With the recent OPEC announcement regarding sustained oil production at current levels, the oil price is in free fall. The days of $120+ oil are gone for now as the commodity is hovering around the $65 price point as of Sunday evening.
The oil industry is huge worldwide and an a priori requirement of the global supply chain. The United States alone has some monster producers and a burgeoning shale / fracking industry that is creating thousands of jobs on a monthly basis.
In fact, an argument can be made that this very oil industry & greater energy sector has been the one area of the economy that is holding America up. After all, unemployment remains stubbornly high and deficits continue to bloom. Something in addition to the Federal Reserve is keeping this all propped up and that thing is likely the oil industry.
The majority of US producers cannot remain profitable at these levels. If this price dip is sustained for any length of time those aforementioned jobs will be hemorrhage and companies will start going under. The bigger, well capitalized companies will probably come out of this stronger. The weaker players won’t be so lucky.
Of course, the wildcard here is that oil producers could innovate and find cheaper ways to get it out of the ground. After all, American innovation used to be one of our calling cards as a country.
However, if this pillar of the economy starts bottoming out, you need to watch out. The commodities complex will probably collapse first but the rest of the market will follow. We’ll see deflation and lower asset prices – an opportunity for some and a disaster for others.
If things do get bloody you’ll want to have that dry powder ready. If this is the black swan we’ve been waiting floor (it’s probably not, but could be), you’ll want to be positioned ahead of the “Big Print” the Fed will surely execute when the house of cards comes tumbling down.
Good luck out there.
