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Equilibrium? | Russell T. Rudy Energy LLC

In a recent article in “Oil Voice” entitled “Oil Prices Plunge to Where They Should Be”, Art Berman makes the case that the recent drop to $45 is merely a correction based on market fundamentals. He contends that given production, inventory levels, and demand, this is just the market seeking balance.

Berman rejects the conventional wisdom that prices fell because the market is losing confidence in the effectiveness of production cutbacks, fears of increasing domestic shale output, and weakening demand in China. Rather, he points out that none of these factors are recent changes.  In fact, they were all in evidence when oil was $55 per barrel.  Alternatively, he suggests that the reason for the price drop was they were too high, and based on relative inventories, should have been around $45 all along.

However, in November of last year, prices jumped by $10 in reaction to announced production cuts by OPEC, Russia, and their allies.  Berman calls this the “OPEC Expectation Premium”.  Berman sees this, and subsequent spikes above $45, as emotional reactions based on expectations, rather than market fundamentals.

Berman concludes that production cuts by OPEC et al are real and will eventually reduce global inventories. However, he thinks that this is a long process, and price increases above $45 are based on unrealistic expectations as to how quickly cutbacks will take effect.  The market has been optimistic for about the last year, so Berman would not be surprised to see short-term increases to $50.  However, he sees continuing volatility “… in the tug-of-war between revived expectation premiums and market fundamentals.  Inventories will be the critical factor.”

To read the article in its entirety, please go to https://oilvoice.com/Opinion/4548/Oil-Prices-Plunge-To-Where-They-Should-Be?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OilvoiceHeadlines+%28OilVoice+Headlines%29

Russell T. Rudy Energy, LLC buys oil, gas and mineral interests nationwide.  Please call (800-880-0940), or write (info@rudyenergy.com ) to let us know if you agree, disagree or would just like to comment on this, or any of our posts.

May 10, 2017 | Oil and Gas, Pricing