I've been predicting that crude oil prices will eventually drop below $30 per barrel for nearly two years. When I first started talking about it oil futures were trading on NYMEX at $108. Everyone thought I was too radical in my predictions. Even those interested in my reasoning refused to believe that such a drastic adjustment was possible.
Then, on Friday, September 11, 2015, many industry insiders have received a MarketWatch alert letting them know that Goldman Sachs underbid my forecast, warning that "oil prices could sink to $20 a barrel." I personally don't pay much attention to big-firm analysts (they are most likely low-balling because they have some shorting game in the works), but a few of my acquaintances thought I should've felt justified. The only thing I can say is "What took them so long?"
Human myopia doesn't shock me anymore. However, the level of denial exhibited by those in and around the business of oil and its derivatives borders on blindness. I mean, it's not like I have some special connections or access to secret information, nor do I spent any time on extensive research. The same self-evident facts were always right under everyone's noses, not just mine own.
Look, having been one of the largest importer of oil in the world for decades, the United States used to limit supplies to other regions of the globe by consuming the majority of Saudi, Algerian, and Nigerian output, thus keeping everyone hungry and bidding. Up to a certain price level it was considered more practical to buy foreign oil than to invest into domestic production by pretty much every branch of US energy and petrochemical sectors. But as soon as the prices hit an attractive spot, everyone and their mothers started pumping more oil and throw it into the market. The US production doubled; the same happened in Russia, Iraq, Canada.
Meanwhile on demand side, the oil consumption is slowly (too slow for my taste) diminishes. Tapping into shale formations made natural gas a cheaper energy alternative. Furthermore, the idea that switching to renewable energy (solar and wind) may offer a chance of survival seems to take a stronger hold in more reasonable heads worldwide. Even in our country, in spite of all that protectionist auto lobbying in Washington, vehicular fuel-efficiency finally became a reality. And those of us who travel to Europe and Japan have seen the itsy-bitsy cars most people had been driving there for the past 25 years.
More significantly, the economies are weakening all over the globe. EU is barely holding itself together. China has finally admitted that the country has "problems," which is probably a tight-lipped way of describing a complete disaster. This means shrinking consumption of everything, but especially of oil and oil-derivative products.
As I said, it's self-evident. As far as I was concerned, expecting the downward turn of the oil market was the only sensible conclusion. But everyone seemed to have gone stupid. Seriously, what's wrong with people? You don't need a PhD in Economics to understand this! What happens when you have a product surplus in the market of diminishing demand? Does the price goes up or down?
Of course, ever since the oil has become THE most important commodity on the market, it's been associated with that very special cardinal sin – Greed. (If you search Amazon for books on oil, you will find the word "greed" on at least half of the covers.) And greed is blinding. It makes people reckless. They refuse to consider a possibility that making a profit of $60 per barrel today can turn into a $20 loss tomorrow.
Greed always goes hand in hand with opportunism. As I said above, higher prices attract more suppliers – it's hard for people to resist the opportunity to make an extra buck, regardless of the consequences. All considerations of important values, including the planet's survival, are cast away in the pursuit of hot dollars. They pump more and more. They create new nightmare technologies like fracking. They invest billions of dollars into new facilities, raping the Earth and turning household water into flammable liquids. And then, these blind people have the audacity to look surprised when overproduction manifests itself in rapidly falling prices.
And it's not just oil – prices for every single product on the petrochemical flowchart (kerosene, polypropylene, PVC, polyethylene, etc.) are dictated by the prime material's behavior. When the prices were high, the greedy piggies cranked up the production capacities of those products as well, with exactly the same result – massive overproduction followed by the drastic price drops. What was selling at $1500-$1900 per metric ton a year a ago is now sold for $900.
In theory, the only logical response should be to seize the output. Yet, it's not easy to hit the breaks. When in the fourth quarter of 2014 oil prices sharply adjusted from $93 to $45 per barrel, one CEO of a petrochemical trading company asked me, "Why those Russians and OPEC aren't doing anything to stop it?" And I had to explain to her that for Russians oil is like payroll wages for an ordinary person – they need continuous oil income for sustenance. They will not stop pumping no matter what. What else can we possibly expect from a dictatorship where a handful of usurpers hold national property for personal gain? And OPEC? The cartel's members refused to cut their oil productions for an opposite reason: They are already so rich, they cannot be hurt by falling prices. On the other hand, impoverishing the competition will benefit them in the long run.
Here in the States, though, we still have some shreds of the free-market economy left: shrinking markets and overflowing storage capacities inevitably result in industrial contraction. So far 50% of rigs got decommissioned; research and investments are halted, over 200,000 workers have been laid off.
(Insider tidbit: The other day, in casual banter over lunch, my commercial insurance broker told me that one of her Chinese clients is currently buying oil rigs and related equipment out of the US bankruptcy courts at about 15 cents on a dollar and shipping it to the homeland for resale. Way to enrich our foreign creditors, you guys!)
For the sake of clarity let me fiscally connect the sharp price drops to shutdowns and layoffs. Let's say your product's market price was $1800 per unit, but it's now $900. Even if you are a very shrewd business person capable to quickly adjust your costs to the changing market, avoid operating losses, and maintain your healthy 10% gross margin, in absolute dollars you are now making only $90 gross profit per unit instead of $180. In other words, you have only 50% of cash available to pay salaries, benefits, rents, leases, bank interests, etc. – all those overhead items that have either fixed or increasing values.
And so, the steady stream of insiders' news that comes to me is not surprising at all: Nippon is closing their propylene unit, and Formosa shutting down its Delaware productions, and Exxon is halting their alcohol output, and Sterling Chemicals is running on the negative cash flow, etc., etc.
Meanwhile, our state economists continue telling us that everything is okay and will be even better. Well, I'm saying that it's only going to get worse (especially if voters will be fooled by phony, skin-deep feminism or silly, unattainable promises). And you don't even have to take my "radical" word for it – listen to you trusted "friends," the Goldman Sachs's analysts.
The Frustrated CFO 