EXTREME OIL PRICE VOLATILITY: Bad Sign That All Is Not Well In The Markets

The markets are in serious trouble as the extreme oil price volatility continues to devastate the global economy.  Investors and analysts today are totally clueless because they have become the frogs burnt to a crisp in the frying pan.  Over the past several decades, the oil price has fluctuated tremendously, much like the EKG of an individual whose vital signs have run amuck.

Unfortunately, no seems to notice, and no one seems to care (George Carlin).  However, the market and traders have grown accustomed to the volatile trading insanity as the oil price rises and falls 3-5% in a day.  Today, the West Texas Intermediate (WTI) Crude oil price has been down more than 4%:

And if we consider that the oil price was trading at $74 just last week, it is now down a stunning 8%.  However, if we look at the oil price over a six-month period, the price fluctuations are even more significant:

When the stock markets suffered a correction at the end of January, the oil price fell 12% in a matter of a few weeks.  And more recently, the oil price shot up 15% from a low of $64 to a closing high of $74.  This huge 15% increase took place in the last two weeks of June.

With the world producing and selling 80+ million barrels of oil per day, large oil price fluctuations cause a great deal of stress in the overall markets.   According to the study on Oil Price Volatility: Causes, Effects, and Policy Implications:

Sharp, rapid swings in the price of oil can have outsize effects on companies, economies, and global geopolitics. Oil price spikes can stunt economic growth, for example, and a sudden price plunge can wreak havoc on cash-strapped oil companies. For countries, an oil price roller coaster can blow a hole in government budgets, prompt wholesale economic reform, or alter geopolitical priorities seemingly overnight.

Extremely large oil price spikes can stunt economic growth while collapsing prices negatively impact public and national oil companies.  However, this hasn’t always been the case.  During the twenty years from 1950 to 1970, the volatility of the U.S. oil price was extremely low, and during the latter decade… it was virtually non-existent:

From 1950 to 1953, the U.S. oil price remained at $1.71 a barrel.  Then in 1954, it increased by 12% and remained at $1.93 for three years until 1954.  The oil price then fell 2% to $1.90 in 1957 before rising 9% to $2.08 for 1958 and 1959. Later on Sept 14th 1960, Iraq, Iran, Saudi Arabia, Kuwait, and Venezuela established OPEC and set the oil price at $1.80 from 1960-1970.

However, when the United States peaked in conventional oil production in 1970 and then after Nixon dropped the Gold-Dollar Peg in 1971, the oil price spiked and the period of tremendous price volatility began:

As we can see in the chart above when the world was still on the Gold Standard and awash in low-cost, high-quality oil, the oil price remained remarkably stable.  Although, after the Dollar-Gold Peg was dropped in 1971, then the oil market changed forever.  The oil price shot up from $1.80 in 1970 to $36.83 in 1980, which was the key factor that pushed the gold price up from $36 to $612 during the same period.  As the oil price surged 20 times from 1970 to 1980, the gold price increased 17 times.

Now, if we look at the oil price after 2000, the price volatility has gone completely wild.  The oil price jumped from $19 in 1999 to a high of $146 in 2008.  While the percentage increase in the oil price (8 times) during the 2000’s wasn’t as extreme as it was during the 1970’s (20 times), the volatility is much worse.

For example, the oil price fell from a high of $146 in June 2008 to a low of $34 by the end of the year.  In just six months, the oil price fell 77% from its high.  As the oil price recovered and then stayed above $100 from 2011-2014, it then fell very quickly to $30 by the beginning of 2016.

The reason for the significant oil price rise in the 2000’s was due to the massive increase in global debt and derivatives.  According to the OCC Quarterly Reports on Bank Trading and Derivatives Activity, the total notional value of U.S. Banks Derivative Holdings increased from $45 trillion in 2001 to $235 trillion in 2013:

Now, this is only the amount of derivatives at U.S. Banks and Saving Associations.  According to several sources, global derivatives shot up to $1,000 trillion or a quadrillion dollars during the same period.  Furthermore, the global debt has ballooned from approximately $60 trillion in 2000 to $180 trillion in 2013:

  

While the current global debt is up even higher to a record $247 trillion, we can clearly see in the chart above how quickly the world’s debt skyrocketed from 2000 to 2013.  Thus, the massive increase in global debt and derivatives had a profound impact on the oil price.

As the oil price trended higher from $19 in 1999 to over $100 in 2011 (until mid-2014), this was very supportive to the oil industry.  However, now that the oil price is trading below $70, it is putting severe pressure on the marginal producers (Shale Oil, Heavy Oil, Oil Sands and DeepWater) and is not high enough to generate the needed capital expenditures to maintain or grow production in the future.

Furthermore, when the oil price collapses along with the upcoming market crash-correction, it will destroy a great deal of production.  I believe the next major market crash will be the major turning point for the END OF THE MIGHTY OIL INDUSTRY.

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15 Comments on "EXTREME OIL PRICE VOLATILITY: Bad Sign That All Is Not Well In The Markets"

  1. Ya gotta know something is up because the BIS as well as the IMF and many of the prominent financial analysts including Peter Schiff and Micheal Pento are all seeing the same thing, storm clouds are on the horizon.

  2. I don’t know about shale, but the oil sands (highest land cost producers on the planet) keep expanding at a rapid rate – at sub 70,60,50,40 Bpd – as they have.
    https://www.google.ca/amp/s/globalnews.ca/news/4286911/nexen-energy-alberta-oilsands-project/amp/
    and –
    https://www.google.ca/amp/s/business.financialpost.com/commodities/energy/suncor-energy-files-application-for-160000-bpd-
    lewis-oilsands-project/amp
    And…
    http://www.jwnenergy.com/article/2018/5/meg-proceeding-275-million-oilsands-expansion/
    That’s just 3 companies, just this year. They have been doing it regardless of price. This is factual, verifiable. The notion that the oil industry will collapse is opinion, and one that’s always off sometime in the future – a time that can always be pushed back, further & further.
    I don’t (never have) question Steve’s motives, but doom porn is easy, and has a ready audience. Facts are hard, and don’t support it. Can’t help but notice we don’t hear anything about the “hills group” and the “oil will be $11.76 bpd by 2020” anymore…
    I know, I know, I just don’t get it:-)
    Glta

  3. Ps I must admit I’m impressed with Steve not logging my email & keeping my comments from showing up (which must be possible to do). I’ve been visiting the site every few months for a couple years, and my last 3-4 comments have been not supportive of his theories. Obviously pretty confident in his craft (or I just gave him a great idea :-).

    • Emil,

      There have only been a couple of individuals that I had to moderate their comments. However, if someone provides a logical disagreement or opinion, I don’t have a problem.

      That being said, I wouldn’t gauge what has taken place in the Shale Oil or Oil Sands industries as a supply that will not be around for a long period of time.

      I believe the Global Oil Industry will be in serious trouble by 2025.

      steve

  4. Wow, this article makes my head spin. It’s hard to believe what coming off the gold standard caused but I remember it well: the gas lines at the station, crazy inflation. I don’t know how many times the government froze price increases in an attempt to slow inflation. A bottle of pop which had been a dime for 40 years rose to 15, 20, 25, 35, 40 cents in a few years during the 1970’s.
    I do know our government will subsidise the oil companies if needed (through war or cash) just as they do the big banks in the name of national security. Big oil will probably be the next QE event.

  5. Michael Kohlhaas | July 16, 2018 at 7:57 pm |

    We are in the crapper!

  6. I agree with Mr. Brant Lee about the possibility of government sudsidation of the oil companies if the oil situation should really become severe. The TPTB will do desperate things to keep BAU IMHO if the need arises. I think it will only be a stopgap measure but they will try!!

  7. THANKS, Steve, for your roundup of oil prices for the last fifty years.

    There seems to be a correlation beween prices and total debt, but very broadly and very longterm.

    Extremely interesting, that prices stayed flat from the mid 80ies to ca. 2000, while total debt has tripled from 20 to 60 tn. $ – so for these 15 years there seems to be no meaningful correlation.

    Derivatives create volatility, first primarily upwards and since 2014 primarily to the downside.

    Today they are used by politicos to show the world, that they do have an impact on “markets”. Very sad! 😉

  8. OutLookingIn | July 17, 2018 at 12:37 am |

    Little Known 1974-1982

    Procurement of oil after the oil embargo and gas lines of 1973, with the subsequent spike of the price of oil over $30 per barrel, was made by the utilization of gold.

    The main OPEC exporters were only too happy to sell their oil for gold. They rubbed their greedy little hands with glee, as the price of gold kept going up. The US was in a position to supply them all they wanted, in exchange for oil.

    Then the gold price crashed. These oil producers were caught with vaults stuffed full of gold that they could not sell, to meet their immediate pay rolls and social program benefit promises.

    So in steps the US and offers to take this gold off their hands, at a reduced price mind you, in conjunction with low cost/long term loans. Thus the gold goes back home after doing sterling duty supplying oil at a fraction of the real cost and buying time. After all, time was needed and obtained, to bring the North Slope into production and to streamline/boost the older fields still in production.

    Unfortunately there are no rabbits left in the hat. Shale oil is a last gasp.

  9. Greg Linton | July 17, 2018 at 3:23 am |

    Gold to oil price ratio before 1971. $35/$1.80 = 19.4
    Ratio today. $1244/$68.4 = 18.6
    Coincidence?

    • Greg,

      Well done. Yes, the oil price is one of the leading factors that determine the value of gold. However, going forward, the price of oil or the cost of gold production will no longer be the leading factors in determining the gold price. It will be the massive increase of investors into gold and silver when the value of most STOCKS, BONDS, and REAL ESTATE plummet due to collapsing oil production.

      steve

  10. Steve you have been on a roll lately, with excellent articles, especially the demonstration of ground level research.
    I think you need to address the difference in EROI from EROEI. Right now the way I understand it, , we are in the EROI, or financialization stage of the fraying oil lifeline (with 3-5 years left? ) Energy companies still get financed or receive government subsidies for non profitable drilling. But once this stage runs its course, and maintaining current oil production becomes prohibitively expensive and the malinvestment bubble blows up, then it is no longer an EROI game, but an EROEI game. In the end, simple thermodynamic laws prevail over financialization gimmickry. The Hills Group theory may come to pass, or something far worse.

    • Likely if oil was not manipulated the Hills Group would be right. All the did was treat oil as another mining operation. The problem is oil isn’t just that it’s the life blood of the economy.

      If you balance the debt with the oil production it follows quite closely as they are inverse in relationship. Debt will increase with oil price above economic value. This is a function of declining oil gdp benefit to the economy.

      So if oil is producing only $20.00 bbl to the economy the price is a result of debt. That would be $40-50.00 per barrel.

      96mbpd * 50.00 $5billion per day or $1.8 trillion per year.

      Sound familiar?

  11. Generally speaking, the #DowJones, being representative of the North American economy, indicates all stocks between 1960 and 1980 (20Yrs) had very little volatility; not just oil. The volatility in the #WTI chart since 1986 IMO is not that different to what it is today.

    One could even say, depending on one’s interpretation, the North American economy up until the early eighties, was a very robust economy. AND In hindsight, one can now see it was in the early eighties the #DOWJones index started its EXPONENTIAL GROWTH.

    IMHO the North American economy is FAKE NEWS and has been for many decades.

    “Capitalism” is not the problem!” American Capitalism” is the problem.

  12. Generally speaking, the #DowJones, being representative of the North American economy, indicates all stocks between 1960 and 1980 (20Yrs) had very little volatility; not just oil. The volatility in the #WTI chart since 1986 IMO is not that different to what it is today.

    One could even say, depending on one’s interpretation, the North American economy up until the early eighties, was a very robust economy. AND In hindsight, one can now see it was in the early eighties the #DOWJones index started its EXPONENTIAL GROWTH.e

    IMHO the North American economy is FAKE NEWS and has been for many decades.

    “Capitalism” is not the problem!” American Capitalism” is the problem.

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