ICYMI: Evolving Crude Thinking

The decline in energy prices has increasingly become important for consumers, investors, and policy makers.  Here are nine essays I have written in recent weeks that analyze what is going on; integrating political and economic analysis, geopolitics and game theory.  These series of essays also illustrate how my thinking has evolved through the analysis and subsequent developments.

1.  Oil Supply  This note from October 9th begins the series of recent essays.  I argue against those who were arguing that the decline in oil prices was a function of the strong dollar.  I instead focus on supply issues, and warn that a break of $73 could quickly see $64 a barrel.  I saw that low level as key.  

2.  Saudi's Master Stroke On October 18, more than a month before the OPEC meeting, I argue that Saudi Arabia's decision not to act as a swing producer and cut production was a strategically savvy move on its part.  It dealt a blow to all of its adversaries, including Russia, Iran and the US (shale producers).  

3.  Saudi's Cut Prices  After increasing discounts to Asia and the US in October, Saudi Arabia reduced the discounts to Asia in November.  Two points seem to stick out in my analysis.  The decline in oil prices was more a function of supply than demand.  The Saudis have their own reasons for pursuing market share, and were not attempting to do the US some political favor.   

4.  US Oil Exports I continue to develop these themes, and explore the non-homogeneous characteristic of the oil market.  Gasoline appears to be more linked to Brent than WTI.   I discuss the possibility that a Republican Congress may move forward on relaxing rules that prevent (or dramatically curb) US crude exports. 

5.  Speculative Positioning  Some argued that oil prices were being driven lower by speculators.  I took a look at the speculative positioning in the futures market.  I was surprised to see that speculators on a net basis were still very long light sweet oil futures.  In this piece, I also begin focusing more on the positive economic impact of the drop in oil prices.  

6.  Prisoner's Dilemma   This was my preview of the OPEC meeting.   I cast the issue as two prisoner's dilemmas.  One inside OPEC and the other non-OPEC producers.   I play down the likelihood that a meaning agreement is reached.   Without an OPEC agreement to cut output, prices, I realized would fall until producers were forced to cut.  

7.  Recap of OPEC Meeting I begin thinking about how US and European policy makers will respond to the drop in oil prices.  Europe was likely to be more concerned about the lowflation.  The US was likely focus on the stimulative  consequence of the sharp drop in oil prices.  

8.  What the Frack  I turn my attention to the US shale industry.  It was increasingly clear that Saudi Arabia views US shale producers as a key challenge.  The US had matched Saudi output.  I noticed that US output was built on cheap credit.  I also saw how the drop in oil prices was going to be an important consideration for the ECB, and noted Bundesbank's Weidmann recognized the stimulative aspect impact.  This helped strengthen my conviction that the market would likely be disappointed by the ECB's lack of action in early December.  

9.  Mr Crude Meet Mr Minsky  I further develop the thesis that the drop in oil prices had unleashed more powerful forces than I initially anticipated.  The anticipation of peak oil, and that oil prices would stay high forever, encouraged lenders to base their decisions on the value of the oil rather than economics, just as banks and other lenders lent to home buyers based on the value of the home (and ideas that house prices would only rise).  I suggest that the drop in oil prices is triggering a so-called Minsky moment.