A Concrete Example MAY BE Helpful

The propensity to believe that the costs of essential oil futures agreements are predicting the future price of essential oil is understandable but not backed by the track record of such bets. The prices of long-dated essential oil futures merely reveal where customers and retailers are willing to strike a offer today, for his or her own, diverse reasons.

If so, then it could be reasonable to summarize that today’s low oil prices could persist for a long time. However, from my perspective that over-interprets the market data and ignores some important oil fundamentals. As tempting as it may be to think so, the futures market for West Texas Intermediate (WTI) crude oil is not a crystal ball, and neither is the market for UK Brent crude. A futures price is simply the price someone is ready to pay or receive now for oil to be shipped (or settled without delivery) later.

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It is typically predicated on business needs, then a deep analysis rather. A concrete example might be helpful. 57 in December 2017 likely do so, not because they were certain that the purchase price would be then, but because they couldn’t make certain and either needed to hedge another deal or activity, or thought it constituted a reasonable bet. Aggregating a modest variety of such transactions–long-dated futures trade significantly less frequently than those for the close to months–doesn’t improve the accuracy of the bets with an inherently unpredictable commodity over long intervals.

Anyone who considers it does should analyze the track record of essential oil futures as predictions; it is a sobering exercise, for those who have traded this market especially. So how else might one describe the fact that long-dated oil contracts are trading for less today than they were this spring, if much less a prediction of a longer time of low prices ahead?

Behavior and learning play key tasks. With the first anniversary of this historic price collapse a few months off just, expectations of an instant rebound in prices have faded. The probability that the US could produce as much light oil, for now, a year ago has sunk in with fewer than half as many drilling rigs in operation as. 50 oil is for a few of OPEC’s members, cartel leaders like Saudi Arabia show little inclination to blink first. However, others are blinking, so in retrospect I’m skeptical that oil prices can stay this low indefinitely.

180 billion this season according to one analysis. The cuts claim that the projects in question require higher essential oil prices to be profitable significantly, even after recent cost reductions, or have become too risky at current prices. Few of these businesses are big players in shale. Their butter and bread are large, conventional onshore oil fields, and enormously expensive deepwater oil projects, the collective output which are inherently at the mercy of annual declines in output.

Decline is the “silent killer” of the result, to the melody of 5% roughly every year. We should put the US shale trend in its proper context as well. 100 per barrel, it was a game-changer, not least because no other producer or group of producers were willing to reduce output enough to accommodate this new source.