OT: May have been covered, but...

I was going to post a similar question. I'll be the first to admit, I'm a dummy when it comes to economics. So, I'm totally baffled -- yesterday oil dropped below $50 per barrel and the Dow plunges 330 points. Like, WTF?

They say the lower gasoline prices have led to a big increase in auto sales. Large SUV's and pick up trucks - expensive vehicles over $35k are in sales 35%.

The auto industry is such a driver of the U.S. economy, this seems like a positive.

Well isn't it as simple as supply and demand. There's more oil production with fracking and OPEC not slowing down?

motor: " yesterday oil dropped below $50 per barrel and the Dow plunges 330 points. "

I think it was primarily that oil continues to drop, although Greece was also in the news.

I've discussed this a bit before and in PMs but prolonged low oil prices could trigger general deflation since oil is an input to so many things. This is what the mysterious low bond yields might have been signaling all along.

There is also the risk of defaults from those with high production costs. There could also be layoffs and geopolitical ramifications. It's probably won't be a big deal if it happened so slowly, but so fast catches some off guard.

So that's the bad news. Now the good news is that there have been countless booms and busts in the price of oil, so the more experienced players know how to ride it out.

Large funds and insiders appear to be buying which is good long term. The bad news short term is that hedge funds are also buying some names but going short others. The market loves to beat up hedge funds due to relative small amounts of money to big players and the fact that they don't hold for long and are often over leveraged. So it will probably swing around wildly to get them in both directions.

I personally love XOM between 85-90. If it could drop under $85 that would be a dream buy. XOM is one of the experience players I mentioned. They are very conservative in the cost of production of projects they fund, and will benefit as higher cost producers go bust.

GACAClub: "Well isn't it as simple as supply and demand. There's more oil production with fracking and OPEC not slowing down?"

Actually that's the supply side of supply and deman.

Agreed Doug. I heard US was supplying more than ever. The rag heads have over spent when times were good and won't reign in their production because they have bills to pay and are making half as much! Enjoy the cycle! It's about time they felt some pain!

I am no expert but I've heard it's to put the squeeze on Putin over his invasion of Eastern Ukraine and his annexation of Crimea.

There are rumors that Saudi Arabia is behind it at the US's behest to put pressure on enemies like Russia, Iran, maybe ISIS?

Another conspiracy theory is that Saudi Arabia is trying to knock out U.S. shale producers.

OPEC is certainly talking tough in terms of rhetoric.

I work in the natural gas industry and received an email today from my corporate office about this. Exxon Mobil yesterday announced that even with the drop in oil prices they intend to continue exploration and drilling for future natural gas and oil at current rates. It take about 4 years from the time initial permits are filed to the time actual petroleum is being produced and they want to be prepared for any future demand.

london,

Through 2012, Russia was the largest oil producer. If they used a hell of a lot, then maybe you have a point.

Clubber, I think the point is Russia sells a lot of oil. Their profits are being cut in half. Another way to bankrupt them, just as Reagan did to the Soviet Union.

Saved more than $50 on gas on my drive to Florida for the winter but my Exxon Mobil stock has had the hell kicked out of it so I am a net loser.

XOM stock price may be down but dividends continue to roll in. At the current price , it has a 3% return and the dividend will probably be increased in the second quarter. Keep your shares.

Hang tight! Once the MIC is gone, things will get rolling, I believe.

I believe, but could be wrong, that oil didn't drop that much in price until the dollar went up a great deal versus the euro. With oil priced in dollars, the price dropped dramatically. With a recent survey indicating 98% dollar bulls, the number of dollar buyers should diminish and oil might find a bottom. a bottom though. Not sure where the final bottom will be. I read about Saudi Arabia might be trying to hurt US shale oil producers or Iran, or Russia or all of the above. I also saw a chart showing typically US oil rig counts take about a year to adjust to dramatically lower prices. That's just me looking at a chart. It would mean a bottom in oil prices between now and probably fall of this year. I am not an expert but I do read a lot of financial info.

Saudi Arabia might not want to lose market share as their percentage of the oil market. Iraq and other oil pruducers look set to ramp up production and existing producers might sell more oil to raise cash. Did Farmerart say this last part? I thought he did. All the extra oil and weaker Chinese growth and a much stronger US dollar have made the price plummet. If this continues there is a risk of large loan defaults. Venezeula and Russia are hurting bad. Venezeula might default on some loans I read. I wish Farmerart luck.

just my opinion. not an oil expert.

EXPERT definition:

X - an unknown.
SPURT - a drip under pressure.

Still waiting to hear from art. I the mean time, I'll offer what my non-expert ears are hearing which is that OPEC after failing to cut production has, indeed, actually been increasing production to try and sell more barrels to compensate for loss in profit per barrel. Yesterday they reaffirmed that they would still not cut production and we saw another 5% selloff.

I didn't see this topic directed at me when it was posted last week......sorry.

Question #1. Why? Simple answer..........too much crude oil is chasing too few buyers. Boom and bust is the history of the oil business.

I consider this current plunge in prices to be nothing more than just another normal downdraft in my cyclical industry. During my career of almost 50 years in this business I have lived through six of these cycles. This one is #7. These downdrafts end when blood and red ink start to flow. The blood has already started to flow here in Canada. Just today the largest tar sands operator, Suncor, laid off 1,000 workers. A week before Christmas the second largest tar sands operator, Syncrude, laid off 800 workers. The explorers are pulling in their horns.....the count of active rigs in the western Canadian sedimentary basin is down a huge percentage from the same time last year; and this is prime drilling season in Canada. The same thing must be happening in USA, the North Sea, and all other high cost areas anywhere in the world.

This will only stop when the Arabs start to hurt from the low prices. Last cycle ended with prices in the mid $30s/bbl. The 1998 crash ended when WTI fell to $10/bbl. Saudi Light was selling for $7/bbl in that crash. I could hear the screams of pain from those sheiks all the way over here in North America as they sold their oil at that give-away price.

My impression is that the fall in price of a barrel of crude is near its end. I don't think the price will go lower than the price during the last crash. Generally, a good rule to follow for oil traders is.............never expect oil to fall lower than the lowest price in the previous downdraft.

To put a number on it.......I would say that nothing much lower than $38-$40/bbl will be seen this go-round.

Question #2. Effect on me? Well, I sold the oil part of my company in the spring of 2014. All of my production at that time was hedged forward to the end of 2017 at prices of $92/bbl to $103/bbl. I have no idea what price the new guy is getting for any increased production on the oil leases that went with the sale of the company.

I sold my first company very near the top of the previous price cycle, not at the absolute top of the cycle but near enough to the top of the cycle that the idiot who bought me out went bankrupt as prices plunged.

Currently I am continuing my nat gas exploration play in the North West Territories. I have been able to squeeze my drilling contractor, but not too severely. Another drilling season will see at least a 50% cut in rig day rates, I am sure.