Oil Rout Fuels $2 Trillion Global Stimulus

Sal Gilbertie is president and co-founder of Teucrium, an issuer of single-commodity-focused exchange-traded products like the Teucrium Corn ETF (CORN | D-84). He has deep experience in commodities markets. In 1982, Gilbertie began trading at Cargill's oil arm in New York. He has been involved in the financial markets since that time, most recently with Newedge USA LLC, where he headed the Renewable Fuels/Energy Derivatives Over-the-Counter execution desk and was an active OTC derivatives trader and market maker.

ETF.com recently sat down with Gilbertie to get his take on the latest developments in the oil market and his outlook for 2016.

ETF.com: Where do you see oil prices going in 2016?

Sal Gilbertie: It's reasonable to assume an active 2016 trading range of between $40 and $65 for WTI, with Brent at a fairly consistent $5 premium to WTI, give or take a dollar or two around the $5 differential.

It’s entirely possible to see an ultimate range of $30 to $90 on the extremes, but any deviation out of the $40 to $65 range would be an aberration that is tradable by only the most nimble of traders. I’ve found through experience that temporary extreme moves up or down are generally driven more by emotion than anything else, and they are really tough to capture with any sort of rational trading program.

ETF.com: What's your outlook for supply? Is the recent drop in U.S. production something that will continue?

Gilbertie: I believe the recent drop in U.S. production will continue until the weakest of companies are flushed out and the most marginal of production sites are shuttered. This will probably take well into 2016 to occur and will be fairly visible to investors, but any continued U.S. production decline is entirely dependent on WTI prices staying below $55 or so.

As for overseas production, virtually everything depends upon Saudi Arabian policy. The Saudis are making no move to curtail their production, which seems to support their current trifecta wager of retaining global market share, hurting the pocketbooks of their adversaries like Iran and ISIS, and resetting U.S. production economics so that production from the frontier technologies like oil sands and fracking are marginalized.

In addition, the Iranian nuclear deal will likely bring more oil onto the global markets by mid- or late 2016. Increased Iranian production is going to help offset any further declines in U.S. production, and it may also offset potential declines from countries like Venezuela, Brazil and Russia, whose production is declining due to lack of foreign investment in their energy sectors because of their uncertain internal political policies. All of these factors should keep U.S. oil production levels under pressure through 2016.

ETF.com: Demand is growing fast this year thanks to lower prices, but will the slowdown in China and emerging markets derail that next year?

Gilbertie: The decline in oil prices will continue to stimulate demand, and, in fact, I believe the decline in oil prices will ultimately help curtail the economic slowdown in China and other emerging countries. The result of crude oil falling about $60 a barrel from its peak in July 2014 is about $2 trillion in annualized global oil savings to consumers of all kinds, from individuals, to businesses, to governments.

Remember, oil savings go directly into the pockets of consumers, and consumption is the major driver of economic growth. With oil savings, we are not talking about fairy-tale stimulus money that seems to benefit banks and no one else; we are talking about real, actual dollars of spending money in the pockets of consumers. Consumption of everything, including energy, should ultimately rise.

ETF.com: Do you see geopolitical risks from these low oil prices? Could Saudi Arabia or Russia or another country become destabilized if prices stay low?

Gilbertie: There are certainly geopolitical repercussions possible as a result of the precipitous fall in oil prices from their peak in 2014. Countries like Venezuela, Brazil, Nigeria, Algeria, Libya and others whose economies are fragile and highly dependent on oil revenues could face some degree of instability or, more likely, serious challenges to their political status quo.

Countries whose economies are more diversified and perhaps less oil-centric but still dependent on oil prices to a significant degree (like Russia), along with countries with vast foreign currency reserves (like Saudi Arabia) should be able to weather low oil prices for quite some time.

I’ve been in the commodity markets for more than 30 years, and I believe low prices will stimulate demand to a degree that the current low price of crude oil will not hold long enough to outlast Saudi foreign currency reserves.

ETF.com: Is there anything else you'd like to add?

Gilbertie: It’s worth repeating that the approximately $2 trillion of annualized savings from the oil price decline is a global stimulus package of unprecedented proportions. The decline represents actual spending money for individuals, businesses and governments; it is literally regenerative new spending money that global consumers have placed in their hands day in and day out for as long as oil stays at or near current price levels.

The Saudis know this, and their current policy of record-high production is probably doing more to stimulate the global economy than any other single action by any country or central bank. There are a variety of economic studies I’ve read over the years that suggest large changes in the price of oil—up or down—often take several calendar quarters to ripple their way through the economy.

The price decline in crude oil ran from July 2014 through January 2015, which means barely three calendar quarters have passed since oil prices stabilized at lower levels. I believe the global economy may just now be beginning to benefit from the effects of lower oil prices, which should be a boost to everything, including oil demand.

As for the oil industry itself, it will certainly experience dramatic changes and some degree of stress due to lower prices, but the industry will come out stronger and more efficient in the end. And we’ll probably need that better efficiency when demand for oil reaches record levels in the not-too-distant future.