Futures Margin Explained
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At the low point of the 2008 crisis, there was a lot of concern about the possibility of a coming crude oil shortage. Some of the most pessimistic analysts even suggested at the time, that there was a possibility of global supply being completely depleted by 2020. As a result crude oil prices shot up to triple digits. This explosion in price caused a strong interest in renewable energy sources. By all accounts it looked to many people as if crude oil and fossil fuels were past their glory days. It doesn’t take a clairvoyant to see that crude oil may not be first place among the energy sources of the future. The decreasing price sensitivity of oil was a considered telltale sign of investors turning their attention away from crude oil and towards other alternatives. Meanwhile the stock prices of oil companies were telling a completely different story and crude oil prices did fall to dramatic lows only half a year later, proving the pessimists wrong.
Global Crude Oil Supply
Back in 2018 when President Trump withdrew from the Iran nuclear deal, and in doing so reinstated sanctions on Iranian crude oil exports, fears of a possible escalation pushed oil prices above $64. After it became clear that the situation would be contained, prices became a lot more stable. Even when the conflict at the Strait of Hormuz posed the risk of disrupting gobal supply routes or when the two countries exchanged missile strikes, crude oil failed to approach the previous $64 price level. There are two fundamental theories for why the price of crude oil continued to remain stable and they’re not mutually exclusive. The first reason is that investors assumed neither party had an interest in further escalating their conflict to an outright armed confrontation. It seems the marked had already priced in this political show of arms.
The second reason is a lot more interesting. The idea is that over the past decade, the economic importance of crude oil has been declining. This is partly because of the large number of new oil wells, as well as the fact that a few countriees chose to ramp up their production significantly. One of these countries is the US of course. The current administration’s policy of de-regulating the energy sector, and the fracking industry in particular, has caused what can only be described as an energy revolution in the country. The US now produces approximately 12 million barrels of crude oil every day. Only the past three years daily production grew by 20-25%. For comparison, those 2-2.5 million extra barrels that US production increased by are the same number Mexico’s currently produces on a daily basis. This has made the US the world’s leading produces of crude oil.
Meanwhile Washington continues to suppress other major producers of crude oil. Venezuela and Iran have been practically excluded from the global oil market while the OPEC countries are facing constant pressure by President Trump to reduce their production. There are still massive deposits available for extraction across the world, so these measure seem mainly geared at opening up the market for US oil and it’s interesting to think about just much crude oil could be produced if there were absolutely no international restrictions. It seems current prices are being kept artificially high by limiting the available supply to keep profits high for oil producers.
The main reason it’s necessary to keep prices high, is that demand for crude oil has been surprisingly stagnant in recent years. According to one of OPEC’s reports, in 2020 Europe’s daily demand will declime by approximately 300,000 barrels, while the Asia-Pacific region’s demand will drop by 800,000 barrels, or 0.21% and 0.99% respectively. The only region where demand is still increasing is the US, but even there the growth of oil demand is predicted to slow by 0.8%.
The correlation between GDP growth and demand for crude oil isn’t as strong as it used to be, showing that the sectors that rely heavily on oil aren’t the main engines of economic growth anymore. The process itself is reminiscent the changes agriculture went through in the early 20th century. For most countries, agriculture used to make up 30-40% of their national income, however, today that number is less than 5% for developed countries. The oil industry could be undergoing a very similar transformation because it’s possible that we’ve already reached the upper limit of crude oil consumption and are instead focusing on different (mainly digital) sectors of the economy. The way to substantiate these claims would be by comparing the S&P 500 sector performances. If we take a closer look we’ll see that the energy sector was the only one wit ha negative performance. The S&P Energy index declined by 4.42%, while the IT sector index (S5INFT) grew by over 51% over the same time period.