Here's the Crude Oil Chart as of yesterday
Crude Oil has witnessed one of the most dramatic fall in its history. The extent of fall is surprising but fall is not surprising at all.
Fundamental Sign: The Power of Creative Destruction:
Crude Oil always traded at premium because of Geo-political risk in Middle East. Everybody was worried about limited supply and unlimited demand. But Fracking revolution in US destroyed the limited supply argument.
The signs were there and I tweeted this way back in 2012
Real Game Changer for US, Oil and Middle East politics:would not be surprised if Brent Crude tanks to USD 70. http://t.co/hBTdQuNb
— Deepak Singh (@smarket) July 9, 2012
If US becomes energy independent and start exporting gas: it would mean end of OPEC and Crude non sense 🙂 and it's happening
— Deepak Singh (@smarket) July 9, 2012
At that point of time, it sounded ridiculous but all signs were there which I continued to tweet in 2013.
The big PLUS: U.S. crude imports are at a 16-year low. US consumes more than 25% of world's oil..so this is HUGE
— Deepak Singh (@smarket) June 11, 2013
The reason: US is producing Oil like crazy. Crude oil production in the US has risen to the highest level since 1988 pic.twitter.com/QmTSofwlFi
— Deepak Singh (@smarket) April 24, 2014
Oil prices have peaked internationally with US now major player....OPEC is on verge of extinction - deregulation has come at right time
— Deepak Singh (@smarket) January 17, 2013
"OPEC — the cartel that used to bully superpowers, unnerve financial markets, and bilk drivers throughout the world — is clinically dead"
— Deepak Singh (@smarket) December 12, 2014
It was not the Fracking that broke the back of the Crude Oil Market. It was the technical setup, rise of dollar and decline of Chinese growth that destroyed even minor bullish argument for Crude.
I did mention just when Crude was trading in a tight range in June on this blog itself
Technically Crude was set up for big move
The rise in Dollar index around the same time
Crude oil is a globally traded commodity, and denominated in the US dollar. The rise in dollar means fall in Crude prices.
Here's the rise in dollar index just when crude started cracking in June 2014.
I always argued that one should never fight the trend especially if it is backed by fundamentals. I warned against Bullish Crude even when it was trading at $60. It's sad that all we have heard over last 12 months: where is the bottom in Crude? Absolutely meaningless question
Here's Fresh News: US Crude at $30 but demand continues to drop
The US EIA (Energy Information Administration) reported in its latest report that the US crude oil refinery demand fell by 105,000 bpd (barrels per day) to 15.5 MMbpd (million barrels per day) for the week ending February 5, 2016. Last week, the US crude oil refinery demand fell by 24,000 bpd for the week ending January 29, 2016.
What does drop in refinery demand do?
It increases the crude inventory and put an additional pressure on prices. Now remember, Dollar index has pulled back pretty substantially from 100 to 95 but still Crude has not made any meaningful rally.
Crude Oil Story is Over
GARTMAN: Crude oil will never trade back above $44 'in my lifetime' https://t.co/PXWDysw24u
— Business Insider (@businessinsider) January 26, 2016
The world is always fascinated with an asset that has promising future. Crude does not offer that anymore. The fracking revolution has altered the power equation. Now consumers of Crude have far more negotiating leverage and producers of Oil are looking for long term contracts. Crude Oil is done for good. It might continue to trade between $20 and $55 dollars and the world is adjusting to this new reality. Now there is big difference between $20 and $55 but that's ok considering how Crude has fallen and Industry has to survive so there will be adjustment of the production side. The price will reflect some sanity one day but the story of Crude is over for good. It will become a boring asset
What damage crude has already done?
Low oil prices have cost the U.S. oil and gas sector 70,000 jobs (about 200,000 worldwide).
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Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers