.  Even agri commodities, which continue to see solid demand and no technological disruptions of any significance, have been impacted.

Pretty much all countries dependent on commodity exports, from Australia to Brazil and Argentina, are seeing slowdowns and contractions.  Even worse, net oil importer countries, like my hometown Indonesia, fail to benefit from the drop in oil prices, usually through a lethal cocktail of resource misallocation, sticky prices, inflation, and strong dollar.

7.  So volatility is here to stay... or is it?  

The past 10 years have seen some of the most volatile crude prices in history.

But history is history.  Going forward, there isn't seem to be much volatility going around.  Supply shocks don't have much effect on prices, because traders know that US and Canada can ramp up production quickly whenever prices go up.  If anything, we may not have seen the bottom.  Maybe the market will move again in the long-term.

No comments: