Monday, December 1, 2014

Calling the bottom on the oil price plunge

According to the Wall Street Journal, the plunge in oil prices is more about markets and less about politics. The self-proclaimed free-marketeers at the WSJ don't see a bottom till market price meets lift cost in the lowest cost producers.

On the other hand, the think tank here at Falling Downs has pegged the plunge as being all about politics. Specifically, it's all about the Gulf states preserving their American market by squeezing the tight-oil producers out of the market.

There is also the school of thought that agrees it's all about politics, but the politics are about putting the squeeze on Russia and Iran.

The problem with that theory is that Russia and Iran are far better equipped to survive that squeeze than our Gulf vassals are to apply it. Selling oil at $60/bbl instead of $100 costs our friends in the Gulf an awful lot of money. They may be willing to do so for a relatively short while to achieve specific goals in which they have a vested interest, ie preserving their markets.

But crippling Iran and Russia by selling oil at artificially low prices would take years. Do our Sunni allies in the Gulf really have that kind of commitment to American hegemonic aspirations?

I'm guessing not.

So here's the conundrum; world markets and the global economy are relatively happy with $100/bbl oil. But the exceptional nation, the USA, demands that a wide swath of her allies inflict major damage to their own economies for the sake of inflicting major economic damage to Iran and Russia. Most of America's allies can probably figure out that this is about America's ruling class preserving their hegemony, inside and outside of America's borders, and holds no particular interest for them.

That's a very stupid strategy, bound to end in major blow-back, and the longer the strategy is pursued, the more catastrophic the blow-back will be.

So, short-term, many of the Gulf statelets can be coerced into playing along. But short term is months, not years. They do have a real interest in shaking the fringe suppliers out of the picture, those marginal fracking entities that have helped create a temporary glut of (high-priced) oil. Keep the price low for a quarter or two, till those marginal guys miss their bond obligations and are heading for bankruptcy, and then normalcy will return.

As an investor, what you want to be doing right now is shorting any high-cost tight-oil producer listed on an American or Canadian exchange. Not only do they have the politics against them, there's a wave of public condemnation heading their way too.

And bet big on the price of oil heading up. We'll be back over $100 once these political issues are settled.

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