Oil Can Be Your Liquid GoldByRaymond D. Matkowsky
The price of oil is responding to the plunge of demand because of the coronavirus pandemic. On top of this, Russia and Saudi Arabia have started a price war within the Opec+ countries. Demand is expected to fall by as much as 20 million barrels a day. Futures in in the New York exchanged tumbled to a total loss of 29%.
West Texas Intermediate crude for April delivery fell to $22.43 a barrel. For May delivery it was $22.63. As of March 27, 2020, Western Canadian Select crude was selling for just US$5.00 a barrel. Brent crude for May delivery dates was US$26.98 a barrel on the European futures exchanges. The average gasoline price in the United States is US$2.03 a gallon. In Europe it ranges from 1.09 to 1.70 Euros per liter depending on the country. This is the cheapest it has been since 1999.
Price War
Technically a price war between Russia and Saudi Arabia has started in spite of the virus pandemic. Price, however, is not the goal. The goal on the Saudi side is market control. On the Russian side, it is bankrupting the American and Canadian shale oil industry. In my opinion both are destined to fail and it will be costly for both.
Russia’s state budget is almost completely based on the production of energy. In order to balance their budget, they need a price of slightly more than US$40.00 a barrel. The budget will probably be in a deficit this year and possibly followed by the potential of a recession. The Kremlin has built up the country’s foreign currency reserves and believes it could outlast the Saudi.
Saudi Arabia finances most of its social programs from oil revenues. They need about US$70.00 a barrel to do so. However, they do have a fleet of ships that could deliver larger quantities of crude in a timely manner more so than the Russians. The Saudi also need America as a market. The U.S. is a net exporter of oil. However, a great deal of oil is still imported. The problem for the U.S. is that oil and refineries are not interchangeable. Many refineries can only process a certain grade of oil obtained from a certain sources.
The American and Canadian shale oil industries have seen prices in the twenties just a few years ago. It forced them to find cheaper ways to extract the oil. Many in the industries continued to drill for oil in spite of not making a profit. They did so in order to continue servicing their loans. Those that did go bankrupt were swallowed up by bigger more stable entities that resumed pumping after the conflagration ended. The same will probably happen now. Also, American and Canadian energy does not come with any strings attached as has been the case with Russian energy supplies in the past.
“Fish At Your Feet, First”
The Maori are a native tribe of New Zealand. They have a saying Fish at your feet, first. Don’t look overseas or to your government for timely help. Take the future into your own hands. Work with your current situation. Determine what you could do now with what you have or can get to survive or even thrive under these and future conditions.
For instance, gasoline and most energy supplies haven’t been cheaper in the last decade. Can you buy and store large quantities of gasoline and oil? If you cannot, is there something that you can do? For example, many homes had heating oil storage tanks that are no longer used when they switched heating systems. Theses tanks maybe on the market at very low prices. There maybe discarded tanker trucks in salvage yards. You don’t want to drive them, you want to use the tanks for storage. Is the market for some oil based finished goods in a bargain basement? Can you hedge future contracts that can save you cash when the price will eventually go up? There are probably many things that you can do. Look beyond everyday thoughts.
If you have any further suggestions, do not keep it to yourself. Help your fellow readers!
If you have any questions, comments or suggestions drop me a line at rdm@datastats.com.
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