What really has broken the back of oil price yesterday was the supply concern on the market. The fact is that the US supply report has shown incremental mainly due to a major US refinery outage. Refinery outages typically leaves more oil in storage tanks, this brings the opportunities for others. Some refiners may reschedule their maintenance and use the higher margin as a leverage. However, at the same time, a lower oil price will also force the producers to cut their output as their margins are squeezed.
The debate is heating up every day that the US Federal Reserve will uplift the interest rate and September is still a sturdy candidate for this. So far we have seen colossal investment in the US shale primarily due to the two reasons. Firstly, it was the boom in the oil price, which we experienced last year, and brought many opportunistic players in the market. These players saw that there are higher margins for them and they borrowed with both hands to invest in the US shale oil business. However, those sunny days with rosy price levels are not there anymore and these investors cannot see much margin for staying in the market for any length. So for them, the only possibility is to become more efficient, if they want to stay in the game and this requires more investment. Second, it is cheaper borrowing rates, which made them to invest heavily in this industry.
Currently, we are experiencing a decade of low interest rate and ostensibly the Fed no longer wants to leave the interest rate at this level for much longer time. So, the question is, what this means for those who are investing in the US shale industry? They have surely borrowed at ultra low interest rates and this has been the main ingredient in their cost recipe, but now if those rates are going to go higher, then you want to ask the question, if such players can last any more?! Although, the Fed minutes were dovish yesterday and it has dented the possibility of a rate hike in September, but it is imperative to remember that it is still on the table!
The Fed was really aggressive only a couple of weeks ago, however, the FOMC minutes had aloof the oil stability paragraph yesterday from their statement and if this is under looked, it will be an astounding mistake. Does this decipher the Fed is becoming increasingly worried about the stability of the oil price? Yes, for sure! Nevertheless, something which is even superior is the currency war in emerging markets, weakness in the Chinese economy and the Fed are increasingly becoming more apprehensive about this and this is reflected in the price of gold today. The precious metal is surging on the back of this and also the uncertainty in the Asian markets is also supporting its price.
These are just some of the elements which are keeping the hopes alive for the US shale oil producers that they will still be able to borrow cheap for a little longer. Nonetheless, if we want to see the price of oil propping back up, we need to see a major effort by suppliers to put a firm cap on the supply side as long as the demand side does not pick up. So the burden really is on both side, the US shale oil producers and the OPEC countries. If we do not see these producers coming to their senses, evidently, this is will erect the supply side even further and the entire equation will be more out of whack.