The reason that crude oil price crashed

[NewLiberty]

The cost of some US shale producers is below $50. The cost of UK North Sea oil is about $70. These are profitable if  the oil price is over $100. A few years ago, it was expected that oil price would be over $100. There were lots of investments into oil sector. if those investors foresaw the oil price would be $70 now, they would not spend a penny into US shale or North Sea oil.

Well North Sea oil has been around since the days of the last fuel crisis.
Aka the Saudi era but true enough if they calculated fracking they would have just moved their dollars to the lowest cost area and get the gas out of there to maximize profits and keep the price down.

Once we run out of the cheap stuff then we have to go get the more expensive stuff.

Perversely, if they did foresee the price and didn't spend a penny, the price would still be over $100 because no supply increases would have occurred.  So what was done made sense.

At the lower prices, consumption will increase and then demand will rise as well.  Until then it will overcorrect and maybe whipsaw a few times.

[freedomno1]

The cost of some US shale producers is below $50. The cost of UK North Sea oil is about $70. These are profitable if  the oil price is over $100. A few years ago, it was expected that oil price would be over $100. There were lots of investments into oil sector. if those investors foresaw the oil price would be $70 now, they would not spend a penny into US shale or North Sea oil.

Well North Sea oil has been around since the days of the last fuel crisis.
Aka the Saudi era but true enough if they calculated fracking they would have just moved their dollars to the lowest cost area and get the gas out of there to maximize profits and keep the price down.

Once we run out of the cheap stuff then we have to go get the more expensive stuff.

Perversely, if they did foresee the price and didn't spend a penny, the price would still be over $100 because no supply increases would have occurred.  So what was done made sense.

At the lower prices, consumption will increase and then demand will rise as well.  Until then it will overcorrect and maybe whipsaw a few times.

Yep as new liberty implied price forecasting is difficult to do.

If there was no US fracking to account for or (less than what was expected) companies who spent significant amounts of money developing North Sea oil and looking for new supplies would have made greater returns on their investments.

Inversely if there was no fracking (due to environmental concerns flaming faucets anyone https://www.youtube.com/watch?v=4LBjSXWQRV8) the moves they made in that area can become profitable to them and worth the returns. It just goes to show that the market is in turmoil and has volatility.

Although if the Saudis wanted to stop/slow down the pace of new reserves and discoveries for a few years they just need to push the price down so that the industry stagnates since new development would be too costly/make them eat losses.

[picolo]

The cost of some US shale producers is below $50. The cost of UK North Sea oil is about $70. These are profitable if  the oil price is over $100. A few years ago, it was expected that oil price would be over $100. There were lots of investments into oil sector. if those investors foresaw the oil price would be $70 now, they would not spend a penny into US shale or North Sea oil.

Well North Sea oil has been around since the days of the last fuel crisis.
Aka the Saudi era but true enough if they calculated fracking they would have just moved their dollars to the lowest cost area and get the gas out of there to maximize profits and keep the price down.

Once we run out of the cheap stuff then we have to go get the more expensive stuff.

Perversely, if they did foresee the price and didn't spend a penny, the price would still be over $100 because no supply increases would have occurred.  So what was done made sense.

At the lower prices, consumption will increase and then demand will rise as well.  Until then it will overcorrect and maybe whipsaw a few times.

Yep as new liberty implied price forecasting is difficult to do.

If there was no US fracking to account for or (less than what was expected) companies who spent significant amounts of money developing North Sea oil and looking for new supplies would have made greater returns on their investments.

Inversely if there was no fracking (due to environmental concerns flaming faucets anyone https://www.youtube.com/watch?v=4LBjSXWQRV8) the moves they made in that area can become profitable to them and worth the returns. It just goes to show that the market is in turmoil and has volatility.

Although if the Saudis wanted to stop/slow down the pace of new reserves and discoveries for a few years they just need to push the price down so that the industry stagnates since new development would be too costly/make them eat losses.

The oil from some of the new projects cost 60 to 90$/barrel to get.
There will be no more projects like this as long as the oil stays under 60$

[freedomno1]

The oil from some of the new projects cost 60 to 90$/barrel to get.
There will be no more projects like this as long as the oil stays under 60$

Yep and when demand picks up there will be a shortage of supply causing a large price gap and a new surge for oil and gas because the price makes it attractive plus a lag period of course.
(New economic entrants taking a lot of oil after a recession is what caused oil to spike last time, when China started to grow their economy rapidly)

(All the reserve barrels got eaten short term and there was a lack of new production since they were still reeling over from the shortage of demand from the last recession and fired a ton of people, so slow to start up again.)
In not so many words we did the whole life cycle of the oil and gas market, prices drop investment falls, new economic shift causes a shortage and prices to rise rapidly, causing a new influx of investment till the price is to low again and we go with current supply till it reaches a new crest.

Did the whole oil and gas cycle without even needing to read Daniel Yergins the Quest or the Prize 

[malaimult]

the shale supply has been going on for a few years, that doesn't explain why the price suddenly collapsed almost 50% in 4 months.
most shale oil production is not even profitable below 70$

something else is going on...

There is less global demand for oil.

It also potentially has to do with the fact that sanctions have been put on Russia which is a major oil exporter

[aronnov]

this could be due to the use of oil declined for each country, this is due to the price of oil is too high in a country, thus making the purchasing power of oil decreases, the use of natural gas and LPG to be one alternative for the community to replace the use of petroleum , its price is cheaper than the price of petroleum ... 

[RoadTrain]

the shale supply has been going on for a few years, that doesn't explain why the price suddenly collapsed almost 50% in 4 months.
most shale oil production is not even profitable below 70$

something else is going on...

There is less global demand for oil.

It also potentially has to do with the fact that sanctions have been put on Russia which is a major oil exporter

Demand is still increasing, but at a bit slower pace.

And how would sanctions on Russia lower oil prices? Conspiracy theories apart.

[Armadillo]

You guys keep saying its just simple supply and demand.....that's like saying you just buy low and sell high.

There are a multitude of complex interactions going on.

With some numbers to compare we might have a better idea of what is happening...

What is the current global demand in bbls?
What is the Saudi output in barrels vs last year?
What is current global demand in barrels?
What is the change in total world production?
What percentage of world supply is US shale production?
What is the current rate of oil field decline globally?
And many others...

Once we have some actual numbers you can see where the changes are taking place.

Some say the Saudis are attempting a price war on US shale production since shale drilling is relatively expensive and they can't weather a price drop for long. This will allow the middle east to raise prices in the future without competition from the US.

I'm no expert but speculation without facts is no way to go if you are trying to make an investment decision.

[NewLiberty]

the shale supply has been going on for a few years, that doesn't explain why the price suddenly collapsed almost 50% in 4 months.
most shale oil production is not even profitable below 70$

something else is going on...

There is less global demand for oil.

It also potentially has to do with the fact that sanctions have been put on Russia which is a major oil exporter

This is the opposite of the truth.
Look at the data.

There is MORE global usage of oil, not less.
In fact, demand is accelerating!
With lower prices, you should expect usage will increase further and more swiftly.

This is really basic economics.  It is almost surprising to see such confusion on these things in a Bitcoin forum.

[johnyj]

This is a strange discussion.  Must oil prices be a grand conspiracy that is only about some politics?

I thought everyone already know that in today's system, it is fiat money supply decide the price, not supply and demand

Supply and demand are good to be used to EXPLAIN the price movement, in what ever way it suits, but that is historical trading. However, the money supply can be used to forecast: When money supply stopped, the price of everything WILL fall (since there is suddenly much less money on the market)

Since there is a consensus that QE is going to stop, the other major currencies all fell against USD this year. Take Ruble for example, it fell almost at the same pace as oil, which means the oil export income counted in Ruble is almost the same, but Russian's import from US will be affected heavily

Everyone know that FED has printed 6x more money since 2008, but there is no 6x inflation, no 6x increase in GDP/income either, where did all those QE money go?

Now it seems the answer is here: Just like housing bubble, they were loaned out massively. But they did not enter the consumer's budget
since consumer is very poor now. So they are loaned into those oil companies to build rigs over sea or shale infrastructure, at the same time, many of those fiat money went to buy commodities including oil as a store of value

That's the reason those oil that cost $30 to produce can be sold at $120 for extensive amount of time. (QE pumping out 2.8 billion per day, while world oil production is 90 million per day, gives each barrel of oil $31 premium, if you consider M2 it is even higher)

Somebody said that after housing bubble there will be a bond bubble, but I guess the oil/commodity bubble is more likely the trigger of next financial crisis. Of course in this crisis the major victim is oil companies, but if banks have been loaning heavily to these companies or investing heavily in commodity ETFs, maybe we will see a "too big to fail" bank asking for bailout again

[NewLiberty]

This is a strange discussion.  Must oil prices be a grand conspiracy that is only about some politics?

I thought everyone already know that in today's system, it is fiat money supply decide the price, not supply and demand

Supply and demand are good to be used to EXPLAIN the price movement, in what ever way it suits, but that is historical trading. However, the money supply can be used to forecast: When money supply stopped, the price of everything WILL fall (since there is suddenly much less money on the market)

Since there is a consensus that QE is going to stop, the other major currencies all fell against USD this year. Take Ruble for example, it fell almost at the same pace as oil, which means the oil export income counted in Ruble is almost the same, but Russian's import from US will be affected heavily

Everyone know that FED has printed 6x more money since 2008, but there is no 6x inflation, no 6x increase in GDP/income either, where did all those QE money go?

Now it seems the answer is here: Just like housing bubble, they were loaned out massively. But they did not enter the consumer's budget
since consumer is very poor now. So they are loaned into those oil companies to build rigs over sea or shale infrastructure, at the same time, many of those fiat money went to buy commodities including oil as a store of value

That's the reason those oil that cost $30 to produce can be sold at $120 for extensive amount of time. (QE pumping out 2.8 billion per day, while world oil production is 90 million per day, gives each barrel of oil $31 premium, if you consider M2 it is even higher)

Somebody said that after housing bubble there will be a bond bubble, but I guess the oil/commodity bubble is more likely the trigger of next financial crisis. Of course in this crisis the major victim is oil companies, but if banks have been loaning heavily to these companies or investing heavily in commodity ETFs, maybe we will see a "too big to fail" bank asking for bailout again

Is the theory here that banks will seize petrol production assets from debt defaults, those assets will be undervalue and non performing, and so it will be a bailout for oil and gas and then banks by taxpayers, or banking bail-in?

Here is the risk analysis report from before the big price drop in April 2014.
(You may not be wrong, but I don't know the future.)

http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/pub-ch-a-og.pdf

[dinofelis]

Everyone know that FED has printed 6x more money since 2008, but there is no 6x inflation, no 6x increase in GDP/income either, where did all those QE money go?

Now it seems the answer is here: Just like housing bubble, they were loaned out massively. But they did not enter the consumer's budget
since consumer is very poor now. So they are loaned into those oil companies to build rigs over sea or shale infrastructure, at the same time, many of those fiat money went to buy commodities including oil as a store of value

That's the reason those oil that cost $30 to produce can be sold at $120 for extensive amount of time. (QE pumping out 2.8 billion per day, while world oil production is 90 million per day, gives each barrel of oil $31 premium, if you consider M2 it is even higher)

Somebody said that after housing bubble there will be a bond bubble, but I guess the oil/commodity bubble is more likely the trigger of next financial crisis. Of course in this crisis the major victim is oil companies, but if banks have been loaning heavily to these companies or investing heavily in commodity ETFs, maybe we will see a "too big to fail" bank asking for bailout again

Indeed, QE is not (yet) circulating money, but went into:
1) increased required bank reserves at the FED (which essentially means that this is money that was printed, lend out to banks, which had to put it at the FED as a banking reserve) - this money was printed and frozen.  This money will only start circulating when banks go bankrupt and their reserves have to be put on the table.
2) the FED bought a lot of stock and other bonds with it, which means that the FED made these assets being more expensive than the market would decide them to be.  As such, the FED essentially blew a stock market bubble which has been financed by all people buying stock and other paper assets the FED was buying too.    The money went to those issuing those paper certificates (bonds and other securities that the FED bought in its QE program).  That money is somewhere but hasn't entered the domestic consumer market (otherwise, indeed, massive inflation would be the result).

Central banks usually fight slumps which are the result of collapsing bubbles, with new bubbles.  Last time they blew a housing bubble.  Now they are blowing a securities bubble.

[RoadTrain]

Indeed, QE is not (yet) circulating money, but went into:
1) increased required bank reserves at the FED (which essentially means that this is money that was printed, lend out to banks, which had to put it at the FED as a banking reserve) - this money was printed and frozen.  This money will only start circulating when banks go bankrupt and their reserves have to be put on the table.
2) the FED bought a lot of stock and other bonds with it, which means that the FED made these assets being more expensive than the market would decide them to be.  As such, the FED essentially blew a stock market bubble which has been financed by all people buying stock and other paper assets the FED was buying too.    The money went to those issuing those paper certificates (bonds and other securities that the FED bought in its QE program).  That money is somewhere but hasn't entered the domestic consumer market (otherwise, indeed, massive inflation would be the result).

Central banks usually fight slumps which are the result of collapsing bubbles, with new bubbles.  Last time they blew a housing bubble.  Now they are blowing a securities bubble.

What stock did the Fed buy? I only know it bought treasuries and MBSs.

[OrientA]

I think FED cannot buy stocks. The governments bail out companies by buying shares into them.

[Erdogan]

Oil production takes up to 30 years from start of investment to the product reaches the consumer. Low interest rate means to much investment (and to little investment other, unseen, places).

[dinofelis]

What stock did the Fed buy? I only know it bought treasuries and MBSs.

On further checking, you're right.  I thought that in the packages of MBS, there were actually also stock.  I had a misunderstanding of what were MBS, I thought they could pack stocks too, but they seem only to apply to real estate, not to the "commercial" property in a commercial MBS which is essentially equivalent to stock.   But I was wrong.

[OrientA]

Oil production takes up to 30 years from start of investment to the product reaches the consumer. Low interest rate means to much investment (and to little investment other, unseen, places).

I thought it takes a few years.

[johnyj]

What stock did the Fed buy? I only know it bought treasuries and MBSs.

They don't directly buy stocks. However, their purchasing injected liquidity into those banks and now banks have much more money at hand to play around with other assets like oil and stocks

Imagine that you are a bank with lots of unsold houses (MBS), when FED purchased those houses from you, you suddenly get loads of cash at hand

[johnyj]

Is the theory here that banks will seize petrol production assets from debt defaults, those assets will be undervalue and non performing, and so it will be a bailout for oil and gas and then banks by taxpayers, or banking bail-in?

Here is the risk analysis report from before the big price drop in April 2014.
(You may not be wrong, but I don't know the future.)

http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/pub-ch-a-og.pdf

Indeed a nice theory: Big banks pump up some asset using loan money, and tighten the money supply to let it crash, seize defaulted assets, and ask FED to buy those assets from them, and voila: FED have assets and banks have cash (And FED is owned by those banks indirectly by the way, so banks own both assets and cash in the end)  

People must use bitcoin to end this kind of madness

[RoadTrain]

What stock did the Fed buy? I only know it bought treasuries and MBSs.

They don't directly buy stocks. However, their purchasing injected liquidity into those banks and now banks have much more money at hand to play around with other assets like oil and stocks

Imagine that you are a bank with lots of unsold houses (MBS), when FED purchased those houses from you, you suddenly get loads of cash at hand

The bank can always get more money from the Fed provided with eligible collateral. The very problem that QE was aiming to solve is to remove some excess of the bad assets from banks' balances.
Now that banks have enough liquid assets, further QE is pointless. Well, I consider any QE beyond the first one pointless.