Economic Optimism Abounds As Crude Oil Prices Plunge by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
January 6, 2015
IN THIS ISSUE:
- New Year Forecasts Upbeat & Revised Higher
- Crude Oil Prices Plunged 46% in 2014 & More Since
- Americans Saved $14 Billion as Gas Prices Plunged
- Some Analysts Now Predict $30 Crude Oil
- Crude Price Plunge Shocks the Oil Industry
- Is Saudi Arabia Behind the Oil Price Plunge?
New Year Forecasts Upbeat & Revised Higher
Each year at this time, we see a plethora of fresh forecasts for the New Year, and this year is certainly no exception, especially with the recent implosion in oil prices. There is widespread agreement that sharply lower energy prices will provide a boost to the global economy this year, especially for oil-importing nations including the US.
As a result, almost all of the New Year forecasts that I have seen in recent days have been upbeat and revised higher with regard to the US economy. With that in mind, I thought it would be a good idea today to revisit the recent developments in the oil and energy markets over the last six months. What we have witnessed since last summer has been nothing short of breath-taking, to say the least!
Crude Oil Prices Plunged 46% in 2014 & More Since
Oil prices ended 2014 with the worst annual price drop since 2008, reflecting the global supply glut caused by slowing demand from China and booming US shale production. US crude (West Texas Intermediate) ended the year at $53.27 last Wednesday, down from near $108 in June. That’s a drop of 46% for the year. Brent crude ended the year at $57.33, down 48% for the year.
On Monday and again this morning, crude prices plunged even more with the price of West Texas Intermediate falling to near $48 as this is written. That’s more than a 50% decline since June. Short sellers and hedgers are piling on. Short open interest on crude futures and options contracts more than tripled from 15 million barrels in August to 77 million last week.
In the past, the Organization of the Petroleum Exporting Countries (OPEC) has cut oil output to keep prices afloat in times of supply abundance. But the group, comprised of 12 oil producing nations, has been reluctant to lower the supply this year, fearing that its market share will simply be filled by US competitors.
While a Reuter’s survey last Tuesday showed that OPEC nations’ output fell by 270,000 barrels per day in November and December, that’s just a drop in the bucket. Most forecasters still predict a large excess supply to remain all year.
Despite the plunge in prices, US crude production accelerated to 9.14 million barrels a day by mid-December. That’s the fastest rate since the Energy Information Administration (EIA) began tracking this weekly data in January 1983.
Likewise, inventories of crude at Cushing, Oklahoma, the delivery point for WTI futures contracts, increased by 2 million barrels to 30.8 million in November, according to the EIA. That’s the highest stockpile level since February.
Sluggish global demand has been persistent for much of the year, and a new manufacturing report from China last Wednesday underscored the conditions facing oil producers. Activity in the country’s factories shrank for the first time in seven months in December, according to Reuters, citing a survey by HSBC Bank.
Americans Saved $14 Billion as Gas Prices Plunged
The national average price for regular unleaded gasoline peaked on April 28, at $3.70 a gallon and has slid almost 40% to the year’s low of $2.26 a gallon last Wednesday – also the lowest price since May 12, 2009, according to auto and travel group AAA. Last year’s average was $3.34 a gallon, down from $3.49 in 2013.
The slide in gas prices saved Americans an estimated $14 billion in 2014 versus their 2013 gasoline tab, according to AAA. Given that 320 million people live in the US, that’s $43.75 for every man, woman and child, or about $115 per household.
Most of the savings came in the final months of the year, after a rise in prices in early 2014. That means the savings were particularly pronounced in the run-up to Christmas. “Many drivers are saving $15-$30 every time they go to the gas station compared with a year ago,” AAA said in a statement.
The savings will be even bigger in 2015 if oil prices stay relatively low. AAA put the savings number at $50 billion to $75 billion this year, as compared to the $14 billion in 2014, or as much as $234 per person, or around $600 per household.
Prices at the pump have fallen for a record 100+ straight days, AAA added. The average price per gallon was below $2 in five states: Missouri, Oklahoma, Ohio, Indiana and Texas as of last week. With the continued plunge in crude prices this week, that could put at least another seven or eight states under $2 per gallon.
Should oil prices stabilize, gas prices could begin rising within a month or so as the maintenance season for oil refineries begins, thus reducing supply. AAA noted that gas prices typically rise by about 30 cents to 50 cents a gallon during the spring maintenance season.
The drop in prices at the pump has been credited with boosting consumer confidence, leading to a jump in retail sales during November and the strongest third-quarter economic growth (GDP up 5.0%) since 2003.
Some Analysts Now Predict $30 Crude Oil
The plunge in oil prices may not be over just yet. As noted above, oil took another hit on Monday with WTI crude falling below $50, a level last seen in the Great Recession, and is down to $48 at mid-day today. It’s hard to recall that crude oil traded for over $100 a barrel as recently as July.
Few, if any, forecasters saw an energy meltdown of this magnitude coming. Now that prices have plunged below technical support at $50, analysts warn that a further move lower is indeed possible as the momentum remains firmly to the downside. Of course, they always say that. The fact is that oil prices are critically oversold, and no one knows what will happen next.
In any case, today’s sharply lower oil prices are good news for the overall US economy, especially consumers who are saving money each time they fill up their gas tanks. If oil fell to around $40 a barrel, that would translate to a national average gasoline price of roughly $1.80 a gallon.
I’m certainly not predicting $30 oil or even $40, but as I’ve always said, commodities have a tendency to over-do it in both directions. While the major producers in the oil market are so far unwilling to cut back output, if prices continue to fall, they will have to cut back at some point.
Crude Price Plunge Shocks the Oil Industry
The plunge in prices is pinching the oil industry big-time, including the high-cost US shale sector, Canadian oil sands producers and the up-to-now red-hot Texas economy. Several thousand layoffs in the energy sector have already been announced, and no doubt more are coming.
The oil price plunge has been fueled largely by excess supply caused by the North American