Why Crude Oil Is at a Bottom (and why it won’t last)

In Blog by Michael Arnold

Green oil rigI was a guest on CNBC Futures Now yesterday, on Bloomberg Television Monday, and BNN Canada also on Monday and in all three interviews, I said the same thing; crude oil is at a medium term bottom. Here is why.

OPEC, essentially has been dismantled. It’s all Saudi Arabia. They are making unilateral decisions with no regard to the fate of other OPEC nations, and some might say with a direct target on the back of their rival, Iran. There is less cooperation now between OPEC nations then there has ever been in its 56 year history. At $30 a barrel, oil is below a price where profits can be made anywhere on the globe. Even the Saudis, (who have a true cost-per-barrel of around $11 dollars) really need about $90 a barrel to pay for social programs the House of Saud have in place. With current budget cuts, which have brought their true break even down closer to $60 a barrel, they are losing between $400 million and $600 million a day with oil at $30. That’s why you are starting to hear about meetings between Saudi Arabia and Russia to freeze prices. Now if Saudi Arabia is started to blink, imagine how the more marginal countries are feeling, with a higher cost basis and fewer foreign reserves? Countries like Angola, Nigeria, and Venezuela, are in tremendous economic distress.

OPEC is no longer the marginal producer, meaning they are not the major swing producer that changes the supply and demand dynamics, the United States is. While 2/3 of US oil rigs have gone quiet, they were mostly smaller producing rigs in the range of 50-200 barrels a day. If prices stay here much long, the bigger rigs will be shut down severely affecting supply and this could happen right around the summer driving season when demand tends to spike. Nadex binary options can help you take advantage of these price spikes without out the margin call risk that a high volatility commodity like crude oil can produce. The spike could be fast and it should also be short lived. The fracking technology that made the US the 3rd largest oil producing nation continues to improve, lowering the cost-per-barrel for drillers. So the global oil over-supply will continue, but for now, we could be at a bottom in crude oil .

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