BMW April 2022

As a mere mortal on planet earth the situation of the fluctuating oil price has been a worry ever since dear old president Richard Nixon rode rough shod over the Bretton Woods’ internationally recognised gold standard in August 1971, saying it was only a temporary measure as the USA introduced the Petro Dollar into the international oil traders as the reserve currency in dealings. They have now, in the last 50 years, managed to colonise in a sort of way countries as diverse as Nigeria, Venezuela, Russia and Saudi Arabia, amongst others – and their sales of the sticky black stuff in crude oil and gas.

The years of talking up the global shortages has held sway for a very long time as everyone in the mix grew fat, rich and happy. As the West Texas Oil Interchange set the daily rate for a barrel of oil in trades that have gone to the unsustainable levels of $100 a barrel to the current selling rate during the pandemic of $18 up to $40. This was to hugely impact on the price of oil.

Discovery Prices are ‘out of the window’

After the economic devastation of 2008, legislation for a benchmark price was noted by the USA congress. The Don Freight Act, was supposed to be legislated and in place, but strangely it was never carried through to oil traders and their over-zealous activities in everyday trades. Now factor in over two months of thin demand this year, because of the pandemic and the close to 30% of oil speculators made up of mostly domestic banks, private equity concerns and private individuals, were seen to be in a major panic. The reason was simple. With all the strorage facilities close to full up across the world and tankers ploughing through the world seas fully laden, the glut of oil was becoming clearly visible to market analysts.

Oil speculators use finance to purchase with their exchange trading funds in their futures oil price gamble and it seems that many of them forget to look at the small print of these funds which clearly states that the term of the future date of delivery has to be met. That means they have to find space to off-load the “black gold” in storage. What happened next is simply unbelievable. 

In the world of such a demand and supply commodity, a panic set in. Speculators sold off their ECF documents under the Discovery production cost of oil causing a meltdown as oil became weaponised by speculators in a kind of fantasy world of trading. But with no legislation rules in place the wild west phenomena hit the price of oil out of the park with physical oil producers and their Discovery oil price left bewildered and helpless, also suffering a market decline as a major scare on international markets with OPEC – had taken place. 

They were unable to keep the Russians and the Saudi’s from entering into over production of oil on international sales. Market factors and reasons for them were in many ways obvious as for years they felt that the high oil prices were borne out by the USA to develop at their very own fracking oil production boom which now lies in tatters for their rumoured cost. This production option is in reality closer to $60 per barrel produced at cost. So mass liquidations will, in all probability, result from this. It’s a clearly unsustainable business model as international demand has already slid down by over one billion barrels for the rest of 2020.

Oil goes negative

It takes 100 years on the West Texas Oil Intermediary to see their benchmark spot price of production costs go negative and as volumes are now set to rise slowly once again the poor regulation of the oil futures market leaves many unexplained questions for the global economy. The first one, is this the end of the Petro Dollar era with the jury going out on proper currency and its constant over printing problem from Trumps’ management seen in the USA? Secondly, how come no one saw this descending oil bench mark crash coming?

Perhaps it is because the USA stock markets are now so far removed from the world of reality their traders in the aggressive chase for profit and that the Dons Freight Act of 2008 under USA (which was supposed to be implemented to avoid the recent oil price tumble  that was never legislated) or suddenly got teeth as the unpredictable trading path of speculators have shown us.

 In real time, with over a quarter of the oil business and its every day operations now controlled by oil gamblers and with the exchange trading funds of The West Texas phenomenon, the oil price is clearly in the lap of the gods and no longer a major feature on the long-standing supply and demand principle feature of a free market which was the very foundation of its discovery price model 

What’s next for the oil market?

By Ian Groat