Low energy prices now, purchased by previous rampant speculation

Another day another violent swing in oil prices.  From a massive short-covering rebound to $53 for WTI yesterday, today (so far) prices have relapsed, falling 5% 8% as news hit that the US inventory build the past week, was twice as high as consensus had forecast (6.3 million barrels versus 3.25 million barrels expected).

U.S. Oil inventories saw a build of 6.3 million barrels in the past week, sending prices lower to a five percent drop in today’s trading. Here is a direct video link.

The fact is that a 60% plunge in price, and shuttering of some oil rigs to date, has done little to slow gushing production even as global demand continues to weaken. Those calling for a bottom and rebound every day now, are overlooking the lasting impact from massive speculation in the energy sector during the financial bubble. (Hint:  $145/barrel never was fair value for oil.)

For a worthwhile overview of the mis-pricing and over-production of oil and other commodities during the 2005 to 2014 credit orgy, see, Michael Masters on speculation, oil and investment:

At this point in the cycle, it’s Masters’ opinion that the market has to appreciate that at $45-60 per barrel returns can still be generated and that will keep production and efficiency flowing.

“Everyone will cut the cost of what they are doing but they are going to keep doing what they’re doing and keep doing it more efficiently. If you cut the cost, the production will keep flowing,” he stressed. “You’re going to get the production, but with less economics for the E&P businesses and with less economics for your vendors. Things will get cheaper and people will simply make fewer returns.”

And that, fundamentally, is the irony of the speculative run to $145 per barrel in 2008, according to Masters. Even if it was fanned by those who saw profit in exploiting society’s fears about energy and resource shortages, in the long run it did lead to a paradigm-shifting efficiency surge which will be impossible to reverse.

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