Since we covered the drop in crude a month ago, prices have continued to fall. An updated chart is below. A commodity crash looks like any other crash. If you are holding oil stocks or futures, you want to get out today because it may go lower tomorrow.
This is worse, actually, because everybody knows the other guy’s cost of production. Here in America, shale oil is comparatively expensive – and subsidized with cheap (relative to risk) financing. The producers best equipped to endure price pressure are the Saudis, and they know it.
Yesterday, we read that the oil crash is not a problem for Russia because the ruble is also crashing. Jeremiah enjoys the unique insights at Zero Hedge, but this is the dumbest idea ever. They printed a chart showing that the price of oil is stable – in rubles. All this proves is that Russia has two crises, and they’re related. So what if oil consumers in Russia have a stable cost? Their purchasing power is still getting crushed.
This is an example of “reasoning from your conclusions.” The author must have some thesis about the Russian economy, and he’s looking for a way to support it. Maybe he’s long Russian stocks. The key to understanding the world is always to have an unbiased model of reality. As Saint Francis said, “Seek first to understand.” Only then is it safe to make investments – or public policy. Jeremiah is not even interested in the stock market. We only follow it because of Mark Felt’s advice.
Some pundits say the Saudis have spiked the price of oil because America asked them to help crush the Russian economy. That’s a little conspiratorial, but it does explain the (one) cause and effect. Our original post was more market oriented, and held that the target is actually marginal American shale producers. Only the Saudis know what went into their analysis, but we’d like to believe it was based on maximizing their long term revenue.
The catalyst could have been any early warning of lower prices to come. Destroying Russia? How about a slowing global economy? One would certainly want to be proactive about that – or Venezuela. The wheels have been coming off the Bolivarian Revolution since Chavez died. It was only a matter of time before a glut of North and South American supply ran into waning global demand. The present crash was unpredictable only because a key participant chose to force the issue.