In almost everything I wrote this week, oil has come up at least once. This is simply because oil is being oversold and it’s affecting the oil stocks even more. I want to pound the table now on something that I feel strongly about and not wait to point it out after the fact as old news.
Self-fulfilling prophecies tend to be a commonality in the world of financial markets, and some are saying that a slide in the price of oil is what led to a “crash in the oil sector.” So oil is trading lower because of the momentum of fear trades that are affecting it. The fact is, with the overall market down about 7% in the last couple weeks, stocks across the board have been oversold and oil has taken the brunt of that heat due to other macro factors.
Oil has seen large drops also from lower growth in Europe and Asia with the U.S. producing ample supply contributing to an overall well-supplied global market.
Something interesting to note is that Saudi Arabia said it would be comfortable with lower oil prices, (which could just be a bluff), however, countries such as Venezuela are pushing for production cuts to manipulate prices back to $100 per barrel. Just like any other industry, if there isn’t a profit to be made significantly past the cost to produce, businesses shut down. Interestingly enough, the Saudis took 400,000 barrels out of the market in August to alter the supply for price reasons.
With the majority of the civilized world going into the colder seasons, oil will become a commodity that goes into higher demand and could catalyze a bounce back towards the $100 dollar range in the proximate future.
Because of inflationary pressures, the pullbacks that happen in commodities such as oil are short-lived and generally bounce back after significant corrections. Because of the high global demand that exists, oil is not a sector that producers need to suffer in. This is as opposed to industries that service nonessentials.
OPEC nations have their backs against the wall in certain senses in terms of their objectives and their own national interests. They would prefer to have the highest possible prices, with the most sustainable production, while at the same time discouraging alternative competing energy. They need to price and produce oil to create an equilibrium of stability that will be supported by the market.
The play on what will happen going forward will be a result on whether or not the global economy goes into a recession that will takes its toll on prices around the world. Over the long-term, oil at these prices are optimal and the discounts they are providing in oil stocks are highly attractive.
Chief Editor at CrushTheStreet.com