July 5th 2018 Market Minute

July 5, 2018

Crude Oil, (Sweet), $75.24 hit it’s highest level since November 2014 this week.
30 US Treasury yields (2.93%) dropped to their lowest level since the end of January 2018. The NASDAQ Composite (7,595) is towards the upper end of it’s 2018 high of 7,806 from last month. The Dow Jones Industrial Average (24,352) is about in the middle of it’s 2018 high (26,661) and 2018 low (23,509). The 10 Year US Treasury yield (2.82%) is also in the middle of it’s 2018 high (3.11%) and 2018 low (2.43%).

It is my belief that the price per barrel of Crude Oil and the Oil Market itself, has more factors impacting it’s supply, demand, and price than any other commodity, asset, or currency in the world.

It is because of this that we will sometimes see the price reach highs like it did in 2008 ($147), and lows like it did in 2016 ($28). The lows of 1998 ($10), due to Asian Financial Crisis, are all but forgotten except by those with a little more ‘vintage’ to their age.

The most recent downturn of Oil between 2014-2016 was very different than any other downturn in the price of Oil we have ever experienced though. Every other dramatic price drop in the history of oil has ‘always’ been caused by a reduction in demand. Or at the very least a belief in the slowing growth of future demand, and or an anticipated drop in demand. Excluding, of coarse, any ‘price controls’ set throughout the last 75 years.

The decline between 2014-2016 was different due to an increase in US Crude Oil production. Increasing supply, and the associated continued anticipation of increasing supply led to this dramatic decline. No one thought 20 years ago that US crude oil production would double between 2005-2010 yet alone double again between 2010-2015. We are now producing 10.9 Million barrels per day! If the US current production increases at its current rate the US will overtake Saudi Arabia as the largest oil producer in the world within the next 10 years.

I can only wonder how low oil could go if both demand dropped like it has in the past and supply continued to grow in the US. The ‘Demand and Supply Curves’ will adjust, eventually, like they always have in the past. It may be much more interesting though due to the price being pushed lower from both sides rather than just the ‘demand’ side.

Source: International Energy Agency, Wall Street Journal, Thompson One Financial, South China Morning Post, Bloomberg News, Financial Times. Business Insider

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