Sunday, March 13, 2016

0% Oilbliteration Continues

A monopolist will only cut output if it increases overall revenue. However, no one oil producer can reduce oil output enough to increase their revenue...meanwhile the infantile fantasy that there will be an OPEC/Non-OPEC agreement, is going to wipe out a lot of speculators...

Reuters: Mar. 11, 2016
IEA says oil may have bottomed
"The IEA said it nevertheless saw global oil and product stocks rising heavily in the first half of 2016 in the area of 1.5-1.9 million bpd"

"The risks to global oil demand growth are almost certainly on the downside"

Global oil production (red line)(millions barrels per day) with Brent crude...

USO Oil ETF :30 min


Brent crude:

When prices are falling, forecasters are pessimistic, when they are rising, they become optimistic. It's a social mood feedback loop...

The operating concepts precluding supply reduction are first off, "perfect competition", meaning that all producers are price takers. With a two million barrel per day glut, no country can control price without reducing their own revenue. 

Secondly, sunk costs. Most of the oil produced now has already been "paid for" with investments made years ago. Those investments are burning through the balance sheet, and need to be financed. Which leads to the third parameter, fixed costs. Fixed costs need to be serviced, or else the producing entity becomes insolvent. Therefore as long as variable costs are covered, production continues, albeit unprofitably on a long-term scale.

It's called delaying bankruptcy.