The oil market is playing with time

The oil market is apparently calm. Price per barrel (Brent standard) is around $ 110, with occasional leaps, but so far no dramatical changes. Yet, a large number of analyzes from different angles conclude that peace in the oil market, without which modern civilization cannot exist, it is the quiet before the storm.
We found analysis that highlights the significant risk of fluctuations in prices dramatically upward – perhaps the pinnacle of July 2008, when the barrel was almost $ 150. At that time it was a major oil bubble, but I couldnt believe that we perhaps get rid of bubbles – quite the contrary. The second group again draws attention to the medium-term risks of a sharp decline in oil prices down, which would have extremely serious effects on oil (or raw) economy, which today typically needs a price of at least $ 100 per barrel. In the analysis of both attitudes and factors, I found that the key factor is the time, respectively. Timing or concurrence of certain events that are most likely to happen, will determine how the oil market will look like. Again, oil is a key commodity in the world in which we live, derived from the prices of other primary commodities (including agricultural), is also heavily traded on financial markets and operates a number of macroeconomic indicators: the current account, the rate of inflation and the economic growth.
What are the key factors for the development of the oil market in the short to medium term? Not only is the understanding / estimate of future fundamental, but also plays a big role for feedback and interconnections. I’ll try to at least outline the article.

Economic growth
World economic situation is not very appetizing, not surprisingly, when the country does not solve the fundamental problem and instead either run unorthodox monetary policy (the wave of quantitative easing, which will be discussed below), or instead to implement structural turnover pour into the economy next (questionable) investments and lending her hard overheat (China). The euro area may also pass through quantitative easy, although this policy will be somewhat “out of the development.” (Ie starts with her at a time when other countries, USA, Japan and expect it to phases). Either way, the overall high economic growth is increasing oil consumption and the risk of bubbles is huge. The main causes are to me just unresolved fundamental problems of the Western economies (ie, inability, respectively. Reluctance to alter the system vis-a-vis labor-saving technologies. Instead, the West is trying to get out of a deflationary trap and start the bubble growth just as the use of tools such as is QE. Ty but in my opinion, this will only lead to an artificial growth (ie a factor of zero interest rates for the “recovery” of the economy, respectively. started, lending, and a flood of liquidity to the market). This will not work in the real economy – there are more important factors such as necessary evolution of wages (and therefore purchasing power). Instead QE inflates financial markets (eg with slate gas, as we shall see). Real economy always eventually triumphs and bubbles implode. Of course impact on the loss (fictional) of wealth are important and also the “correct” prices down even mention. Classically bubbles appear on the real estate markets (rising prices for apartments) and the stock markets. Estimation for future medium-term (as short term financial market can become almost anything) is important just watch the fundamentals, ie the real economy: wage developments, new jobs (and their structure, ie whether it is a working poverty), real investment and their composition, etc.

China and emerging economies are a slightly different case. Their development is at risk because they are unable to carry out structural maneuvers that at the stage of their development is needed. Very striking is that in China, where analysts have faced an increase in lending (the total amount, the pace of debt …) say that China faces a steep fall – the only question is when. At the same time officially China’s leaders are well aware of what to do (they have also embedded in all strategic documents), but it seems to be forfeited panic that China’s economy should slow down significantly. But this has to happen, otherwise not so-called “pull the plug.” Tighter I wrote about the Chinese maneuver.
Instead, China is approaching the development in Japan, which is a maneuver to change economic policy was not shaken hard and the bubble burst in the late 80s. Japan subsequently garnered the two lost decades. Today is his fighting tool Shinzo Abe’s policy, which includes – what a surprise – the massive use of quantitative easing. Similarly, we can dismantle and India, unable to control population growth and to correct a number of structural deformations of their dual economy. Russia still goes for his raw trajectory, with all the risks that entails, and the Eurasian Union, I really did not promise greater economic benefits.
Brazil has the football championship which gives a remarkable economic boost but in the shadow of that country has big need to invest in the modernization of infrastructure.

Although it now seems to strongly criticize the developing countries, their problems are becoming easier to solve than in the West. The problem is that they are still largely associated with Western financial markets and were not able to create your own financial architecture. We’ll see what progress will bring the July meeting of BRICS (about which I’ll write a report) and that even if progress of the establishment of a joint bank will be too late.

Financial factors
The oil market is obviously very heavily influenced by financial factors. Speculation in the future market may indicate future expectations, but also strongly distort prices and give confusing signals to future investments. It also play a role dollar and overall monetary environment. In the 21th century trend began to show that primary commodities are also regarded as financial assets. Thus, demand for them in a situation where such a weakening currency, higher expected inflation, weak dollar, etc., in which the world price of oil still has quoted the price of oil inverse proportion (the weaker dollar against a basket of other currencies internationalist, the price of oil tends to increase). But overall monetary environment characterized by just kvantatitativn√≠m release in a number of systemically important countries, if necessary. Very loose monetary policy and low interest rates, etc. stimulates demand for “real” assets like crude oil. But the question is, what will happen when (if?) FED and Bank of Japan ends its series of quantitative easing. At that moment, not only dries “infinite” source of liquidity and the exchange will have to sober up from Raus, which in recent years has fluctuated, but undoubtedly begin to raise interest rates. This could have an impact on the exchange rate of the dollar against other currencies. This development would open the way for a series of bursting bubbles, which would both indicate slowing growth, respectively. Manifestation of the extent to which the growth (mainly in Western countries, USA) bubble-growth and reduce the preference of primary commodities. Then there could be even steeper drop in oil prices, which would surely provoke OPEC (as we shall see, the ability to act now is not the largest) and severely damaged the oil economies, which largely cannot afford to finance their economies in the price below $ 100 per barrel (and a number of one also needs a much higher price). But: the bursting bubbles can get into a time overlapping with other factors, which may in turn act in opposite directions
Boom in extraction of shale gas and oil is proving to be one of the key factors in the oil market. Some analysts believe that just increasing self-sufficiency USA, along with a “counterbalance” the role of Saudi Arabia led to the fact that oil prices have begun to massively grow when the market started to fall out important countries and OPEC members such as Libya. Currently, the United States experienced the thrill of being strongly reduced their imports (share of imports in consumption declined from 60% in 2005 to about one-third of the previous year) and the oil companies are pushing for it to start to export (which is forbidden for now ). In official sources such as the EIA (U.S. Energy Agency) no longer count on the fact that the U.S. very soon, maybe even next year, the largest miner in the world and could overtake Russia and Saudi Arabia. Both consider it extremely unlikely for the following reasons.

There is information about revisions of deposits of shale gas and oil. As an example, California Monterey Shale, which was recently revised recoverable reserves down by 96%. Let us further that shale oil has significantly lower energy return (EROEI) than conventional oil (eg, high-quality oil in Iraq), which means it needs a higher price. The deep slump in oil prices would therefore not help American miners not much. Would harm them even more if oil prices fall with a change in monetary policy. Shale mining industry is very capital intensive, requires massive and cheap financing. Should more aggressively raise interest rates and access to credit would become more difficult, then the whole today, dynamically-looking industry, got into serious trouble. The dream of self-sufficiency USA with all the implications for foreign policy (as it was in past decades the energy needs of the USA influenced very strongly) would vanish. I therefore consider the fact that the U.S. shale boom is a bubble driven by quantitative easing, more and more frequent. The key, however, is time, ie, when and under what constellation shale bubble burst. In combination with eg certain geopolitical events would then be able to quickly market the prices are stable or even declining, get up the steep growth.
Geopolitical influences are almost inherently unpredictable. In recent years and months, we have seen that a number of important countries dropped out of the market (Iran – sanctions, Libya), respectively. Their production is far below its potential. Iran still benefits far below their capabilities and is strongly negatively affected by the sanctions. The question of whether sanctions will be removed and then how quickly Iran gets the original level of production. Then there is Libya, whose output fluctuates and cannot be considered reliable. If you omit Nigeria, attempts to develop mining in Venezuela (oilfield Perla), then it is certainly a key player in Iraq. Before the offensive ISIL Iraq had primed for a record increase their extraction, which was around 3.3 million barrels per day (mb / d). Moreover, Iraq had big ambitions and even planned in future years mining to 12 mb / d, which overtook Saudi Arabia. Although I consider this possibility less likely, Iraq was undoubtedly primed to overtake importance within OPEC Iran and also as “asking for” the allocation of the quota as a country affected by war (or occupation) did not. Its current situation is to separate large analysis. Nonetheless, we can say that the export of oil is at least in danger, exports from Kurdistan seems to go through Turkey. The oil market is affected by the logical chaos (controlled?), Which leads to the belt-expanding failed states such as Libya and Iraq. The question is whether a state will keep because it opens up the possibility of an independent Kurdistan, but that as Turkey (unlike Israel) will be welcome. The collapse of Iraq also hit China, which is not only the customer but also a major investor in the country. China would then have to turn to Russia and possibly Iran to cover the failure of Iraq. Seen globally, Iraq is a failure of systemically important. It is essential, whether and how the replace it, then again in what constellation: if Iraq falls completely out of the market prior to / or after the bubble burst, the worst possible scenario, the failure of “meeting” with shale oil bubble burst in the USA. In this case, it cannot be excluded price increase somewhere to $ 200 per barrel.

For now, let’s look at current developments. IEA (International Energy Agency) reports that OPEC spare capacity is around 3.5 mb / d 80% of the available capacity from Saudi Arabia, which highlights the role of “balancer” in the oil market and its strategic importance. No other country cannot quickly (ie within a matter of weeks) increase their production to 12 mb / d If the IEA data is correct, then by the OPEC (or the Saudis) had a failure of the Iraq deal (but if nothing else changes, see the previous factors). But: the market would be in the situation of so-called tightness (tight market). Tight market, is when demand is barely covered, spare capacity is extremely low, it is directly feast for speculators to bet on growth rates. This situation we have experienced, such as in 2004-2006, the spare capacity OPEC came under 2MB / d, which was very worrying situation which itself swept up oil prices. Events in the Middle East also affect OPEC. Relations between some countries have never been too friendly (typically regional rivals Saudi Arabia and Iran), but the current development and decay Iraq can, diplomatically speaking, creating a number of surprising and unexpected constellations coalitions that can ratios within OPEC as well as his lack of discipline change.
On the oil market, competition consists of several factors. The timing will be key to the future price of oil. The price of oil also backward affects of economic growth, geopolitical relations, including the functioning of the cartel OPEC. We cannot at this time accurately predict (and the dynamics it is not possible, perhaps only express the probability of each scenario) as key factors gather together. How long will the United States shale boom last. That actually ends FED quantitative easing if there (and when) the bursting of the credit bubble in China and in other countries, how will the Iraqi mining … One thing is still true: the oil market reflects powerful forces of this world.


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