insideoil

Oil, Stock, and Housing Declines

Seems people have forgotten when oil was 10-12$/bbl - it was not THAT long ago.
Fundamentals now support $80/bbl (based on marginal new production costs) - even with declining demand, and new increased Saudi production on line in the last few months. My simple view is that the OPEC members also keep their eye on return of capital, rather than just return on capital - so we will see production line out to demand by just cutting back to quota levels after the Sep 9 meeting. The loudest OPEC members in favour of production cuts will be those without investment portfolios - they need the cash to run their countries, and they are seriously struggling with $ induced import inflation.
The worst that can happen if the USA does not get its house in order is a bail out from the US$ by OPEC members, in favour of a currency basket for these oil producers.
My simple view is that the dominant OPEC decision will be taken one by one based on return of capital i.e a fear based defensive action looking at investment portfolios, rather than pure income only. We will see a dip to the $80/bbl level short term, but as soon as as any strength in demand returns, prices will jack up again as greed returns. That strength in demand can come from East or West, or from hurricanes or politics - it matters not from which cause, only when, as supply does not exceed demand by any comfortable margin.
The lower the price falls and the more jawboning on green alternatives, nuclear, drilling USA or whatever, the more real oil/product projects will be slowed - leading us closer to that supply/demand balance problem again.
I'm betting the energy sector will fall just as everything does during this downturn, but its pick up on the next cycle upwards will be faster and even more furious than the last rise from $10/bbl to $140/bbl.
Aaahh - but the only problem is the timing !!!