Oil, oil everywhere and not a drop to…. wait, that’s not how it goes. But, the truth is there is a lot of oil coming out of the ground. And this is contributing to an epic drop in oil prices. WTI Crude oil has dropped more than 50% from its high of $107 per barrel in July 2014 to about $45.50 per barrel today. You’ve no doubt noticed how much nicer it is to fill your gas tank. Last week, I saw the first sign offering gasoline at under $2.00 a gallon!
But, what’s really going on here? While we enjoy the cheapest gas since 2009, is there a bigger picture we should be concerned about? Of course there is, otherwise I wouldn’t be writing about it!
As mentioned above, there is a lot of oil being produced. Especially here in the US, where production has increased nearly 50% since 2008. However, we also demand the most in the world and still import about 8 million barrels a day. But this speaks to the world supply and demand relationship. Growth in world demand has started to wane, but supply has continued to increase. The US Energy Information Administration (EIA) reported that in 2014, global inventories rose by 0.8 million barrels per day while demand slightly declined.
Importantly, in November of last year, OPEC forecasted that worldwide demand growth would continue to be tepid, but decided NOT to decrease production. Now, I am a great believer in free market capitalism and letting the market determine price, but this is very uncharacteristic of the cartel. It has been argued by some (myself included) that OPEC is hoping to shake out some of the higher cost producers by keeping supply high and prices low. Many of these higher cost operations are the shale producers in the US.
Outside of just lowering prices, this supply and demand dynamic has more troubling implications. A drop in oil consumption relates directly to a slowdown in economic activity. Manufacturers and consumers using less oil means less overall consumption and less economic growth. Currently, this is especially true in China and Europe. Chinese GDP grew at 7.4% for 2014, the lowest level since 1990. And, the ECB just announced a 60 billion euro bond buyback program to try to combat deflation in the euro zone.
Another reason why oil prices have dropped so much has nothing to do with supply and demand. The U.S. dollar has been on a tremendous run over the last year as the Fed exited its quantitative easing program, and it became apparent that the ECB was about to start its own. Since March of 2014, the U.S. Dollar gained nearly 20% against the Euro, a huge move in the world of currencies. Because oil prices are denominated in U.S. Dollars, as the Dollar gets stronger, the price of oil goes down.
A strong Dollar is a bit of a conundrum in and of itself. On the one hand, it is good for our stock market as domestic assets will appreciate against foreign assets. On the other hand, it will hinder exports as it will cause our goods to become more expensive to the rest of the world. Conversely, it will cause our imports to become less expensive, which could help the US consumer. This, however, could undo much of the progress we’ve made in the domestic manufacturing sector. You see the problem.
Oil is a complicated commodity. With nearly 40% of production controlled by OPEC and subject to supply chain interruptions, the price is very often at the whim of geopolitics. Wars have been fought over it. And economies have collapsed over it. So, enjoy the price cuts at the pump, but remember that there is much more going on when you fill up.
Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
Check the background of this investment professional on FINRA’s BrokerCheck.
An Investment Advisor registered through CUSO Financial Services, L.P., Gavin has 22 years of experience as an advisor in the Puget Sound area.
“I believe every client is unique and deserving of a personalized financial plan that will help them reach their individual financial goals. Before I make any recommendations, I like to get to know my clients. By asking the right questions, and developing an honest, trusting relationship I can really get a sense of what’s going to work best for them.”
Gavin graduated from the University of Washington with a BA in Business Administration and started his financial career with US Bank in the Investment Department. Prior to joining Verity in 2006, he spent eight years with Piper Jaffray.
So what is Gavin’s vision for his dream retirement?
“My dream retirement would be absolutely worry free: financially, emotionally, and in every aspect of life. My finances would be in order so expenses for travel, luxuries, and gifts for the kids, grandkids, and great-grandkids would be taken care of. My kids would be financially sound, so I would be confident in their prosperity. This would give me the freedom to travel and play and do whatever it is I want to do.”
When Gavin’s not working, he enjoys spending time with friends and family, watching Husky football, and taking weekend trips around the Northwest.
Gavin is registered to transact securities business in the states of WA, OR, CA, AZ, FL, HI, ID, IL, MN, NM, NY and VA.
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
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