Oil is failing $70!
$66 is a 40% (strong) retracement from the $110 top we saw just over a year ago but this time may be different as OPEC ended their meeting with no agreement to reign in the massive over-supply of crude that's spilling out onto the markets, even in the face of continuing declines in consumption.
This is good news for consumers on two fronts - especially in the US, which has been miles behind the rest of the World in fuel economy. What we're seeing in play now is the lasting effect of the Obama Administration's Aug 2012 mandate that has required automakers to double the average fuel economy of new cars and trucks by 2025 to 54.5 miles per gallon and, already, by 2016, we are on track to hit 35.5 mpg on the average.
As the biggest guzzlers of gasoline in the World, the US was consuming 10.5Mb of gasoline per day when Obama took office in 2009 and already we are down 14% to 9Mb/d, which is a 14% decrease in oil consumption. 1.5Mb/d is 1.7% of the entire World's 88Mb/d oil habit but that number too is shrinking as it doesn't pay for auto manufacturers to make high-mileage cars just for the US, so the entire global fleet has been using less and less for 4 years now.
Getting to our goal of 54.5 mpg over the next 10 years will cut another 53% off our current consumption. If that feat is replicated Globally, we're taking about knocking back another 15Mb/d – at least!
And it's a double-win for consumers as their cars not only consume 14% less gas but that gas itself is now less expensive. During the Bush era, for example, gas was $4.00 per gallon and cars were getting 22mpg so the average citizen driving 15,000 miles a year was using 682 gallons of gas for $2,728 in fuel costs. Now, even at the early stages of the Obama Fuel Act, at 33 mpg it's only 454 gallons of gas and, at $2.85 per gallon, it costs just $1,294 to drive for the year – a $1,434 annual savings PER CAR!
Not only that, but think how much less pollution we are causing by cutting our fuel consumption by almost 1/3 already. I hear a lot of crap about how awful these "Executive Orders" are but THANK GOD for this one! We debated this rule just two years ago and already the critics look like idiots:
The Romney campaign has criticized the new rules as “extreme” and said the standards would limit the choices when consumers shop for a new car. “The president tells voters that his regulations will save them thousands of dollars at the pump, but always forgets to mention that the savings will be wiped out by having to pay thousands of dollars more upfront for unproven technology that they may not even want,” said Andrea Saul, a spokeswoman for the Romney campaign.
Sorry Mitt but cars have not gotten more expensive and people do seem to like saving $1,775 per year on fuel – this will be a tough one for the Republicans to roll back, even with control of both houses.
At the same time as we've been cutting our consumption, Obama made concessions to the "Drill Baby, Drill" crowd at the GOP and has opened up vast portions of the US to additional oil exploration and now we are producing 8.5Mb/d in the US alone, up 3Mb (50%) in 4 years and that's caused us to import 3Mb less, which means we're sending 1.1 BILLION barrel x $100 (prior average) = $1,100,000,000,000.00 LESS money overseas each year and, of course, keeping that money in the country is good for our economy.
This is why the US is able to relatively prosper despite the ongoing Global Recession. To some extent, we are hurting the rest of the World (especially OPEC) by NOT giving them $1Tn per year (1.5% of the Global GDP) and keeping it for ourselves. Not using $1.1Tn a year to buy a commodity that is literally set on fire also helps to keep our Dollar strong and allows the Fed to create a brand new $1Tn a year without suffering the usual inflationary consequences.
Unfortunately, we've already prospered from the fat part of this change with a 50% reduction in our fuel costs. In fact, since we have, in fact, already saved 52.5% off gasoline costs since Obama took office, even if we reduce our consumption to zero, we can only save another 47.5%, so the net effect of continued savings diminishes over time. Still, let's be thankful for what we've accomplished so far – as it's HUGE!
Huge also is the impact it's having on global oil prices and OPEC's failure to cut production this week was likely an attempt to choke off investment in alternate and conventional alternatives. To some extent, it's already working as oil companies are cutting back on R&D spending and there will be well shutdowns and even bankruptcies in the industry but the damage is done and I don't see oil getting back over $85 again without a serious crisis occurring.
As you can see from this handy chart, there is still plenty of oil (4Tn barrels, or a 100-year supply at 32Bn barrels a year) that can be recovered for less than $75 per barrel. For years, I have been telling you that there was a $20 fear and manipulation premium priced into oil and, for the most part, that premium has been washed out as all the "peak-oil" rhetoric has been essentially debunked.
So don't look for oil to "bounce back" – it never should have been higher than $85 in the first place and, if $85 is the top of the range then 20% less than $85 is $68 and that's only the middle of a normal range! Another $17 lower (20%) and we're looking at $51 (and there's 3Tn barrels of oil that can be pulled for less than $30) but, just because oil is back to "normal" doesn't mean it will no longer be manipulated so I'm more inclined to play bullish off the $68 line than bearish.
We already took a bullish position on oil last week, in anticipation of OPEC making cuts. That didn't happens so our bullish premise is blown for now and we'll retreat to longer-term positions but we still expect to see the upper $70s by summer though, over the longer haul – unless OPEC takes action or $70 oil causes a lot of production to drop off line – low prices should be here to stay!
Oil took down the Dow Futures this morning and my comment to Members in our Live Member Chat room at 7:25 was:
Oil in massive collapse below $70, Brent $72.50 as OPEC craps out. That's keeping the Dow and S&P low but RUT and Nas are green and they're not going to let today be red, so Dow (/YM) can be played bullish over 17,775 but be careful at 17,800 but, after that, we should be good again.
Already (8:45) the Dow Futures are bouncing back to 17,825, up 50 points for a very nice $250 per contract game in just over an hour. As I often say to our Members:
We don't care IF the market is manipulated, as long as we can figure out HOW it is being manipulated and are able to play along!
Have a great holiday,
- Phil
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