Oil Comment: Russia, US "Playing With Matches" Now
We are now in what feels like a dry forest where any spark could set off the proverbial forest fire.
Playing With Matches
If you are going to do something which is potentially dangerous, don't be surprised if you get hurt.
by Brynne Kelly for Cornerstone Futures
The intense battle between Russia, the U.S. and Europe is yet again driving the fear of war, and perhaps even invasion. The Ukraine is a front to both the East and West, which means that a country, a nation could be deplorably sacrificed. Russia, which invaded Crimea, and annexed eastern Ukraine, is trying to solidify its position in the Black Sea and Eastern Europe.
Meanwhile, the U.S. and the West are trying to ensure their own security by manipulating the fate of other countries. They are using Ukraine as a front against “the threat from the East.”
This narrative led to an endless stream of geopolitical headlines that are colliding with reduced production, low inventories and frigid temperatures and driving markets to new highs.
The tinder is dry and extremely vulnerable to the spark of fire. This led to an exciting, volatile week for energy markets, specifically natural gas and crude oil.
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But, when a child starts playing with matches, it's time to have a calm, serious talk about the rules and consequences of this behavior. Oil markets are reflecting the consequences of the global game that is being played out. The stakes are always higher when natural resources are deemed to be tight. This creates leverage.
Leverage is best applied at the extremes. It is believed that we are at an extreme when it comes to oil inventories, production and demand. The graph below highlights the relative low level
of current US petroleum inventories versus prior years. Only took us 8 years to work our way back down to pre-shale 2014 inventory levels!
Let's be real here......going forward do we expect there will be another time in the modern history of US oil production growth like the one we witnessed from 2014 - 2020? Is another 'Shale Revolution' on the horizon?
History has shown that rapid production growth crushes the market for years to come without a similar expectation of rapid demand growth.
The upcoming OPEC meeting on February 2 should deliver the