Quietly Flows the #oil price #GreatGame++ 71/ Shale 2016 and Housing 2008 -- A Tale of Two Cities
I have said that crude oil prices may not consistently and stably go much beyond $50..$60 per barrel ; this is contrary to published views by many People Who Know in oil, investment banks, industry & finance institutions, etc.
I'll illustrate with a simple example ; simple also in its assumptions.
It was 2008 the worst of times.
Imagine you had a mortgage on a house and saw considerable reduction in the value of your property. The mortgage was now worth more than the reset value. In this simple example, one just pays the monthly instalment with whatever cash is available [no complicated techniques for asset/money management]
[photo: pbs]
Let's say someone approached you to rent your house for a few months and the monthly rental was equal to the mortgage payment.
Would you would accept the monthly rent and redirect it towards the monthly mortgage ? Now you do not lose the house, or delay that trouble.
It was 2014 ... the best of times... then came 2015.. and 2016. Imagine you own an oil fracking business in the USA shale belt. Let's assume you produce mostly oil and till end-2014 you were making good profits.
Saudi Arabia's Nov 2014 decision to continue crude oil production rates has squeezed almost everyone. Some/many lenders may have adjusted debt terms, some others may have engaged other financial measures with you. With the simplicity assumption your exposure is translated to monthly debt payments.
It is May-June 2016. For a year and a half, your profits declined but you had debts to pay. So you produced as much as you could from [lets call it 'oil wells' for simplicity] that you could afford to produce at $50-40-35-30 per barrel.
Now, for whichever reasons, oil prices headed above $40/barrel and in May/June even broke through $50. At these prices, you can start producing more again and send more money towards those monthly debt payments.
Would you produce more oil ? as much oil as possible ? Would others in your predicament also produce as much oil as possible ?
[caveat: c.p. thus, Canada oil sands production resumes, Nigeria production resumes, ... etc].
With excess oil production available, what happens to the price of oil ?