Oil: Priced for Perfection in an Imperfect World

Below $30, oil is priced for perfection. Iran sanctions were lifted sooner than expected, but the market will be disappointed that Iran can't instantly increase production by 1 million barrels/day. The planned IPO of assets of Saudi Aramco reflects not capitulation by the Kingdom, but the building of a war-chest with which to attack growing US "energy independence." Saudi's new willingness to flirt with geopolitical risk embeds calls that the present oil market is not pricing. Stories of US shale productivity have gotten way ahead of the reality of below-breakeven prices, and rising bankruptcies. And recessionary expectations of a demand collapse ignore that prices are already so low consumers have no incentive to stop buying gasoline. Even if all these perfections are delivered, then oil has no reason to fall further. But they won't be, and this journey below $30 is likely the climax phase of a sloppy bottoming process.