Topic: The reason that crude oil price crashed - page 6. (Read 12519 times)

If oil prices fall far enough then oil production can be taken offline. The reason oil companies will not stop production after only a short time of low oil prices is because it costs money to both shut down production and start it back up, plus a lot of the costs associated with extracting oil is "prepaid" with the costs associated with building infrastructure to extract such oil

Yes. The production can not be taken down quickly, because that would bankrupt the involved companies, as they are heavily debt loaded. In addition, the biggest oil investments are done by governments, who do not turn around quickly, and, they need the cash flow to stagger the hordes, even if they have to loan more to keep the oil flowing.

They could, but the non-OPEC countries could do it just as easily. The proposition does not conform to logic.

The oil price will continue to fall.

Opec countries could have lowered oil production which would support high oil prices, but then they would lose market share. It's not that they (including Saudi Arabia) specifically hate US oil producers, they hate all competition and would do whatever it takes to protect their market share. Just as any other market participant would. E.g. Microsoft or Intel.
Anyone knows where I can get a good tinfoil hat?

Prices aren't "set" in that way.  It is primarily a global auction market price, with some lesser side-deals.
What the OPEC countries do is set and publish production targets for themselves.  Sometimes they also violate these targets and release more oil than they say that they will behind the backs of the cartel partners.

To say what is "intended" by them is essentially a bizarre claim of mind-reading.  There may well be other intentions entirely, (such as maintaining the largess of their regime and thus forestalling a democratic revolt) and the effects on USA and Russia may be merely side effects and unintended consequences, or even simply not as big of a factor as other financial concerns of selling enough oil as they feel that they need to sell.

Not all effects of actions are controlled.  Even children know this the first time they accidentally break something.

It's not arbitrary at all, and it's not really OPEC, as many OPEC members would rather see higher prices for their own internal political reasons. The primary driver is Saudi Arabia, who is trying to crush the shale oil producers in the US (particularly, and to some extent Canada) where oil cannot be produced at profit for less than $80 a barrel. A sustained price below that point is intended to chase US firms out of the market, as they can't produce profits at this level, which in the long-run would be good for Saudi Arabia.

How far is oil going to fall?

Oil is eligible collateral, but not when it is under $10 per barrel, same for housing, when price is in a long downtrend, anything becomes bad asset, and is not eligible collateral anymore

The bank can always get more money from the Fed provided with eligible collateral. The very problem that QE was aiming to solve is to remove some excess of the bad assets from banks' balances.
Now that banks have enough liquid assets, further QE is pointless. Well, I consider any QE beyond the first one pointless.

Indeed a nice theory: Big banks pump up some asset using loan money, and tighten the money supply to let it crash, seize defaulted assets, and ask FED to buy those assets from them, and voila: FED have assets and banks have cash (And FED is owned by those banks indirectly by the way, so banks own both assets and cash in the end)  

People must use bitcoin to end this kind of madness

They don't directly buy stocks. However, their purchasing injected liquidity into those banks and now banks have much more money at hand to play around with other assets like oil and stocks

Imagine that you are a bank with lots of unsold houses (MBS), when FED purchased those houses from you, you suddenly get loads of cash at hand

I thought it takes a few years.

On further checking, you're right.  I thought that in the packages of MBS, there were actually also stock.  I had a misunderstanding of what were MBS, I thought they could pack stocks too, but they seem only to apply to real estate, not to the "commercial" property in a commercial MBS which is essentially equivalent to stock.   But I was wrong.

Oil production takes up to 30 years from start of investment to the product reaches the consumer. Low interest rate means to much investment (and to little investment other, unseen, places).

I think FED cannot buy stocks. The governments bail out companies by buying shares into them.

What stock did the Fed buy? I only know it bought treasuries and MBSs.

Indeed, QE is not (yet) circulating money, but went into:
1) increased required bank reserves at the FED (which essentially means that this is money that was printed, lend out to banks, which had to put it at the FED as a banking reserve) - this money was printed and frozen.  This money will only start circulating when banks go bankrupt and their reserves have to be put on the table.
2) the FED bought a lot of stock and other bonds with it, which means that the FED made these assets being more expensive than the market would decide them to be.  As such, the FED essentially blew a stock market bubble which has been financed by all people buying stock and other paper assets the FED was buying too.    The money went to those issuing those paper certificates (bonds and other securities that the FED bought in its QE program).  That money is somewhere but hasn't entered the domestic consumer market (otherwise, indeed, massive inflation would be the result).

Central banks usually fight slumps which are the result of collapsing bubbles, with new bubbles.  Last time they blew a housing bubble.  Now they are blowing a securities bubble.

Is the theory here that banks will seize petrol production assets from debt defaults, those assets will be undervalue and non performing, and so it will be a bailout for oil and gas and then banks by taxpayers, or banking bail-in?

Here is the risk analysis report from before the big price drop in April 2014.
(You may not be wrong, but I don't know the future.)

http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/pub-ch-a-og.pdf

I thought everyone already know that in today's system, it is fiat money supply decide the price, not supply and demand

Supply and demand are good to be used to EXPLAIN the price movement, in what ever way it suits, but that is historical trading. However, the money supply can be used to forecast: When money supply stopped, the price of everything WILL fall (since there is suddenly much less money on the market)

Since there is a consensus that QE is going to stop, the other major currencies all fell against USD this year. Take Ruble for example, it fell almost at the same pace as oil, which means the oil export income counted in Ruble is almost the same, but Russian's import from US will be affected heavily

Everyone know that FED has printed 6x more money since 2008, but there is no 6x inflation, no 6x increase in GDP/income either, where did all those QE money go?

Now it seems the answer is here: Just like housing bubble, they were loaned out massively. But they did not enter the consumer's budget
since consumer is very poor now. So they are loaned into those oil companies to build rigs over sea or shale infrastructure, at the same time, many of those fiat money went to buy commodities including oil as a store of value

That's the reason those oil that cost $30 to produce can be sold at $120 for extensive amount of time. (QE pumping out 2.8 billion per day, while world oil production is 90 million per day, gives each barrel of oil $31 premium, if you consider M2 it is even higher)

Somebody said that after housing bubble there will be a bond bubble, but I guess the oil/commodity bubble is more likely the trigger of next financial crisis. Of course in this crisis the major victim is oil companies, but if banks have been loaning heavily to these companies or investing heavily in commodity ETFs, maybe we will see a "too big to fail" bank asking for bailout again