Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Stock prices are climbing today, but the route of oil prices has continued, pushing the U.S. oil benchmark, West Texas Intermediate, below $60 in mid-afternoon trading. That's a 44% drop from its peak at $107.95 per barrel in mid-June. Brent crude oil, a global benchmark, is slightly higher at $64 per barrel.
So what: A more dire prediction for oil hit the market today with Andy Xie, a former analyst at Morgan Stanley and IMF senior economist, predicting that oil will stay around $60 per barrel for the next five years. Another notable comment came from former senior advisor to OPEC member Qatar, Abdullah bin Hamad al-Attiyah, telling the Telegraph in the U.K. that the oil cartel is now "powerless" to control the price of oil.
Attiyah suggests that the world is oversupplied by 2 million barrels per day and OPEC alone can't (or won't) cut production enough to boost prices. It will have to work with countries like Russia, Norway, and Mexico to curb supply or we'll see prices continue to plunge.
Now what: The core problem in the oil industry today is that supply is so diverse that no one group controls the price. Twenty years ago, OPEC supplied half the world's oil and could push prices higher or lower with a small change in production. Today, the U.S. and Russia are two of the world's largest oil producers and have different incentives than OPEC and may not cut production even if prices are low.
That's the supply side. And when you stack slowing growth in China on top of that, no one knows where future oil demand growth will come from. Hence supply exceeding demand with every party involved waiting for the other to blink.
So far, we haven't see U.S. producers blink, but I would be surprised if we don't begin to see a pullback in shale drilling with oil now at $60 per barrel. Analysts often see $80 per barrel as the point when shale wells begin to be unprofitable. As oil falls lower, larger and larger swaths of the country are heading below that breakeven point for oil extraction. But even if explorers stop drilling today, it'll take months before supply slows down in a meaningful way because wells are already producing oil.
With these dynamics in mind, and the whole energy industry wondering who is going to cut production first, the next stop may be $50 per barrel. That seemed unthinkable this summer, but it's certainly a possibility with no end to the supply/demand imbalance in sight.