Finally, oil has gotten crushed in 2015 and it’s not looking better so far in 2016! We haven’t seen this large of a decline in oil in years as momentum speculators rushed out like someone discovering their Match.com date looks nothing like their picture. Nobody would have guessed oil prices would have declined by 50% over the past 10 months.
Let’s try and understand WHY oil prices collapsed so much when global economies are largely recovering.
WHY DID OIL PRICES COLLAPSE?
The US and Canada started drilling more! For years, oil prices were hovering over $100 a barrel until North America decided to ween itself off the dependence of foreign oil. Meanwhile, demand for oil in places like Europe, Asia, and the US began declining at the margin as other forms of energy took off.
By late 2014, world oil supply was on track to rise much higher than actual demand. A lot of unused oil was simply being stockpiled away for later. So, in September 2015, prices started falling sharply.
Low prices are excellent news for oil consumers in places like Japan or the US, where gasoline is the cheapest it’s been in years. Low oil prices act like a tax cut for everyone. Unfortunately, oil is big business for a lot of countries like Russia, Venezuela and the OPEC countries.
Amazingly, OPEC hasn’t cut production at all. After a meeting in November, 2014, OPEC couldn’t quite agree on a response and ended up keeping production unchanged. “We will produce 30 million barrels a day for the next 6 months, and we will watch to see how the market behaves,” said OPEC Secretary-General Abdalla El-Badri after the meeting.
Who knows where oil prices will go from here. Given most speculators are nothing more than momentum investors, you know that many of them who’ve been long oil have lost a lot of money. What happens when you lose a lot of money all of the sudden? You become shell shocked and end up doing nothing for a while until momentum returns.
It’s really too early whether oil will climb back, but I’m betting money in my Motif Investing portfolio that oil prices will rebound. I’ve got oil exposure in USO and Chevron, for example.
LOOKING ON THE BRIGHT SIDE
I never thought I’d see gasoline prices for under $2.50 again, but here we are in 2015, enjoying some of the cheapest gas prices in recent memory. Perhaps it’s time to get that big gas guzzling SUV again! Lower oil prices should lower production costs for anything that requires plastic and steel as an input. Airfares should also decline as well. We should all be thankful for the decline in oil, but prepare ourselves for higher oil prices in the future.
And now for some brilliant humor by Iman Crosson which highlights the main reason for why the commodity bubble popped. This is classic.
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About the Author: Sam began investing his own money ever since he opened an online brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $175,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.
Updated for 2016 and beyond.