Current Crude Oil Prices
Current crude oil prices have very likely overshot the mark on the downside even with a world wide recession underway.
As crude oil prices advanced last year above $100 a barrel long speculative positions were undertaken by hedge funds, financial institutions, and speculators of all stripes in the belief that crude oil prices would advance beyond the moon. For a while it looked like the speculators had made a good forecast. Current crude oil (spot) prices advanced in spectacular fashion to a high of $147 a barrel.
The piling on of speculative crude oil positions was usually done with great leverage, up to as much as 40 to 1 by the aggressive hedge funds, so when the financial meltdown began in 2008 it wasn’t long before crude oil and just about every other asset class was being pitched out the window by speculators who had to sell assets at any price in order to raise cash to meet margin calls.
The current relatively low price of crude oil therefore has little to do with supply and demand factors and everything to do with the consequences of the worldwide financial meltdown. When you are forced to liquidate the bulk of your portfolio good positions get tossed out with the bad. When you are operating with excessive leverage it doesn’t take long for a bear market to do you in.
While a slow down in growth of the economies of most nations has lead to a decrease in the demand for crude oil the supply and demand situation is actually still pretty closely balanced. Total supply is about 85 million barrels a day and demand, even after some demand destruction is only slightly below that. The growth rate for crude oil and refined products in China, India, Russia, and Brazil may be reduced somewhat. However, the total demand for crude oil and refined products will increase due to the growth of middle class consumers in those and other countries who will move up the economic ladder to the purchase of automobiles, air conditioners, homes, and all of the items in a developed country that increase the demand for energy.
The fact is that all of the major oil producing fields in the world are in a rapid state of decline as current crude oil prices make the development of alternative energy sources unprofitable. Alternative energy sources do not compete well with oil at prices of below $60 to $70 a barrel. At current prices for crude oil even new exploration and drilling projects are being canceled or postponed as they would no longer be profitable. In addition, with gasoline prices below $1.50 a gallon in the US the American public has already lost interest in extreme conservation efforts for energy.
The longer that crude oil prices stay at low price levels the more likely it is that the next spike in crude oil prices will be a super spike the will once again create conditions that will decimate the world economy. Since within a few years any increase in demand will be up against a declining supply level as peak oil makes its presence all too obvious the next major move in current crude oil prices will probably be well about $200 a barrel.
