Weekly Update

An Overview of Oil

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Published July 7, 2017


Since hitting $55 per barrel at the beginning of the year oil prices have steadily declined to a price around $45 now. This tumble below $50 marks a point where some newer wells might be unprofitable. Nevertheless, U.S. supply of oil has been surging higher for years now upsetting the decades-long dominance of OPEC oil nations and remaking the global oil market.

Chart 1: Oil prices are fully half what they used to be

Oil prices are fully half what they used to be

The article below from Delta Investment Management provides further information behind the price dynamics.

“On July 4, 1776 the United States declared its independence from England. Declared independence became actual independence in 1783 when the U.S. successfully concluded the Revolutionary War. Political independence led to free commerce, elimination of British taxation and 234 years of wealth creation.

Today, the United States has essentially declared its intention to be energy independent. After 40 years of not allowing exports of oil, the U.S. began exporting oil in 2016. This is a vote of confidence that America’s oil production capability is gaining strength and we are on a path to produce more oil than we consume.

Since 2014, U.S. oil production has grown by roughly 18%, double the production growth of OPEC and three times faster than the rate of growth of oil consumption in the U.S.

Production, consumption and inventories, millions of barrels per dayIn 2005, foreign oil represented 65% of the U.S.’s daily energy needs. In 2015, it was 28%. Analysts project the U.S. may achieve energy independence within three years (2020).

Rising domestic oil production is a primary driver of falling crude oil prices. Having crude oil trade down from about $100 per barrel to about $45 per barrel today has led to a reduction in U.S. average retail gasoline prices from roughly $3.50 per gallon to roughly $2.30 over the past seven years.

A dollar-plus reduction per gallon of gasoline saved consumers about $143 billion in 2016. If gasoline continues to trade around $2.30 and Americans continue to consume about the same amount of gasoline annually, the $143 billion of savings is a recurring savings each year.

Energy independence was hardly imaginable thirty years ago. In the mid-1980s, economists and oil experts were predicting the world would run out of oil by 2000. It is 2017 and it seems the supply of oil will only expand for the foreseeable future.

Energy independence effectively relieves American consumers from a foreign oil production tax. Rather than shipping dollars abroad when we fill-up the car, our dollars remain in the U.S. economy. Because of the increased domestic supply, the price of gas is lower. Energy independence has the potential to contribute significantly to many additional years of wealth creation in America.”

Market Update

Markets remained in a tug-of-war between the prospect of rising interest rates and improving economic growth. The unwinding of the technology trade continued at the outset of the week with the Nasdaq falling -0.5% while the broader market posted a +0.2% gain. The Monday session was but a few hours long with trading cut short for the Tuesday Independence Day holiday. Traders returned Wednesday happy to step in and buy the tech stock dip, however, pushing the Nasdaq higher by +0.7% while the broad market again had a slight +0.1% rise despite a -4% drop in crude oil. Interest rates popped higher once again Thursday continuing a 7-session burst upward to unnerve stock markets leading to -1.0% tumble. Once more buyers stepped in, this time keying off Friday’s solid monthly jobs report to embrace growth stocks in Friday’s trade and recover the losses from earlier in the week.

For the week, the S&P 500 (SPY) ended mostly flat with a +0.12% move. The Nasdaq 100 (QQQ) followed suit with a +0.09% add as the index attempts to cling to its 10-week moving average – a trendline the index has remained above since November of last year. The smallcap Russell 2000 index (IWM) posted its third straight week of stalemate trading with a +0.13% tally.

Warm wishes and until next week.