The Supply Glut is To Blame for Tumbling Crude Prices

If you’ve filled up the family car this week, you may have noticed a pleasant surprise.

Sky high petrol prices are coming back to Earth. And just in time to put a few extra dollars in your pocket for the Christmas holidays.

Over at Port Phillip Insider — a daily investment e-letter free to anyone subscribing to one of Port Phillip Publishing’s paid services — I’ve been forecasting the end to oil’s bull run since early March. And I kept at it, even when many pundits were forecasting a return to US$100 per barrel or more.

Nonsense, I said. Expect West Texas Intermediate crude to fall below US$60 in November.

Now that this has eventuated, there’s no shortage of analysts saying crude’s price rout could indicate a weakening global demand. And this could mean trouble ahead.

While there may be trouble ahead, oil is not the canary in the coal mine in this instance.

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The supply glut is to blame

As I’ve been writing for months, the big picture here is all about the supply glut. And that glut shows little sign of abating.

The US, Russia, and Saudi Arabia now pump more oil than the 15 member OPEC block combined. And as Bloomberg reported this week, new pipelines in the oil rich US’ Permian Basin are scheduled to deliver an extra two million barrels of oil per day to the Gulf Coast within 18 months.

Anything could happen. But with the supply picture in mind, it’s hard to imagine crude prices rebounding to anywhere near their October highs in the foreseeable future.

Now the tumbling crude price has also been linked to the wider stock market falls.

There’s some obvious truth to that. When the oil price drops, it takes the share price of the energy companies — big and small — down with it.

But that’s just the free market at work. The oil price was artificially high. And investors who bought into oil stocks in the final months of crude’s bull run are suffering the consequences of their decision.

As for the rest of us…what’s not to love about cheap energy?

It’s good news for airlines, freight, and consumers’ wallets…to name a few. Less money spent on energy costs means more money available to spend elsewhere…or for companies to buy back shares and drive up their stock price.

For some confirmation bias, let’s turn to Anatole Kaletsky, the founder and chief economist of Gavekal Research Ltd.

From Bloomberg:

Crude oil below $60 is “fantastic” for importing nations, Kaletsky said at a seminar in New York on Wednesday. He assumes oil will trade in a range of $60 to $80 a barrel, and sees benefits everywhere from emerging markets such as India to European consumers.’

Deutsche Bank is on the same page. The article continues:

Deutsche Bank AG economist Torsten Slok said in a note Wednesday that lower energy costs coupled with a stronger dollar is “exactly what the doctor ordered for the U.S. economy if you want the expansion to continue.” Fundstrat’s Tom Lee wrote in a report that falling oil “is $182 billion of household stimulus.”

The Bank of Japan in a bind over crude prices

With that said, tumbling crude prices have, apparently, put the Bank of Japan into a bind.


Because once again inflation in Japan is refusing to cooperate. As Bloomberg reports:

The sharp slide in oil prices threatens to halve Japan’s inflation rate over the next six months, while cheaper mobile-phone bills and free nursery education could even push it below zero.

This view from private-sector economists is very much at odds with the Bank of Japan’s forecast for its core inflation gauge to average 1.4 percent in the fiscal year starting in April. It also points to BOJ sticking with its monetary stimulus program for longer.’

Oh dear.

A stable yen. Cheaper energy. Cheaper mobile phone bills. And free early education for the littlies.

Pity the Japanese.

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Bernd Struben
Editor, Port Phillip Insider

Money Morning Australia