FourBrane

OPEC's Cuts Can't Fight Global Recession Headwinds

Friday's drop in oil has to be seen in context: EVERYTHING has been dropping worldwide. Oil paid no attention to OPEC nor is it mechanically responding to supply or assumed demand destruction because the broader context is VALUE destruction. Market-wide, normal valuations (PE, etc) mean almost nothing. None of us are comfortable buying anything at any price (oil, gold, or grain) until we think we might actually have a chance to figure out the game.

Under these conditions, oil may momentarily drop to $30 and diamonds sell for the price of glass. The craziness probably won't end until at least the Japanese carry trade has been totally unwound and probably when most hedge funds are belly up with nothing left to dump.

The market is already pricing as though no one will ever drill for oil again. There are oil service companies selling at PEs below 2 right now. Their market values are below the fully depreciated replacement cost of their equipment...never mind other aspects of their usiness. Tellingly, even these companies can't be snapped up on the cheap because no one can borrow a dime.

It won't last. Without exploration, the price of oil will have to climb as pumping rates slowly decline. Peak oil is real and peak world population is nowhere in site.

Forget $100 a Barrel - Oil Will Plummet to $30

Oil drilling rigs are not "booked until 2012." There's plenty of idle capacity available right now, as anyone invested in drilling asset stocks already painfully knows. The current price of oil has not been in place long enough to give exploration companies the confidence to start investing in drilling at nearly the level needed to soak up capacity.

Oil vs. the Market: Major Changes Expected This Month

mjaniec: "the recent conflict?" What a relief. I guess the war is over.