Five Reasons Why Crude is Plunging
- Increasing oil production in the US. The US is on a path to oil independence. This is a good thing.
- Oil production in Russia is up.
- Trump granted significant waivers on Iran sanctions.
- Saudi Arabia, OPEC in general, and Russia all stepped up production based on Trump sanctions that did not fully happen. Europe is working out additional procedures to avoid US sanctions.
- The global economy is slowing. A global recession looms. Barring disruptions, the price of oil will fall.
I will be on Coast to Coast AM tonight (Tuesday November 13) to discuss the energy bloodbath. I am on about four times a month just after Midnight Central for economic updates.
Click on the above link for a local station if you want to tune in. This will be a short call.
In December, I will be on for an extended segment for an hour or more, taking live calls on the economy. The theme will be what’s ahead for the economy in 2019. I do not have a date yet.
I disagree with Trump on sanctions and tariffs. Inevitably, both sanctions and tariffs are a tax on consumers or businesses in one way or another.
Tariff Scorecard
For every steel or aluminum US employee, there are dozens of US manufacturer employers that use steel and aluminum.
Herr’s a Tariff Scorecard: 57 Companies Bitch About Trump’s Tariffs, 7 Give Positive View
Trump has not brought back a single US job with his tactics.
GM and Ford both complain. For discussion, please see Auto Truce is Over: Trump Again Threatens the EU, Japan with a 25% Tariff.
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Correction: The USA is perceived (by the markets) to be on the path to oil independence. In reality fracking is a “flash in the pan” for oil production. It will destroy the ground and ground water for a few years of oil supply before production falls off a cliff. There’s only so much blood you can wring from a stone. Ignorance when practiced in economics and politics is ultimately very costly.
I hope, I really hope, that this is not the start of a major deflationary trend. If it is the world is in big trouble. Deflation and debt don’t mix very well. God help the banks and bondholders.
The government certainly will. No god required.
Another possible explanation is the role of speculation — increasing the natural price swings due to temporary imbalances in supply & demand. Those damn algorithms again!
Over the last 10 years, the price of oil has varied between $27/Bbl & $128/Bbl — a factor of almost 5 times. Neither demand nor supply has varied by anything like a factor of 5.
For comparison, over the same period, the price of gold has varied between $750/oz & $1,850/oz — a factor of about 2.5 times.
Recent price drop in oil is well within historical experience – no surprises there. Interesting feature with the rise of shale oil is that supply may be much more sensitive to oil price now, compared to the past era of oil mega-projects where supply today was relatively inflexible and depended on decisions taken 5 – 10 years earlier. It will be interesting to make real world observations about this hypothesis.
Isn’t it just wonderful to see the most crucial industrial commodity in the world trade like a “pink sheets” penny stock?
Probably not.
Good post.
only reason oil quadrupled in price in 3 years is central banks printing trillions and buyin oil futures through shady front companies,you can pretend it’s shale or iran like you can pretend the stock market quadrupled in 10 year by “earnings” growth (lol)!
Hedge funds are doing it to.
I would like to know why oil is going way down and natural gas is going way up.
EU is turning away from coal due to “climate change” and many EU countries have promised to stop using coal and replace it with natural gas or renewables.
Since renewables are not there in usable quantities the main beneficiary is natural gas.
Exception is Germany that is increasing usage of both natural gas and coal since Merkel promised to turn off all German nuclear reactors by 2022 to coddle German voters that were scared by Fukushima.
Tied to this shutting down of nuclear reactors is the massive pipeline directly from Russia to Germany under the Baltic Sea that pumps massive amounts of natural gas to Germany.
Demand is so great that Germany and Russia are building a second even bigger natural gas pipeline under the Baltic sea direct from Russia to Germany next to the first pipeline.
Crazy decision by Merkel to close nuclear reactors by 2022 and tie Germany at the mercy of Russian energy but she has made many crazy decisions.
Because nat gas futures always go up when cold or snow is forecast. Same thing happens when a hurricane is forecast in the Gulf. It is just the way nat gas traders do business. It is called hedging.
What about a sixth reason – a credit contraction and speculative risk off that is deflating “all” asset bubbles. Gold has also been feeling the pinch of late.
Mish: As someone who has been in the energy business for thirty years as a coal producer and global coal broker and also as a natural gas producer I agree with your five points. Spot on. I’ll be listening to you tonight on Coast to Coast.
“Inevitably, both sanctions and tariffs are a tax on consumers or businesses in one way or another.”
True — but incomplete. The lack of reciprocal tariffs has been shown in the real world to be a heavy burden on formerly-employed workers and on the taxpayers who are now supporting them.
And at some point, the unilateral free trade crowd have to address the elephant in the corner — non-tariff barriers, such as China’s “Make it in China 2025” policy.
Mish, the way you write about Trump’s tariffs, it is as if you expect them to be permanent. I would have expected you of all people to understand the strategy of negotiations. Also, what else can Trump do to get China to stop stealing our technology? Or should he, like all the previous presidents, just ignore that?
BTW, I’m loving the lower oil prices, even though the IDIOT majority here in CA just voted to sustain the highest fuel taxes in the nation. The last increase passed by the dummycrat supermajority, which was “barely legal”, should have been repealed but they put a misleading title on the Proposition 6 which fooled the ignorant voters.
I voted to roll the taxes back for one reason only – because the electric cars DO NOT have to pay any road taxes since they don’t require gas. It isn’t fair!
It’s also good that the oil decline occurred after Oct 1, or else we might not have gotten the large bump in SS checks. Thanks Trump and oil companies!
“Trump has not brought back a single US job with his tactics.”
Huh?
https://www.chicagotribune.com/business/ct-biz-us-steel-tariffs-gary-plant-20180816-story,amp.html?__twitter_impression=true
So he saved some jobs in steel at the expense of everyone that uses steel. Isn’t big government great when picking winners and losers.
And what does it matter?
A village betrays us, a village is burnt.
The point’s made.
Your point, their village