Thursday, June 8, 2017

Crude Oil Sinks on Continuing Glut, Slack Demand, Alternatives

While stocks have zigzagged and gone nowhere the first three days of the week, oil has been more consistent in direction, with WTI crude dropping by two dollars a barrel on Wednesday under $46, a nine-month low.

There's been a glut of oil on world markets for some time now, but it's been especially painful to producers since the market riggers lost control in 2015, sending the price from imaginary levels - forced upon the planet by the myth of "peak oil" - around $100 per barrel to where it stands today.

Oil's recent swoon brings up a good question. With all the oil sloshing around and a myriad of factors leading to lessened use of the "fossil fuel," what exactly is fair value for crude?

There are many arguments with which to weigh the answer, whatever that may be, but one element that is undeniable about the current condition, is that producing nations aren't exactly in love with what they're being paid for a barrel of the slippery stuff. That's because many of the producers - OPEC and Middle East nations, primarily - had budgeted for steady sales around the high-water mark of $100/barrel.

Since that price turned out to be completely unsustainable, these countries have had to adjust their spending and programs, leading to some degree of discontent among their citizens. Americans, who benefitted from fracking and shale drilling, have been the biggest beneficiaries, seeing the price of a gallon of gas fall from an average near four dollars to today's prices in the low two dollar range.

One of the largest factors contributing to the glut is purely demographic. Many established economies - Japan, US, Europe - are aging, and older people simply don't drive as much. Add to that the improvements in fuel economy, plus alternatives such as cars which run on natural gas or electricity and he trend becomes more pronounced.

As the price of crude continues under pressure, alternative fuels, such as increased use of coal, solar, and wind in the United States, will only exacerbate the condition.

Back in the good old days of the 70s and 80s, oil used to be under $20 per barrel. Then along came the "peak oil" sham, which sent the price through the roof and consumers to the poorhouse. The true price may or may not be found in the current regime of futures prices, a system that has and probably continues to be gamed, but the real price, taking into account the massive amounts of oil on and off the market, the stagnation of the global economy, and emerging alternatives, is likely to be found at levels well below what it is pinned at today.

Try thinking of oil at about $32-36 per barrel and gasoline at $1.60 and you're probably on the right track.

At the Close, 6/7/17:
Dow: 21,173.69, +37.46 (0.18%)
NASDAQ 6,297.38, +22.32 (0.36%)
S&P 500 2,433.14, +3.81 (0.16%)
NYSE Composite: 11,667.73, -3.73 (-0.03%)
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