Over the past week or so, the world crude oil price has dropped by about 10%–although it is rebounding a bit as I’m writing on Wednesday morning.
I have several thoughts:
–this is the weakest part of the year for crude oil demand, since the winter heating season is over and the spring driving season is yet to begin
–the surprising aspect of recent crude oil prices is not that they are weak, but rather how strong they have been in January and February in the face of a rising rig count in the US and a milder than average winter in heavily populated areas around the world
–hard as this may be to believe, the price drop suggests to me that many traders in the crude oil market are new to the game, and for some reason haven’t filled themselves in beforehand on the basic characteristics of the commodity
–since there’s a direct relationship between the price of oil and the price of oil exploration and development stocks, the current odd price action in the crude market makes evaluating and trading in the equities more difficult
–I’ve built a small position in e&p stocks over the past couple of months, so I’m sitting on my hands. If I owned nothing, I’d be tempted to buy something–although I’d be more comfortable if crude had been gradually declining in price over the past month, rather than exhibiting the panicky behavior of the past week. This is also predicated on the idea that what’s driving crude is thoughts #2 & #3.
Hi. Do you have a sense how far will this oil price correction go? My thinking is that Saudi has exercised its swing producer role twice; first they raised production in 2015 and second they cut production early this year. Both yielded the direction of oil price they wanted. But now US shale production is recovering faster than expected. Do you think Saudi will again raise production to exert discipline on US shale producers? Or Saudi will maintain current production, effectively giving up its swing producer role, and allowing oil price to drop if and when US shale production causes oversupply? Or Saudi will cut production further to support oil price? Thanks.