Washington, DC -- (ReleaseWire) -- 02/17/2015 --Oil producers are on a race to the bottom, and it is an oily, slick slope. Prices continue to drop, now almost fifty percent of the high of over a hundred dollars a barrel earlier this year, and collateral damage continues, affecting companies and jobs, especially in oil producing states, where initial jobless claims surged last week. The oilfield services company Baker Hughes publishes a count of operating oil rigs in the United States each week, and this week's numbers were down once again. U.S. rig counts were down 5.6% last week alone, and Canadian rig counts were down 3.2%. Year over year, the February 6th numbers from Baker Hughes were down by 315 rigs, a nearly 18% decrease.
The Kansas City Fed notes that respondents are seeing non-durable (petroleum) demand as "sluggish," and yet, despite plunging prices, slowing demand, and even bankruptcies, Bloomberg reports that the US is set to pump more oil in 2015 than it has in forty-two years, as drillers ignore the decline in price. US producers have the benefit of declining equipment costs and enhanced drilling techniques, which they believe more than offsets the collapse in oil markets. They are shutting down expensive production, but, borrowing a page from the iron ore producers, who are also in a race to the bottom, they're producing more raw materials than ever, in hopes of putting their competitors out of business as fast as possible. They're shifting their focus to the most prolific, low cost fields, which means extracting more oil with fewer drilling rigs.
In short the US industry is doing on a national level exactly what OPEC did on an international cartel level, which is battling plunging prices and demand with surging, if not record, production. So, everyone's hope is to flood the market with as much cheap oil as possible in order to take out higher cost competitors and to remove supply quickly. On the surface it sounds like a solid plan, but the biggest part of the paradox of the crude price collapse is that the near-term outcome will be an unprecedented surge in oil supply, which could potentially lead to an even greater crash in prices before everything reverts back to a more stable equilibrium.
Saudi Arabia is now realizing that they don't exactly have a quick win. The question is whether OPEC's plan to flood the world markets with cheap oil will backfire on them, or if Saudi cash reserves will last long enough for the US energy sector to implode under its own weight.
Another impact of tumbling oil prices is real trouble for Russia's economy, and continuing Western sanctions, stemming from Russia's annexation of the Crimea region of Ukraine in March, certainly won't help. U.S. sanctions ban the export of goods, technology and services to Crimea, and prohibit U.S. individuals and companies from purchasing real estate or business in Crimea or funding Crimean firms. Russian and Ukrainian individuals and companies are also specifically targeted for sanctions, including the Russian equity investment group Marshall Capital Partners.
While Western sanctions target Crimea, the impact on Russia's oil and gas exploration in the Black Sea can't be ignored, since Russian state energy companies are already struggling to stay afloat. This is a highly volatile situation with global impact, because Russia holds approximately $670 billion in foreign debt, and as its economy continues to do worse the possibility that it will default on that debt looms larger and larger. There are impacts not just to the world economy but to the individual investor, if Russia fails to pay back those loans. They are at a crossroads with a dangerous combination of economic and political risks, and the sheer enormity of Russia's foreign debt makes that debt almost a weapon of mass financial destruction that could be used in currency and economic war, even with NATO. Every investor should be alert to that possibility of financial upset.
All data sourced through Bloomberg
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Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com. She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
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