Precious metals, energy and commodities recently hit a rough patch.
But will these low ‘pullback’ prices last forever? Even in the face of what seems (to me) as an extreme wave of inflation rushing over us?
Today we’ll cover all the bases. Starting with crude oil…
West Texas Intermediate (WTI) crude oil is in the low-US$90s per barrel, while the iconic Brent Crude price just over US$100. That’s low, by recent standards, for two reasons.
One reason is that global oil demand growth is moderate, due to the creeping worldwide lack of economic confidence. China has slowed. Japan is moribund. Europe is a mess. The North American economy is iffy, on the best of days.
This widespread lack of confidence may or may not morph into the next recession (pleasant thought, eh?). But the global economy is a big, arm-waving subject, and let’s not go there just now.
Another reason for declining oil prices is US fracking. Let’s discuss that. As I’ve written before, the fracking revolution has changed the rules of the global energy game. Every new barrel of ‘fracked’ US crude displaces a barrel of imported oil.
Even five years back, nobody really saw the ‘shale gale’ coming. Yes, a lot of people were leasing land and planning drilling programs. But the overall impact of widespread fracking was entirely speculative.
Certainly, at high political levels, US policymakers have been taken by surprise by the fracking revolution. Large, new supplies of affordable oil and gas were not part of the political script.
Overseas, the fracking effect has confounded many a foreign potentate who grew used to having his way with oil prices, via twisting a few valves. And as to the potentates? Well, screw ‘em. Let’s frack away!
In the US, the sweet spots are known. Leases are in place. Fracking tech is out there. The system for drilling multiple wells, staging logistics and completing the holes is quite developed. The barrels are coming — for the near and medium future, at least.
Large oil exporting countries — Saudi Arabia, Venezuela, Russia, etc. — have reason to sweat. Their traditional flow of petro-lucre is tightening, if not drying up as their own internal consumption rises.
That is, many big oil exporters are called ‘petro-states’ for a reason. They need ever higher oil prices, from net exports, to pay the national bills. Without higher and higher oil prices, they can’t balance accounts. Tough luck.
Meanwhile, lower oil prices are like a global tax cut. And if you’re an airline, railroad, shipping company, trucking company, farmer or fisherman — let alone running a mining operation — stable or declining energy prices means that a key part of your cost structure is moderating. Whew!
To be sure, I do NOT believe that oil prices will crash down into the $30s and $40s per barrel, like in late 2008 or early 2009. I’m not in that school of thought — unless we have another huge market and economic rout, again. In which case, all bets are off.
So what’s the ‘right’ price for oil? I’d say about where it is now. The recent price for oil is low enough to allow large energy-users run their businesses and still make money. Yet the energy price is high enough to encourage people to drill wells and produce more oil and gas. Win-win, all around.
Byron King
Contributing Writer, Money Morning
From the Archives…
Why Waste Your Time on Gold When You Can Invest in Dividend Stocks?
19-04-2013 – Kris Sayce
A Trader’s Eye View of Gold’s Frightening Collapse
18-04-2013 – Murray Dawes
Why You Should Buy ‘Dirty, Grimy’ Gold Stocks
17-04-2013 – Dr. Alex Cowie
Why this Historic Fall in the Gold Price Equates to a Historic Opportunity
16-04-2013 – Dr. Alex Cowie
Beware the ‘Safety Bubble’, But Don’t Sell Dividend Stocks Yet
15-04-2013 – Kris Sayce
