December 11, 2014

Don't Be Fooled by Sudden Drop in Oil Prices

Matt Towery

12/11/2014 12:01:00 AM - Matt Towery

So the price of oil suddenly plummets by more than 40 percent from June of this year to early December. Suddenly oil-related stocks are taking a dive, and all manner of experts are proclaiming that we will have a plentiful supply of oil potentially for years to come.
Don't be quick to swallow this line. Indeed, if you have a little cash to play with, you might just want to call the experts' bluff.
Yes, our domestic production of oil has soared recently. According to OPEC and, more importantly, Saudi Arabia, projections for consumption in the coming year are on the lower end. But does anyone really believe that simply because of our increased ability to use fracking technology and shale deposits, that America has in a matter of months witnessed a lasting shift in the availability and price of oil? In six months? Really?
If there is any commodity that has proved capable of sneaking up on even the experts and suddenly posing a major shift in cost, it's oil. Time and again this has happened.
But to witness the selloff of oil-related stocks on Wall Street, and to read the predictions that the bastions of the energy sector have permanently now ceded their positions as leading indicators of the market -- all this suggests a rush to judgment about "permanently" lower oil prices. Those who ignore this reasoning could stand to make a great deal of money in the future.
The idea that we are witnessing a sudden, life-changing moment of transition to cheap and plentiful oil for years to come is harder to believe when one considers the various circumstances that surround this alleged shift.
First, there are the geopolitical benefits and drawbacks that a glut of oil brings to assorted nations. Several astute publications have focused on the impact this drop in oil prices has on nations such as Iran, whose rhetoric and actions have sparked concern about dire attacks on Israel. Iran's economy is being deeply affected by the decreased value of oil, and in a fairly quick period of time.

Then there is Russia, which perhaps surprisingly has played along with OPEC in not cutting oil production levels. But that decision is more out of necessity, in that a decision to go it alone in pulling back on production would likely not increase prices on a global level.

Numerous nations see advantages to Russia enduring a steep and immediate decline in the value of oil, a mainstay for its economy. Vladimir Putin's swaggering ways have needed to be reined in, and a sharp decline in oil prices might just start that process.

As for the big oil companies who have seen their stock values drop in recent weeks, there may well also be a silver lining. Several of the big-name corporations have announced or are already implementing cost-savings plans to make their companies leaner and meaner.

For consumers this has been the equivalent of a tax break; more spending money in their pockets, and just as Christmas season swings into full gear. Yes, spending reports for this season have not been as promising as expected, but then again this drop in gasoline prices took place so quickly that many didn't realize they had extra money until the media started to focus on the issue.