Mar232020

money matters

"May you live in interesting times"

There is no more important influence of prices than supply and demand. Rooted in the core of capitalistic system is this price discovery method of supply and demand.

It like seems like every time I even type the word capitalism lately some part of my brain winces in fear of the incoming flak from some readers.

However, capitalism and its pricing mechanism of supply and demand are benign in reality. Both the system of capitalism and its mechanism supply and demand is, in the simplest of terms, people buying at the price they are willing to pay from sellers selling at the price they are willing to take.

Pretty simple stuff really and whether one is a supporter of capitalism or a detractor of it, both sides of the argument practice it almost every single day of their lives.

A no-more near perfect example of supply and demand and its effect on prices is the recent 25% price thumping of West Texas crude oil on March 9th. One could say it was caused by both the Russians and the Saudis, for if either one hadn’t acted, the price of oil would have likely remained calm. But both did.

Russia, a non-member of the Organization of Petroleum Exporting Countries (OPEC) began the party by refusing to cut oil production by half a million barrels a day, a request by the consortium of oil producers in response to the falling demand worldwide caused by consumer inactivity in response to the Corona virus.

The Saudis, angered by Russia refusal to cooperate in an orderly cut-back, retaliated by opening the spigots, signaling the first shot in a price war that comes with a double whammy. Increasing supply while demand is falling. The double and synergistic action of supplying more oil while demand is falling yanks both sides of the price curve, essentially providing twice the reason for an exaggerated and historic price collapse.

The 25% price drop was one of the steepest in history, surpassed only by the 31% trouncing oil took in 1991, when the U.S. launched “Desert Storm”, the military move designed to force Iraq from Kuwait. During that event, in an apparent relief price move, the market sold off on the news, anticipating a resolution to the previous spike in oil prices Iraq’s move into the region caused months earlier.

This time around West Texas crude, a benchmark type of oil among the many versions of sold, ended up the day at $31.13 a barrel. The good news is such a price reduction benefits the economy by an estimated one trillion dollars in savings. The markets however saw it as a sign of the times, which is a continued erosion in spending by the consumer as social interaction of all kinds grind to a halt because of contagion fears.

The Dow fell a record setting 2000 plus points by days’ end, setting a single day point drop record, shell shocking analysts and investors alike. March 10 brought a rebound both in oil prices and the Dow, with the Dow rising more than a 1000 points. Short lived, the following day the Saudis vowed even more production sending oil back to the doldrums it saw two days prior.

The lower oil prices will benefit the obvious heavy users of oil products such as the airlines and other transportation companies.  The consumer will also benefit from lower gas prices and the likely fall in prices of the myriad of products produced by petroleum and its derivatives.

For the time being however, the collapse of oil signifies just another symptom of a sick and getting sicker world economy caused by the decrease in social interaction and travel brought on by the increasing fear of the event that is the Covid-19 pandemic.

This article expresses the opinions of Marc Cuniberti and should not as individual investment advice. No one can predict market movements. Investing involves risk. You can lose money. Mr. Cuniberti is an investment advisor representative through Cambridge investor research visors Inc. a registered investment advisor or can be contacted at SMC WEALTH MANAGEMENT, 164 Maple St. Number one, Auburn, CA 95603 530-559-1214 SMC and Cambridge are not affiliated. His website is MONEYMANAGEMENTRADIO.COM    California insurance license 0L34249