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Crude Oil Does The Limbo: How Low Can It Go?

Crude Oil Does The Limbo: How Low Can It Go? thumbnail

The commodity market for crude oil may have been the one of the two most exciting financial markets around the world during 2014’s first 11 months. Crude’s price per barrel rose to a high of $107.95 June 20, according to Federal Reserve Economic Data, or FRED. And oil’s price per barrel fell to a low of $66.15 Friday, based on its January 2015 futures settlement price at the CME Group.

This breathtaking plunge of -$41.80, or -38.72 percent, has had and will have major — and wildly uneven — implications for crude-oil consumers and producers globally. Accordingly, both the winners and the losers in the new petroleum pricing game have stakes in attempting to contextualize where the commodity’s market has been, is and will be.

For example, airlines in the Asia-Pacific region generally have not yet pulled the trigger on hedging their aviation-fuel costs because they are waiting for crude prices to sink even lower, industry executives told Reuters Friday. Hedging historically has been employed by airlines to establish fixed costs or fixed ranges of costs for jet fuel, which the International Air Transport Association reported is their largest expense.

Understandably, the big dip in the oil price in the wake of the Organization of the Petroleum Exporting Countries meeting Thanksgiving Day had airline-industry execs in a holiday mood, as exemplified by AirAsia Bhd CEO Tony Fernandes, who posted on that the drop was an early Christmas present for his company, which he described as “hardly hedged in 2015.”

Past performance is not necessarily indicative of future results, but it is helpful to look at the long-term trend in crude-oil pricing to assess where the market may move in the short to intermediate terms, as follows:

WTI Crude Oil Prices-Nov. 24, 2014 Covering the period between Jan. 2, 1986, and Nov. 24, 2014, this daily chart is based on EIA crude-oil prices for West Texas Intermediate, or WTI, at Cushing, Oklahoma, as retrieved by the Federal Reserve Bank of St. Louis’ FRED site.  U.S. Energy Information Administration/FRED

Clearly, the long-term trend in crude indicates it could bottom in the range from $50.00 to $60.00 per barrel, with the midpoint circa $55.00, as suggested by the red line on the above chart. Of course, one risk in this case is the fact oil is still mostly a U.S. dollar-denominated commodity. And the currency market for the American greenback might have been the other of the two most exciting financial markets around the world during 2014’s first 11 months, as follows:

U.S. Dollar Index-Nov. 21, 2014 Covering the period between Jan. 2 and Nov. 21, 2014, this daily chart is based on Federal Reserve System data on the trade-weighted U.S. Dollar Index: Major Currencies, as retrieved by the Federal Reserve Bank of St. Louis’ FRED site.  Board of Governors of the Federal Reserve System/FRED

Here is an interesting thing about the comparative strength of the U.S. dollar and the comparative weakness of other major currencies, as shown on the above chart: The difference appears to be based to a large degree on a bias divergence on monetary policy between the Federal Reserve, oriented toward tightening, and other major central banks, oriented toward loosening.

And there is no indication this gap between the big central banks will be bridged any time soon, which means the crude-oil market could be in a funk for the foreseeable future.

International Business Times     

6 Comments on "Crude Oil Does The Limbo: How Low Can It Go?"

  1. Plantagenet on Sun, 30th Nov 2014 3:34 pm 

    Just as markets overshoot on the high side (i.e. create bubbles) markets also tend to overshoot on the low side (i.e. become oversold).

    Oil can go quite a bit lower from here.

  2. Speculawyer on Sun, 30th Nov 2014 4:19 pm 

    Markets definitely undershoot. The question is whether that has already happened though. I guess it could go a bit lower. 50s for WTI is possible for a short time. But I don’t see it hitting the 40s.

  3. Revi on Mon, 1st Dec 2014 7:57 am 

    It might go lower, but how low can it go? This is already going to kill shale oil production, so some time next year when the Bakken hits peak, or the year after when the Eagle Ford hist, it will have to go back up.

    I think…

  4. Dredd on Mon, 1st Dec 2014 8:01 am 

    The crude oil business has always hit below the belt (A Methanol Economy Way Out of Here – 6).

    They are killers after all.

  5. Davy on Mon, 1st Dec 2014 11:07 am 

    The oil related articles are hot and heavy over at ZH

    With a third of S&P 500 capital expenditure due from the imploding energy sector (and with over 20% of the high-yield market dominated by these names), paying attention to any inflection point in the US oil-producers is critical as they have been gung-ho “unequivocally good” expanders even as oil prices fell. However, as Reuters reports, new data suggests that the much-anticipated slowdown in shale country may have finally arrived – permits for new wells dropped 15% across 12 major shale formations last month, as one analysts warns, “the first domino is the price, which causes other dominos to fall.”

  6. Northwest Resident on Mon, 1st Dec 2014 1:34 pm 

    How low can it go? Ask China!

    Sorry Makati1. Time to wake up and face the music. China is DONE building cities for nobody and bridges to nowhere. From here on out, it is all downhill. It should comfort you to know that is true not just for China, but for the rest of us too.

    China plays big role in oil’s slide

    “HONG KONG (MarketWatch) — All eyes have been on OPEC after its failure to agree to a production cut triggered the latest dramatic slide in the price of crude oil.

    But if you want to understand why the demand side of oil has been unraveling — and why it could continue — look no further than China.

    Opinion over the state of the world’s second-largest economy is typically divided between whether it is merely undergoing a rebalancing or a more painful slowdown after years of excessive credit growth.

    But if the industrial commodities that have fed China’s prodigious economic rise are taken as a guide, there is little need for debate: There has already been a hard landing, as all the prices of these resources have collapsed to multi-year lows.

    Now oil is falling in line as it too adjusts to a world where China is no longer bidding prices ever higher. Granted, oil is different from steel, iron ore and coal, where China is the world’s largest consumer (The U.S. still consumes almost twice as much oil as China). Yet Chinese demand is still pivotal.”

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