Let's talk about how Trump's oil price shock isn't over.... - Belle of the Ranch

[TexasTowelie]

Well, howdy there Internet people. It's Belle again. So, today we're going to talk about how Trump's oil price shock isn't over.

Okay. So, if you were to look through the headlines right now, you'd undoubtedly see quite a few telling you that some major investment house or some big name in oil or investing is trying to warn people that the prices aren't done going up and some of them are forecasting some pretty drastic climbs.

That brings us to our question. "Belle, can we get a breakdown on why JP Morgan, the IEA, and everybody else is saying oil prices will go up more? I'd also like a clear answer on whether that oil price increase will send gas up more. And if you're feeling generous, work in what physical and paper oil is. Some of the headlines even say it's simple math, but it sure doesn't seem simple. Any help would be useful. They're talking about a 50% increase in oil. I can't take a 50% increase in gas.”

Okay. So, we're going to work backward through your questions because it'll help with building blocks on this one.

Physical and paper oil. That's two pricing methods. Paper oil is contracts, futures, stuff like that. Physical is literal oil and barrels and the price that is paid. The prices don't have to match perfectly, but they should be close, and they're not at all. And generally, if the physical price is high like it has been, the paper price will catch up.

So assuming oil price continues to rise, yes, gas prices will continue to rise, but it's not one for one. If oil goes up 50%, gas typically doesn't go up 50%. Under normal circumstances, a 50% increase in oil would lead to a 25 to 30% increase in gas at the pump. But it's worth noting that's under normal circumstances. This is, I hate to use the word unprecedented.

On to why big names see prices rising even more. It's the simple math they're talking about. I'm going to use made-up numbers here to keep things simple.

Let's say your country needs 10 million barrels per day. That's your demand. Your country keeps a couple million barrels per day in a cave or a hollowed-out mountain or whatever. That's your inventory. Then you have a supply of 8 million barrels per day coming in from domestic production and imports. Right now, you're fine because your inventory of 2 million plus your supply of 8 million equals your demand of 10 million. That's perfect.

But let's say your supply drops by 1 million barrels per day because some genius didn't understand geography and started a war that disrupted oil supply. The paper oil price may be calmed by the genius saying the war will be over soon. The physical oil price does not care what the genius says. It only cares about supply plus inventory in comparison to demand.

If demand is the higher number, prices will go up. It's unlikely that your demand will go down significantly without price increases. And generally, it takes a large price increase to stop people from driving as much. That's your simple math. Good old supply and demand.

Forget excess capacity stuff or the shale analysis or any of the other stuff. That's all important. But all it boils down to is not enough supply and inventory to match demand. Therefore, prices will go up.

Anyway, it's just a thought. Y'all have a good day.