Quote from: K-dogAn oil glut, that should put everyone's head in the sand.
It's definitely an interesting way to present the situation to J6P, because it makes it APPEAR that there's plenty of oil and once the economy recovers, all will be well again.
The reality is there will only be a glut as long as they keep the price up above around $70. Thiss is why the IEA is pitching out its warning to the producers for their future planning. It's telling them to get ready to start shutting down production from wells which have higher production costs or they will lose money. If the companies heed the advice, they'll begin to shut in production next year to keep the price up. So no real "glut" will actually appear. Unless of course they don't believe the IEA, keep pumping and the recession hits.
It takes a while to shut down production, longer than it takes for a buyer to call up and say "I am cancelling my order for that supertanker" anyhow. When recession hits, the trucks stop moving so much freight and use less diesel. So inside a month or two, the truckstops don't need their regular delivery of diesel as often. The demand is getting destroyed.
So, for as long as the producers are behind the curve of the economy, waiting for the orders to be cancelled, there will be a glut. Once there is sufficient glut all the storage is taken up, they have to lower prices to get rid of inventory. Better known as a "Clearance Sale", "Everything must go! 50% off!" lol.
The way they estimate the demand is on the Futures Market. Traders who think the price will go up buy future contracts at today's price, believing when they take delivery they'll be able to sell at a higher price. Traders who think the price will drop go Short on Oil. This is why the Saudis stepped up to the plate, because if too many traders believe the IEA, they will short the living shit out of the futures market. If the IEA prediction comes true, those who did not believe the IEA will take a bath. Depending how deep and how fast the recession sets in, it could be a blood bath. The Saudis are trying to reassure the traders and keep the futures contract price high.
The way to see who is believed is by watching the futures price for delivery of oil in 2029. Traders who believe the IEA will short the contracts and drive the price down. Then the question is, how low a price will a Saudi Prince take for a contract for 2029? They still have legacy oil fields that produce pretty cheap oil, so they can go pretty low and not actually lose money. Tight Oil producers can't go that low, so they won't sell a contract below their production cost. They have to wait, hope the IEA is wrong and then sell high when 2029 rolls around. If the IEA was right, they are stuck with the oil on a tanker and have to sell it for whatever they can get. It costs money to keep it on the boat.
Watch the futures market to see who is believed here. It will be pretty volatile I bet. Probably hear a good bit of cheerleading from both sides. Should be entertaining. ;D There's a winner and loser in every trade. I'll bet with the shorts. Here's some current prices on the futures market as a benchmark.
RE