I'm not convinced any longer myself. 40.00 or 49.99? Or anything in between? I'm curious why you think oil is going down? Nice move tonight. At least in Brent.
Questions: 1. Is the assumption then that oil prices actually are driven by actual supply and demand of physical oil? What about speculation or other interests? It's a non-renewable energy source and currently the most important one in our global economy. I don't think they'll give it away for free. 2. In percentage of the total global production of oil, how big is the supply surplus? In other words, how much would it take to switch from 'too much suply' to 'too little supply'? 3. Some producers are already shutting down. How does that affect the supply side?
I believe Soros got it right when he suggested that information and observers of that information are stuck in perpetual feedback loops. The oil and product fundamentals have an impact on perceptions of hedgers and speculators which transfers into price action via their responses to perceptions which then drives physical participants to respond with more or less supply. In this stage it's very much like game theory between countries among themselves and producing firms in glutted regions. Each knows the others won't stop pumping if the economics support production, and what is there to gain by lowering one's own revenues and shutting in for the benefit of friends and enemies? Any country or firm at this stage would voluntarily weaken its own standing if it were to shut for reasons other than economic cost. Non-renewables and non-conventional oil are usually not economical when prices are this low. Many are higher on the cost stack like deep sea drilling and wind or tide energies. The supply fundamentals suggest there is an overhang of 1.0-1.5 million barrels of daily excess production in the market and has been that way since Q3 14 and will likely continue till the end of Q2 15., however some estimates suggest we could see 2.0 million daily excess by end of Q4 15. Daily demand for oil and products is 93-94 million barrels per day, so we are roughly +1-2% oversupplied on a daily basis with growing inventories of gasoline and crude from USGC to EU to Singapore. The weaker producers who weren't hedged will be forced to idle rigs which has been evidenced in the drop in US rig count. However, supply and demand, with the increase in idle rigs, human labor, and equipment, the cost of production has dropped significantly in the last 6 months. The economics of production are dynamic and respond to prices and perceptions of future prices.
And back up we go? I'm still holding on to my oil stock. The stock had a significant retrace, almost back to breakeven, but the last days have been excellent and the stock is looking as strong as ever. Overall, the markets are looking pretty strong now, so even though oil prices may take some time to pick up, I think Statoil is due for more upside.