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Sailing the Winds of Market Volatility

Oil prices have been tumultuous at best. The winds of volatility have whipped the markets all over the place. News of supplies, production increases, Iran, and economic instability has played havoc. However, a storm is brewing on the horizon that may bring winds of change for many and generate a new trend before long.

Iran, Venezuela, and other hurting countries are calling for an OPEC emergency meeting. Rumblings of a willingness to discuss country limits within and outside of OPEC have begun to stir. At the most, discussions could influence prices but too many OPEC and non-OPEC members are desperate. The chances of cooperation are unlikely. Even if they did agree on limiting production, there are no good policing methods to insure honesty. Further, stockpiles of oil may take a while to use up.

Russia briefly entertained joining with OPEC to work on strategies to influence current market pricing but abandoned the idea in short order. Russia’s technology inhibits from cutting production then restarting it easily. Mexico is apparently considering joining in, as well.

In the meantime, Europe is due to release economic growth data, which isn’t expected to be positive, but there could be a few surprises in the mix. Ultimately, not a whole lot has changed.

However, lower fuel costs have positive impacts on economies. And the longer prices stay low, the more they have impact.

Consider this: An over 50% drop in fuel costs affects prices of everything sooner or later. Manufacturing costs go down, shipping costs go down, and gasoline pumps costs go down for consumers.

We may be in the very beginning of a market turn. As lower fuel costs begin to trickle down to reductions in material costs, then the costs of goods will ultimately go down.

As consumer disposable income goes up, demand will go up. And, if production falls off due to lower oil prices, a market turn will happen.

So what are the options for producers?

Even with such an ominous forecast for continued low oil prices it remains a difficult commodity to forecast for this week let alone next year. Companies need to continuously restructure strategies based on low cost oil until prices return. Thus, when prices do make a comeback, remaining players will be that much stronger in profits. Producers sustaining this market price pendulum must preserve cash, reduce costs, generate new income using the lowest costs possible, and diversify revenue streams.

Cash preservation involves leasing resources rather than purchasing. Third party contracts of services, equipment, and even labor are means for limiting cash outflow. I recommend including options to purchase leased resources when possible, so that when the market turns a first right position helps to secure potentially limited resources.

A market turn will not necessarily first reveal itself in increasing oil prices.

A market turn will not necessarily first reveal itself in reduced production, since over supply will need to be diminished.

A market turn may first reveal itself when production resources are in shortage, thus driving production costs up.

Reducing costs is a given. But these days, it has to be an ongoing process because services, commodities, and other resources are still going down. However, before long, diminished supplies and offerings will reverse prices in this depressed market. When the remaining available resources fall short of meeting demand, prices will go up. We aren’t there yet, but we could begin to see some reversals in the coming months. The more business closures, the greater potential for a shortfall in resources, that drives prices upwards.

When resources start diminishing and prices start to climb, end users could be in a pinch with increasing costs, while oil prices are still oppressed. Good sailors will navigate the winds of change and know when to lock in lower contracted prices before a cost reverse takes place. It is important to be watchful of trends indicating changes. It will not happen consistently across the board. Some categories will happen sooner than others. Each category will begin a price conversion as supplies fall short of demand.

As low cost producers increase production to generate revenue or at least displace lost revenues, we will start to get a clear picture of regional shortfalls in supplies. End users would also be wise to establish first right of refusal contracts on resources before competition kicks up and resources are less available.

Suppliers would be wise to keep an eye on their competition, especially in their region. Rumor mills may be lifesavers! The more indicators there are for competition closing, moving along to other industry sectors, or even contracting with end users, the greater the potential for a market reversal on the horizon.

We hope you had a great Labor Day!

Have a great week!

Jen
407-810-3102

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