I’d say, ‘not much’. Of course, that depends on who you are rooting for: the oil producing countries (many of whom are not our best friends), or the small segment of the S&P 500 (only about 6.8% of the year-end, index market capitalization) engaged in energy production and exploration, or the 93.2% of the S&P 500 companies that benefit from lower energy prices (and most everybody reading this post plus 7+ billion other human beings around the world). To me, this is a no-brainer. To the folks at CNBC it is something to ponder and worry over as we moved into this weekend.
Another way to look at the question above (a CNBC on-line question last Friday) is that it was a plumb-stupid attempt to get attention to worry people by drawing attention to an issue that is a non-issue.
The seeds of an oil price recovery have already been sewn
I make this point again: crumbling oil prices were never about weakening oil demand. This has been a bulwark of the bearish contention that we were heading into a recession.
According to the IEA’s (International Energy Agency) latest monthly market report for October, global demand growth is expected to slow from its five-year high of 1.8 million barrels a day (mb/d) in 2015 to 1.2 mb/d in 2016 “closer towards its long-term trend as previous price support is likely to wane,” the IEA said. (CNBC, 10/13/3015,”Oil demand growth to slow, IEA says, but is OPEC listening?) It is unbelievable that people would represent the price decline as being rooted in a demand decline. DEMAND CONTINUES TO GROW!
LOW OIL PRICES ARE ABOUT A SUPPLY GLUT PERPETRATED BY SAUDI ARABIA to knock down US shale oil production and any exploration for higher cost sources of crude oil. IT IS WORKING. US oil production peaked at 9.7 million barrels per day last April. It was under 9 million barrels per day last week for the first time since 2014.(“US crude production falls below 9 million barrels per day”) Not only that, but the (Baker Hughes) US rig count dropped to 351, down from near 1600 in 4Q 2014).
Projects deemed feasible at $80 oil a barrel have been put back on the shelf. Projects that may have been undertaken to improve productivity of existing wells or simple maintenance capex don’t get done. To be meaningful in scale to a multinational major like Exxon or Chevron, exploratory projects have to hold huge potential to be considered. These projects, now, are usually deep-water, technologically complex and incredibly costly and difficult to pursue. These projects are now back-burner due to price risk and may remain that way due to ‘recency bias’. Ergo, while demand continues to grow it is very possible that supplies could contract at a much faster rate than Saudi Arabia has the ability to over-supply the market. Prices will rise.
What about Iran?
One reason that Doha may produce nothing substantive in the way of a production freeze (and that looks to be the case as I write this post) is Iran not wanting to play. The Islamic Republic is producing about 3.3 million barrels per day. After years of embargo it would be silly to assume that they would go along and now cut production to satisfy their arch enemies, the Saudis. Back to my earlier point, increasing world demand, the natural production decline of existing oil reservoirs and lack of investment, which may persist due to ‘recency bias’, all conspire to tighten supplies and the market without the help of OPEC.
What about ‘Recency Bias’?
I picked this term up from an in investment advisor/ professional investor that I follow on SeekingAlpha. He goes by the handle “Fear & Greed Trader”. His most recent weekly post, “The Expected ‘Pause’ Was Brief, The Rally picks up Momentum,” introduced me to this term and reinforced another concept on how the punditry world views ‘optimism’. According to The Skeptics Dictionary, ‘recency bias’ is the tendency to think that trends and patterns we observe in the recent past will continue in the future. We see this a lot today in pundit commentary expecting the next be ‘2008’ event to be just around the corner. It probably is not.
As to optimism or being optimistic, F> opines: “Since this secular bull market started, many investors have taken the pessimistic view with the belief that it sounds intelligent, insightful and helpful. Some believe that an opposite optimistic view can sound pollyannaish, naive and blind to the realities of the world.” It would appear that the optimists have been on the right side of this argument since the lows put in in March 2009.
I think that the FEAR and GREED TRADER does a great job of laying out the pros and cons facing the market in his weekly piece. Plus, it is obvious that he has has the wisdom only gained by years of experience. I commend his work to your attention. (Link to complete F&G Trader post)
Back to my point: The pundits think Doha is something to care about. I don’t. Remember too, when oil prices do start going back up, in their continuing efforts to sound brilliant, that will be bad news too.
You can’t win with these guys unless, of course, you go against their brilliant dictates.
What’s your take?
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