Oil: Cheap But Far From Free

Oil: Cheap But Far From Free

For the last decade, there has been much talk about “peak oil,” the point at which the world’s oil fields would reach their maximum output and begin to run dry.  



Oil: Cheap But Far From Free
Oil: Cheap But Far From Free

It drove oil companies and countries to look for oil in hard-to-reach places: shale oil pits, ever-deeper sites on the ocean floor, and beneath the increasingly ice-free Arctic ocean. It gave a sense of urgency to the development of alternative energy sources. And because the threat of global warming has finally become accepted as fact by most people, the development of solar and wind energy got an even greater boost.

Saudi Arabia, however, and in particular petroleum minister Ali al-Naimi never worried about running out, according to a new report by Bloomberg Markets. Saudi Arabia pumped as much as possible while oil was over $100 a barrel and then it continued pumping even when prices plunged.

PEAK OIL AND PEAK DEMAND

So did US shale oil producers, to the consternation of the Saudis, the rest of OPEC, and even Russia, even when the price of oil went below the cost of shale oil production. Like Saudi Arabia, shale companies have deep pockets and appear determined to weather the low price war. The Saudis are more worried about losing market share to the competition, so they have kept pumping all they can and still are doing so.

Instead of worrying about peak supply, the Saudis worry about peak demand:

Before oil prices tanked last year, Saudi officials were bracing for global demand to level off as soon as 2025, says Mohammed al-Sabban, a senior economic adviser to the Saudi petroleum minister from 1988 to 2013. By letting prices fall, they may have bought themselves some time. At $60 to $70 a barrel, peak demand gets pushed back at least five more years, according to Bank of America Merrill Lynch commodities researchers. Such a delay would be bad news for renewable energy companies and for anyone hoping to bend the demand curve lower—slowing or stopping the relentless rise of global oil consumption that has transformed the planet since the first commercial deposit was developed in Pennsylvania in the early 1860s.

THE POST-HYDROCARBON ECONOMY

So will Saudi Arabia just pump indefinitely and hope to come out on top? No, they have an end game and it involves a “post-hydrocarbon” economy, a lofty goal for a country whose economy is so centered on one export. King Abdullah University of Science and Technology, an oasis where male and female students study, side-by-side and unveiled, with top faculty and state-of-the-art facilities, is part of a large effort to establish a broader manufacturing base and more diversified economy. Saudi Arabia is planning for a post-petroleum future. But to pay for it, they need to sell all the oil they can in the present.

THE VOLATILE BUT TRADABLE PATH AHEAD

With so many pressures—the Saudi long game, the potential lifting of sanctions on Iran, the increasing viability of renewable energy, and the willingness of US shale and deep water producers to stay in the game—the one nearly sure thing in the crude oil market is volatility. For individual traders, that can mean spikes that would stop out a futures contract or result in a possible margin call. It can mean markets whose timing and exact price movements are difficult to predict.

Binary option traders are protected from volatility spikes and can’t get stopped out. Futures traders should take care in setting their stops, using technical analysis to identify likely pivot points and avoiding placing their stops where algorithmic trading programs will trigger them. It isn’t easy, but nimble crude oil traders can and will profit in the volatile months ahead. Of course, it also helps to have a five- or six-figure account balance to give you a good cushion.

As for those trading energy ETFs or individual energy companies, it’s more important than ever to do your homework. Look into their cash reserves, their outstanding debt, and their potential to ride out the volatility the same way futures traders have to. Whether they broadcast it or not, every energy services company is also a speculator.

That’s just the reality every crude oil or energy sector trader will face in 2015. Those who embrace it and find a strategy that works will have a better chance of success than those who blindly use the strategies that worked a few years ago. If the Saudi oil minister is planning for a world oil market that is different than it was five years ago, individual traders would be wise to do the same. It’s even more important for us because, unlike Ali al-Naimi, ordinary traders don’t control the spigot.

CHEAP BUT NOT FREE

It’s no secret that oil is not a free market. The supply is controlled by a small group of actors who openly conspire to determine prices. That hasn’t changed since the days of the Standard Oil monopoly. What’s new is the emergence of renewable energy as a viable alternative.Germany is proving that renewables can work, not as a token experiment but a central part of a powerful nation’s power grid.

This means we no longer just have people who want the price of oil as high as possible and other people who want it as low as possible. We also have people who want petroleum to become as much a relic as the prehistoric organisms it comes from.  The game now involves suppliers, consumers, and a growing number of people who want the game over. 


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