What Most People Don't Get About Crude Oil

Oil prices fell 4.9% yesterday (West Texas Intermediate crude price).

The conventional wisdom is that as oil prices fall, producers will trim high-cost oil production, and we'll hit some new equilibrium.

Here's the thing that most people don't get: Producers have bills to pay. I don't care whether you're talking about some Kuwaiti oil sheik or some Texas wildcatter, they all got bills to pay.

Those bills have to be paid with income.  Let's say your source of income is oil. The price of oil goes down. How are you going to pay those bills?

The simplest thing to do is PUMP MORE OIL.

The less money you make on every barrel of oil, the more barrels you have to pump to get anywhere close to the money you need to pay your bills.

See where this is leading?

Let me give you an example.

Goodrich Petroleum (GDP) has already said that its capital spending (exploration) will drop nearly 50% in 2015 given the drop in prices. At the same time, Goodrich expects its output will increase 30% to 40%.

So, if we are expecting shut-ins of production to help the oil price, it likely won’t happen near term. 

My target on oil was $60. We've reached that.  That doesn't mean we have to bounce here. Sure, oil is oversold. But there are easier ways to make money right now than in the energy markets.