A Race To The Bottom?


Pumping Rig In West Texas

Friday, August 21 the Dow Jones Industrial Average dropped 530.94 points, down 1012 points for the week or a 5.8% decline.   This as WTI oil closed at $40.45 down $2.55 or a 6% decline for the week.

The news media made a big deal about oil dropping temporarily below  $40.  The big picture is that oil has dropped 55% in the last year, to a six-year low.

The oil price decline has led Saudi Arabia to borrow $4 billion in July and to burn almost $62 billion in foreign reserves this year.  Analyst suggest the Saudis could issue bonds around $5 billion a month through the rest of the year to foreign investors.  Its budget deficit is expected to reach 20% of GDP in 2015.

Saudi Arabia’s aggressive fight to defend OPEC’s share of the global market has contributed to the massive oil glut.

Some suggest Riyadh refusing to cut oil output in hope to drive other producers, such as U.S. shale companies, out of business.

Professionals in the oil sector keep cutting the price of oil futures in their projections.  The financial sectors exposure to energy could be the next shoe to drop.  One big bank said 72 out of 74 energy producers requested modification of their loan covenants.

Conclusion…With OPEC, Russia, and the United States pumping record oil production, the current six-year low in pricing may be  with us for the rest of year until some production comes off line.

Sources: “What’s Really Going On With International Production,” CNBC August 20, 2015 interview with Dr. Ken Moors; “Riyadh is refusing to cut output,” CNN Money-London by Ivana Kottasova and John Defterios, August 6, 2015,