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What is MDEF™ Investing? Strategy before tactics. Strategic investments dictate tactical actions in the Metals, Defense, Energy & Food sectors.

- Jeffrey C. Borneman

The Double-Edged Sword of Cheap Oil - ConocoPhillips Lays Off 10%

Jeffrey C. Borneman | September 2, 2015

Cheap Oil has arrived on the heels of Peak Oil and, while a boon to some, falling oil demand continues to add to the unemployment lines in America. ConocoPhillips (COP) today announced additional lays-offs of 1,800 workers decreasing its total workforce by 10%.

According to Fuel Fix the number of lost U.S. energy jobs from last fall through the end of June this year was 150,000. Today's announcement by ConocoPhillips should come as no surprise. The question is always, "Where is the bottom of oil prices?” Goldmann Sachs recently opined that it may fall as low as $25 per barrel. Their announcement is no doubt based on a thorough analysis of fundamentals. Nevertheless, in this case the question may not be accurately answered based on standard, fundamental supply and demand equations.

Since the Saudi announcement last November that it would not cut production, oil prices have marched steadily downward, taking global economies, currencies, employment rates and standards-of-living with them (See Venezuela food riots, nationalization). In what has been generally described as a "game of chicken" between Saudi Arabia and the West, late last week it appeared that the Saudis were the first to blink when Venezuela requested an emergency OPEC meeting to discuss cutting supply. It is rumored that the Saudi regime is attempting to coordinate the curtailment of supply with Russia, and it is certainly conceivable that plummeting oil prices have led to such machinations.

It is further worth remembering the Saudis said last December that oil could fall to $20 per barrel and it would not cut supply. This confluence of circumstances and related posturing clearly demonstrate two unspoken likelihoods: That the Saudi Royal Family is ready and willing let all of OPEC go bankrupt to hold its position and power, and that the regime has lost the game of chicken with U.S. shale producers (who have cemented astronomical growth in production) and may be scrambling for a way out of past brinksmanship without actually admitting defeat.

About that Supply & Demand of Oil

Fundamental analysis is a simple gauge in a static world, where adjustments can be made to rectify imbalances of supply or demand. Assuming there is ample supply and dwindling demand, demand is often manufactured artificially, or alternatively, the impetus for organic demand put in place.

Organic demand is preferable, as it tends to be peaceful. In contrast, manufactured demand may easily manifest as violence. The Goldmann Sachs call for $25 per barrel was based on its fundamental analysis and assumed a static view of "all things being (relatively) equal" in the world of slowing economies.

The difficulty is that nothing could be further from the truth – today we have a world at the breaking point. There is simply too much at stake and too much global interdependence for a fundamental analysis of oil (based on constants that do not exist) to produce reliable predictions.

Oil is the lifeblood of numerous economies with too much debt, too many refugees, too much unemployment, and too many governments out of monetary ammunition to handle this economic pivot - and many that now fear for their own survival. Yes, oil may fall further but there will be a point at which the collapsing price and ensuing economic pain become so great that a violent move to cut supply may appear to be the most prudent option.

Remember, the markets always overreact (on both the upside and downside). If such a violent scenario unfolds, we will not be concerned with testing $25 per barrel but whether we will smash through (WTI) resistance around $148 per barrel.

In such a scenario, the manufacturing of demand will have cured the unemployment problem but created many more in its wake.















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