The price of oil (West Texas) dropped nearly $3 and hit it’s lowest level since the 2nd half of 2010. It’s dropped 31% since July. The explanations being promoted by the mainstream blogosphere for the price decline is either 1) the U. S. has manipulated the price lower to punish Putin/Russia or 2) the Saudis have flooded the market with supply to drive U. S. oil shale/fracking out of business.
Both of those rationales are nonsense. Too be sure, I have no doubt whatsoever that the price of oil can be teased lower by manipulative activities. But for the reasons below, I believe that the price of oil can be driven lower for only a very short period, especially if global demand requires at least as much oil as is profitably being produced.
First, it is more difficult to drive the price of oil lower using futures – as is done with gold/silver – because oil is a depletable commodity and the entity shorting paper oil risks the probability that the long side will ask for actual physical deliver. Second, IF the price of oil were being manipulated lower using artificial mechanisms, sophisticated oil traders – Wall Street banks, big hedge funds, sovereign funds and oil companies – would buy up this supply and store the oil until the price bounced back. It’s an asymmetry of information arbitrage play, if you will, and sophisticated entities have superior information to the market in this regard. Also, please note that several banks have invested in oil storage terminals for this purpose. Third, I find it very hard to believe that greedy multi-national oil companies would agree to piss off Putin at the expense of profits. And, by the way, Russia is clearly not hurting given that it bought 37 tonnes of gold with cash in October.
Instead, the plunge in the price of oil reflects the collapsing global economy, which – by the way – includes the U. S. economy:
This post was published at Investment Research Dynamics on November 13, 2014.
Follow on Twitter
Recent Comments