Oil Prices Tumble…But May Soon Find a Floor

We promised you an update on the impact of recent developments on oil prices. Here is a comment from Seth Van Brocklin of Independent Living News.

Shipping, transportation, and consumer stocks stand to benefit from the recent drop in crude oil prices. (Unless the oil market is serving as a harbinger of a global recession. In that case, beaten-up precious metals mining stocks could be the prime beneficiaries as they see lower input costs and rising gold and silver prices.)

Oil has taken a huge decline from the summer highs of $107 per barrel back toward $80 per barrel. The oil market moved on weakening global economic reports and Saudi Arabia’s vow to ramp up production.

The recent slide in global equities markets has created some attractive long-term buying opportunities

If it weren’t for the U.S. oil and gas fracking boom, we would have surely been looking at record high oil prices north of $150 this summer. Along with a lower dollar and a much worse economy under the weight of Obamanomics.

A surge in supply from hydraulic fracturing has enabled domestic oil production to grow the most since 1970 (source: U.S. Energy Information Administration). Consequently, U.S. oil imports have been plummeting. That’s why OPEC now feels compelled to undercut U.S. shale oil by bringing more lower-cost crude to the market.

At first glance, it seems like the fundamentals are in place for much lower oil prices. But the reality of shale oil is that its costs of production are fundamentally high. Oil from shale formations costs an average of around $80 per barrel to produce – compared with only $20 a barrel for conventional oil drilling.

If oil dips below $80 and stays there, the fracking boom will start going bust. And domestic supplies will start dwindling. There seems to be a fundamental floor somewhere around $80 per barrel. The EIA forecasts that West Texas Intermediate Crude will average $94.58 next year. It could go significantly higher on a spike.

Energy investments look attractive, as do precious metals and natural resources in general. Over the past couple of years, the fracking boom has taken pressure off the government and the Fed to provide inflationary stimulus.

That’s allowed the dollar to strengthen temporarily. Which in turn has put downward pressure on commodity prices. But the months ahead could see a big rebound in the resource space as economic realities set in.

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