Economy: Oil - The Speculation Never Sleeps

(Drivebycuriosity) - The world is awash with oil. Producers worldwide are pumping more oil than consumers & companies are burning, but the oil price is sticking close to $50 for months (trading). I think that the oil price gets a lot of support by hedge funds and other speculators who are buying oil futures on the financial market.

Since the collapse of the oil price, which squeezed the price of Brent Crude (the international gauge for the energy commodity) last January to $46, speculators are betting on a quick revival. From February through May a buying spree drove the oil price temporarily to $ 68 (a plus of about 50%!) and in August another fierce buying attack led to oil price jump of almost 30%. Both speculative waves faltered because the fundamentals didn`t change and the oil price had to come back (driveby).

It seems that there is another speculative attack brewing. "Hedge funds increased net-long positions the most since April", reports Bloomberg (bloomberg). In English: More dollars are invested in bets on rising oil prices than in wagers on falling (short positions) - and the imbalance is growing. According to Bloomberg the speculators believe that the oil price has reached the bottom and will climb in the coming months because they expect a falling US oil production.

I think these speculators will get disappointed again.

1. The costs of the US oil production are falling. According to most sources today the costs to extract an extra barrel of oil (break even point) in the US vary around $60 - with a range of range from around $40 to more than $70 a barrel (marketwatch).  At current oil prices - in the moment of writing the US Type of oil WTI costs about $44 - many wells are unprofitable and are getting shut off. This explains the slight fall of US oil production since summer. But, the productivity of fracking is rising swiftly which leads to shrinking costs. (economics21  oilprice). A study by BP explains that fracking is "a standardized, repeated, manufacturing process" and "manufacturing productivity has led to a trend decline in the prices of goods relative to services" (forbes).

So the break even point has been moving lower and will continue to fall in the coming years.  If the oil price doesn`t drop much deeper, the US production will come back.

2. Iran will come back on the global oil market thanks to the lifted sanctions. The additional supply will amplify the current oversupply and execute more pressure on the global oil price.

Even if that attack has a temporary success - like in this spring - it will be short-lived. Rising oil prices will encourage US production and dampen demand. Welcome to the new world of oil.