But the massive changes in the financial markets surrounding oil have had at least as much effect on the downturn in energy prices, and the possibility of a rebound, as any pertaining to the supply chain of oil from the Middle East or here in the U.S.
Must Read: 12 Stocks Warren Buffett Loves in 2014
In 2011, I wrote a book outlining the most important of these financial influences on oil titled Oil’s Endless Bid. And while I’m not willing to say that the “endless bid” has disappeared forever, it has proved able to take a very long vacation recently.
Part of the reason for that is that the investment banks, which I pointed to as the strongest engine of the endless bid, have greatly reduced their engagement with the oil markets.
Morgan Stanley (MS) , Goldman Sachs (GS) and JPMorgan Chase (JPM) , along with the other large banks, have greatly reduced their oil desk activity or sold them outright. Much of their work included finding institutional and retail investors into the energy markets. That impetus is now largely gone.
And passive investment into oil has also taken a hiatus. In light of a rallying dollar and the deepest commodity deflation I have ever seen in a non-recessionary environment, more than $17 billion of investment in commodity index funds have disappeared already in 2014. Gold is down, as is copper and almost all of the grains. Oil is not immune from this ‘flight from the commodity trade’ as well.