Will Oil Prices be Placed on the "Give Away Table?"...Possible World Wide Recession and Geopolitics are in Play.

Generational Dynamics

John J. Xenakis

Oil prices fell over 5% on Monday, with West Texas Intermediate (WTI) prices crashing below $40 per barrel to $37.65. 

The oil markets have changed substantially in the last few days, because a meeting of the Organization of the Petroleum Exporting Countries (OPEC) collapsed on Friday, without reaching any agreement on capping production levels. 

OPEC has had its ups and downs over the years, but now appears to be falling apart completely, mainly because of Iran's nuclear deal with the west. Iran expects to the West to lift sanctions that have prevented Iran from selling oil. As a result, Iran plans to come to market with a tsunami of oil next year, which may push the price of oil down into the 20s. 

Iran and other OPEC members wanted to Saudi Arabia to boost oil prices by cutting its production. But the Saudis have been saying for a couple of years that they are going to continue full production in order to put the US drillers out of business. Fracking isn't profitable unless the price of oil is above $60, and the strategy has been working, as U.S. rig counts have fallen substantially.

DYI Quick Comment:  Fracking will only be out of business temporarily as our government (both parties) will push through large tax credits for any company getting back into the fracking.  The healthy companies will also be able to purchase these bankrupt companies for pennies on the dollar.  

With sanctions lifted, Iran expects its own oil production to surge. Iran's oil minister said that setting production levels "is our right and anyone cannot limit us. ... [W]e do not expect our colleagues in OPEC to put pressure on us. ... It is not acceptable, it’s not fair." 

That was the end of any hope for a deal. Now, "Everyone does whatever they want," according to the oil minister of Iran, which plans to increase exports by a million barrels a day next year. 

The huge fall in oil prices has been disastrous for the economies of oil producing countries, including Russia, Venezuela and Nigeria.

DYI Quick Comment: Saudi Arabia actions is highly encourage (plus the Iran deal) by our State Department as an attempt to destabilize Russia into breaking apart.  Russia is all about commodities and as the prices drop so does her fortunes.  A devastated economy makes it very difficult to fund their military.   Currently inflation is in the 20% range with unemployment growing monthly.  Please note Russia does not have a social safety net that is standard in 1st world economies.  Hungry people are willing to do desperate acts including insurrection.  

As I've been writing for over ten years, Generational Dynamics predicts that the world is in a deflationary spiral, and the collapse in oil prices, and prices of other commodities, appears to be accelerating that deflationary spiral. Oil Price News and Bloomberg and CNN andCNBC

DYI Comments:  My model portfolio only includes gold mining companies, however I do make comments regarding other asset categories as well.  DYI's favorite oil and gas mutual fund is Vanguard's Energy Fund Symbol VGENX excellent for dollar cost averaging.

Oil and gas prices will NOT be low forever as there is limited supply of hydrocarbons.  Prices could very well go lower as the world economy slows or goes into recession plus the geopolitics.  If oil goes into the low twenties then lump summing into DYI's favorite is the closed end fund Adams Natural Resource Fund symbol PEO.

The late Dick Russel of Dow Theory Letters had to say about wealthy successful investors.

"The wealthy investor tends to be an expert on values. When bonds are cheap and bond yields are irresistibly high, he buys bonds. When stocks are on the bargain table and stock yields are attractive, he buys stocks. When real estate is a great value, he buys real estate. When great art or fine jewelry or gold is on the "give away" table, he buys art or diamonds or gold. In other words, the wealthy investor puts his money where the great values are."

If oil prices drop to the low twenties or becomes a teenager then oil will be on the "give away table!"

DYI