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Is $30 a Barrel Oil Coming Soon?
Will the price of oil continue to fall and could it drop to $30 a barrel? Let’s find out.
1)Supply and Demand
When it comes to oil, all you need to do is look at supply and demand. There are other factors at play, such as central bank action and the U.S. dollar, but supply and demand will always win out as the driving forces. As far as supply goes, it’s massive. Saudi Arabia, Russia and the United States have all been producing at breakneck paces. There has also been speculation of rising supplies in Iran. In the United States, U.S. oil production is the highest it has been since the 1970s. There are two reasons for this: cheaper credit facilities post-2008 and technological advancements. (For more, see: What Determines Oil Prices?)
Everyone talks about supply as the key contributor to the slide in oil prices. That’s because there’s concrete information available and nobody will put themselves at risk of being called out for being wrong on the demand side. While supply plays a big role, the demand side of the equation is being overlooked in a big way. The first example is that Saudi Arabia’s oil exports to China just hit a five-month low. And China is the key factor here.
China is the second-largest economy in the world, but its relentless gross domestic product (GDP) growth over the past 20 years is beginning to wane. Because of this slowing GDP growth, the Chinese government has tried everything to keep the engine running and its economic locomotive at full speed. In order to do this, it has encouraged excessive leverage and created what is likely to be the biggest economic bubble in history. Put simply, demand for oil coming from China has slowed because the real economy is not soaring as it has in the past. (For more, see: How China's GDP Is Calculated.)
Demand isn’t any better in the United States. The price of oil has largely been driven by central bank policies. In fact, central banks around the world have created numerous bubbles. When these policies begin to fail, you will see all these bubbles deflate. Greece is far from the biggest economy in the world, but it’s a first sign that central banks can’t save everyone and everything all of the time.
2)Global Deflation
On somewhat of a side note, you can also look at the oil rig count as an indicator for oil demand. The crude oil rig count fell in 30 of the last 32 weeks and is down 59% over last year. Why is demand low? The answer to that question can be summed up in two words: global deflation. Why do you think central banks have been so active over the past several years? It has been to prevent deflation. This can be effective in the short term, but it won’t work over the long haul. (For more, see: 5 Steps of a Bubble.)
3)The Frackers
The plunging price of oil will have a devastating impact on the fracking industry. Some of these companies have taken on too much leverage to be able to survive with oil below $55. They might be able to buy some time, but you’re going to see outright failures. Also keep in mind that frackers make up approximately 20% of the junk bond market, and that 60% of junk bonds are in energy. This is bad news for junk bonds. (For more, see: Can Fracking Survive at $60 a Barrel?)
4)The Bottom Line
Will oil hit $30 a barrel? This could happen at some point over the next 18 months. Will it stay that low for the long run? Likely not.

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