Breaking the $3.00 Barrier
01 November 2014 -- 305/365
North Providence, Rhode Island
The price of gas (petrol, to my friends in Europe) has broken the $3.00 barrier for the first time in years, and the pundits tell us we've still a ways to go before the prices reach bottom. Indeed, looking at the price of WTI (West Texas Intermediate) Crude Futures, I can believe it. December's futures settled at $80.70 per barrel on Friday. More telling, is that December 2016 futures settled at $80.84. When you consider that there are 14 months of time value built into that contract, you're looking at a real price well under the $80 mark. Good news, for sure, at least if you're interested in the price at the pump.
So what's driving this major crash in the oil market? Several things. Remember, now, that oil commodities are fungible. It's a global price driven by global factors. The price is not set - despite popular conspiracy theories - by oil companies, but rather by free market auction. In the US, that's primarily done at the Chicago Mercantile Exchange. Anyway, oil is primarily influenced by the traditional supply and demand curve with a smattering of geopolitical pressures influencing the shape of that curve. The factors we have now are:
1. Supply - Saudi Arabia is pumping oil like there is no tomorrow. They are apparently trying to crush the US and Canadian shale markets and are doing it be increasing their production of oil. (The shale market has a break-even point of $70 per barrel, so the Saudi's are definitely having an impact.)
2. Supply - There have been no hurricanes in the past two years that impacted the gulf coast oil refineries in the US. Therefore, US refineries are operating at near 100% capacity.
3. Demand - China's GDP is declining rapidly off its highs, US demand is relatively flat, and Europe is heading towards a recession. Oil demand, as a result, has decreased dramatically over the past 2 years while supply has increased.
4. Exchange Rates - the weakening European market is driving a surge in the US Dollar. While that seriously hurts US exports, it also significantly drives down the price of oil, since oil is still traded on the dollar.
5. Geopolitical - Tensions between Russia and Europe have eased, and agreements between Russia and Ukraine ensure a steady flow of oil into Europe through the winter.
The net result of all this is a steady decline in price. There will likely be two brief spikes, one very shortly and one in the spring as refineries cycle through their semi-annual maintenance, however I don't expect this to bottom until oil reaches the $76 per barrel range. At that point short-sellers will start covering their shorts, and with the knowledge that the shale industry is being impacted, refineries in the US and Canada will reduce production to force the price back up a bit. Barring any geopolitical impact, though, we may be enjoying a nice reduction in price for the foreseeable future.
Post processing started with a classic filter in Topaz B&W FX. I adjusted color sensitivity sliders, adaptive exposure, regions, contrast, boost black, and protect highlights. A levels adjustment was added in PSE.
Here's the high res version in Smugmug:
http://kannafoot.smugmug.com/Photo-Challenges/PAD2014/i-spWpmZf/0/XL/2014%2011%2001_0011%20copy-XL.jpg
