While oil prices continue to plummet because of the OPEC price war, already we are laying the groundwork for the next oil crisis rally. The break in oil prices is putting on hold many oil projects that were planned to meet the demand of the future. Last week a report said that over $150 billion worth of energy projects are being put on hold as OPEC has added more uncertainty to the global market. Rystad Energy pegs the global average cost of production will come in around $82.50 cents a barrel due next year due to rising production costs, meaning that we won’t be adding to global production capacity at a rate that will allow us to meet potential future demand if and when the global economy starts to expand.
In the meantime companies like Chevron, Exxon Mobil, and the U.K.'s BG are already hinting of scuttling major projects. In the short term, the Baker Hughes rig count seems to suggest that projects in the U.S., already in play, are going to continue but the real damage we will see from OPEC’s oil production offensive will be felt years down the road. Baker Hughes reported that the U.S. rig count increased to 575 rigs up for the first time in a few weeks.
OPEC is basically stealing our future. While oil prices were going lower anyway, OPEC’s move to try to break prices is really market manipulation and does real damage to the economy. While OPEC is all about greed and maintaining their market share, they are also really hurting themselves. OPEC has a decade of record profits and many OPEC nations squandered what should have been an opportunity to grow their economies and invest in their future. Instead they are now just focused on the status quo and hoping that they can hang onto their current market share.
OPEC doesn’t realize that over time low oil prices, if not driven lower by artificial means, would have set the stage for long term economic and oil demand growth. Low prices, if occurring naturally, would have set the stage for a global economic recovery and there would have been enough demand not only for the new projects brought on line but for all the oil the cartel was ready to pump. If the prices fell at a normal reasonable pace, the market would adjust. And the many projects that are now being put on hold -- because of the biggest price drops in the last 50 years -- would continue. Yet, now because of the manipulated price drop and OPEC trying to create fear when demand does turn it will hurt the economy, because the projects that were put in play to meet demand won’t happen. It is hard to take a longer term view when prices are freefalling.
China seems to be an early beneficiary of low oil prices as the drop in price helped them notch a record trade surplus. That came as they imported a record 25.41 million tons of oil to fill their reserves and to take advantage of these low prices.
The other winner at least for now is the U.S. driver. Trilby Lundberg the “princess of petro” is reporting that the average price of a gallon of regular gasoline in the U.S. fell 12 cents over the past two weeks to an average 2.72 per gallon, the lowest price since November 2010. Trilby’s widely respected Lundberg Survey says the dramatic fall-off is due to a spike in crude oil production in North America, not to mention the OPEC price war and a soaring dollar.
The dollar is soaring today as Japan's revised third-quarter gross domestic product (GDP) showed the economy fell more than initially thought coming in at a negative 1.9% annualized rate. Because of that, Brent hit a new five year low and the Big Banks are now lowering their price outlook forecast. They say that oil prices could hit $43 a barrel next year. And Morgan Stanley cut its average 2015 Brent call to $28 to $70 per barrel and by $14 to $88 a barrel for 2016.
For WTI, the big number is the spike low $63.72!
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