Both the supply and demand for oil have been massively subsidized by globalization, which supported $100/bbl oil for a relatively short period of time. That paradigm ended extremely abruptly and "out of nowhere" in mid-2014. 0% interest rates and historically low cost of capital for both consumers and producers allowed the market to clear at the higher price level. As those financing incentives are now being systematically removed, the market ultimately will only clear at a much lower level of output.
The Long-term Supply/Demand for Oil:
The trillions in exploration investments now being shelved, represent an exogenous leftward shift to the long-term supply curve (dotted). The exogenous reduction in demand that initiated the current price collapse, represents a leftward shift in the demand curve (dotted line). Short-term, supply and demand are currently still clearing at the lower price level and the higher output rate (Q0), however, once readily accessible reserves are exhausted, the long-term supply constraint will take effect due to lack of investment. We know that the demand curve shifted because the halving in price has lowered demand not increased it.
Price will be extremely volatile in this future paradigm as represented by the question mark, however, oil production will be unambiguously lower:
Futures-based arbitrage is artificially supporting oil prices
SUV owners are currently enjoying low oil prices AND ample supply, merely because frackers and other marginal producers are over-producing in a futile bid to forestall bankruptcy as long as possible. In doing so, collectively, of course, they are only expediting the process.
CNBC: Feb. 25, 2015
The ability to store unprecedented amounts of oil onshore and in offshore ships is financed by the upward sloping futures curve (contango), which has artificially supported spot oil prices via arbitrage. On the other (long) side of the trade, oil buyers (refiners etc.) have been taking advantage of low oil prices to lock in future prices going out several months into the future. Nevertheless, as available storage space dwindles and tanker shipping rates go up, the full extent of downward pressure will be finally exerted on spot and future oil prices:
"We're going to see pretty fast inventory builds over the next few weeks," Francisco Blanch, head of commodity research at Bank of America-Merrill Lynch, told CNBC Wednesday, noting that global supply is running around 1.4 million barrels a day above demand."
"both WTI and Brent will fall toward $30 a barrel."
"As much as 80 percent of the commercially available storage in the U.S. may already be utilized"
"Tanker prices and lease rates have doubled over the past 18 months"
"Citigroup is forecasting oil prices to fall toward $20 a barrel before recovering."
There Will Be Blood
So far, the financial markets have artificially cushioned the downside collapse in oil, but that support is about to be removed.
The locus of risk: Junk bonds i.e. the funding source for fracking:
a-b-c:
Priced for implosion visualized:
The (stock) market is assuming that this oil price collapse is temporary
The ratio of oil stocks relative to the price of crude oil:
Another leg down in oil stocks will take out the S&P. Game fucking over.
