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Page added on November 27, 2014
Bottom for oil in 2015 is $35
Oil could plummet to $35 a barrel next year if OPEC doesn’t reach an agreement by the spring, oil price tracker Tom Kloza said Wednesday.
The founder of Oil Price Information Services told CNBC’s “Squawk Box” that he expects at least a “lip service agreement” from OPEC members Thursday, when they meet to discuss output, but the members will largely ignore it, creating a bigger crisis in about six months.
“When you look at the second half of 2015, that’s when you see oil beginning to dwarf demand by about a million, a million and a half barrels a day,” he said. “Thirty-five dollars is a possibility if they don’t get an agreement next spring because that’s when the oil really starts to build and you can have a billion barrels of oil with really no place to put it.”
At that point, U.S. deep-water drilling and mature shale projects can keep pumping, but shale plays that require significant investment could be cut, he said.
The slowdown in shale growth has already begun, and the growth of the U.S. oil industry could slow to 750,000 barrels a day from earlier estimates of 1 million barrels.
Oil prices have fallen 30 percent from their highs in June.
Traders are likely to see some unofficial production restraint from Saudi Arabia and its Gulf Arab allies as they aim to chill the production growth rate among U.S. producers and prevent excess supply from flooding the market, said Greg Priddy, director of global energy at the Eurasia Group.
The chance that OPEC produces a disappointing headline at the meeting on Thursday has not been completely priced into oil markets at this point, but it’s unlikely that oil will fall to the $50-to-$60 range on the news alone, he said.
“If the full-flood scenario played out and you actually had to kill off a million barrels a day of production growth, we could very well be there,” he said.
Kloza said OPEC ministers may agree this week to cut production by 750,000 to 1 million barrels per day, but members will likely produce all they can, and there will be no compliance with the accord, except from the Saudis, Kuwaitis and the United Emirates.
Iran, Iraq and Venezuela are unlikely to stick to an agreement because they are already below their quotas and the production levels they need to support social programs and balance their budgets, he said.
Priddy said the Saudis are likely to seek language in a communique that commits members to share the burden of production cuts, but the meeting is unlikely to produce quotas with individual numbers for members.
The problem with the Iranian position is that, as far as they’re concerned, the country has been cutting production for several years due to sanctions related to its nuclear program, which it sees as unfair and enriching Saudi Arabia, he said.
Unplanned oil outages over the last four years caused by the Iran sanctions and turmoil in Libya have offset the overage of U.S. shale growth in the face of relatively weak demand, he said.
“It’s kind of masked the effect of the shale boom, and we’ve finally gotten to the point where the supply side has really won that battle, and OPEC has had to reckon with that, but those disruptions are why they haven’t had to do so thus far,” Priddy said.
28 Comments on "Bottom for oil in 2015 is $35"
SugarSeam on Thu, 27th Nov 2014 7:37 am
where are the economists preaching how supply and demand “always” works?
also, … no way.
Davy on Thu, 27th Nov 2014 8:10 am
We have a disconnect in the financial sector with oil supply and demand and the rest of the economy. The economic system seems to have destabilized to the point where normal market forces and price discovery is in a vacuum. This is often the case near an inflection point or break.
We know the oil sector and the economy has a very fundamental range for health. We know there is debt inflation. Yet, when oil prices are discussed it is all about supply and demand as if we were still in a normal economy with normal fundamentals.
We must at this point look at descent dynamics. We see randomness of economic abandonment. There is dysfunctional reactions to distorted economic conditions. We see irrational response from confidence issues. Confidence is the primary driver of liquidity. Liquidity is the primary driver of our complex global economy. These forces must be recognized in this oil supply demand relationship especially when the zone of healthy prices for oil and the economy is breached.
We are no longer in a normal economy. We are in a repressed economy with low rates and abnormal liquidity. The debt levels are so high everywhere that the application of debt must be maintained and increase at every higher levels because of diminishing returns. This is especially true with increasing levels of debt. Any forecast of prices and production now is flawed because of this new environment.
shortonoil on Thu, 27th Nov 2014 8:13 am
The price of oil will sell at the price that the economy can afford to pay for it:
http://www.thehillsgroup.org/depletion2_022.htm
That will be $77/barrel for WTI’s yearly average in 2015, and $66 in 2016. Most shale producers will find financing as long as they can show short term positive cash flows, and that is not likely to go negative for most of them until 2016.
http://www.thehillsgroup.org/
Northwest Resident on Thu, 27th Nov 2014 9:02 am
The Age of Oil will end with a bust. Right now, the oil industry is emerging from a debt-fueled boom of epic proportions. The only way that the “shale boom” was made possible was through astronomical levels of debt accumulation. So, THAT was the BOOM. And this is the BUST. There aren’t any more Bakkens and there aren’t any more Permian Basins or Eagle Fords — NOTHING left to serve as a justification for ramping up a new round of exponentially more astronomical debt to generate another BOOM. That’s why, regardless of what OPEC or Russia or anybody else does, we are witnessing the last bust. Maybe a pathetic little mini-boom or two somewhere in the future, but I doubt even that.
danlxyz on Thu, 27th Nov 2014 9:17 am
I love these guys saying that OPEC and mostly KSA must solve the problem. As if lower oil prices are a problem.
Who is increasing production? The USA and particularly Texas and North Dakota are increasing production. Shouldn’t they be the ones to lower production, if anyone?
Well luckily Texas has the power to legally do just that. The Texas Railroad Commission can issue a statewide proration order. A 25% reduction would probably do the trick.
Oilmen around the world would celebrate, except maybe not Texans. 🙂
Northwest Resident on Thu, 27th Nov 2014 9:25 am
Oil Prices Collapse After OPEC Keeps Oil Production Unchanged
WTI ($70 handle) and Brent Crude (under $75 for first time sicne Sept 2010) are collapsing… as will US Shale oil company stocks and bonds (and thus all of high yield credit) tomorrow. The Saudis are “very happy” with the decision, Venzuela ‘stormed out, red faced, furious.’ Commentary from various OPEC members appears focused on the need for non-OPEC (cough US Shale cough) nations to “share the burden” and cut production.
…
This is not good news for the US credit market…
According to a Deutsche Bank analysis looking at what the “tipping point” for highly levered companies is in “oil price terms”, things start to get really ugly should crude drop another $15 or so per barrell. Its conclusion: “we would expect to see 1/3rd of US energy Bs/CCCs to restructure, which would imply a 15% default rate for overall US HY energy, and a 2.5% contribution to the broad US HY default rate…. A shock of that magnitude could be sufficient to trigger a broader HY market default cycle, if materialized. ”
http://www.zerohedge.com/news/2014-11-27/oil-prices-collapse-after-opec-keeps-oil-production-unchanged
Davy on Thu, 27th Nov 2014 9:42 am
I wonder what will happen when and-or-if production is cut and nothing happens. What are the big plans then? Plainly we are seeing actions with no normal corresponding reactions in multiple areas today across the spectrum of human activities and events. This is because there is more at work within the system. Our complex global system is an intersection of levels of abstractions that unfold in concrete self-organizing cycle of activities. How can econ 101 or linear thought processes understand or shape this? This is especially true now as we are nearing a turning point, a break, or an inflection probably longer term and shorter term simultaneously in multiple areas. The climate as an example of the above is wildly reactive and stable at the same time. We are going to see strange events occur in this situation of turbulence as we approach a possible phase change.
Northwest Resident on Thu, 27th Nov 2014 9:54 am
Davy — That’s right. It’s like we are entering the “black hole of economics” where none of the Econ 101 or tried-and-true rules of economics apply anymore. Time and space are warping around us, going forward nothing will be as it seems to be and anything can happen. The wild card factor in all of this is collective confidence in the system. When (not if) that collective confidence begins to break down, all hell will break loose.
GregT on Thu, 27th Nov 2014 10:13 am
All Hail the Omnipotent Econ 101!
Growth!
Growth!
Growth!
The more I look around me, the more it appears that the guy from Patmos was correct. The horsemen are saddling up.
Northwest Resident on Thu, 27th Nov 2014 10:14 am
Junk Bond Carnage, One Company at a Time
The time for “buying time” before ultimate collapse is running out of time. Here’s how bad it is:
“This is just the beginning. Yield-desperate investors, driven to near insanity by the Fed’s zero-interest-rate policy, were holding their noses and closing their eyes, and picked up the riskiest junk just to get a tiny bit of extra yield, and that demand drove down yields to ludicrous levels.
But reality – as Colt bondholders are finding out – cannot be pushed out forever. And suddenly investors decide to take a whiff and glance at the junk they’re picking up, and they suddenly see some of the risks that have been obvious all along, and they’re either walking away or clamoring for more compensation. That’s what is happening at the riskiest end so far.
Junk debt can swoon with stunning speed. The market becomes illiquid as buyers evaporate before your very eyes. If a financial institution faces redemptions and has to sell in that environment, its fund would take terrible losses.
During the financial crisis, when the new money dried up for highly leveraged companies, yield on CCC-rated bonds soared above 40%, and the value of the bonds collapsed. The Fed sacrificed savers and retirees to bail out these bondholders with a flood of liquidity and interest-rate repression, no questions asked. With the arrival of ever cheaper money, defaults were pushed into the future.
During the taper tantrum last summer, CCC yields jumped from 10% to 16% in no time, only to get another Fed-inspired reprieve. But now, even the Fed frets about the bubble in that space, about excess risk taking, and investors blindly “reaching for yield.” It’s worried about banks and large institutional investors getting caught with their pants down again, and how that could – given the enormous amounts – jeopardize “financial stability,” which has become the Fed’s mantra. So the Fed has been hammering on them, and it has sent its regulators into the fray to put an end to the frenzy, and another instant rescue when the bloodletting starts in serious is now doubtful.
But when should investors panic? (my comment: any time now) Ha, there’s some new thinking about the markets in this crummy global economy where nearly all assets are overvalued. Read… It’s Official: Party Now, Apocalypse Later”
http://wolfstreet.com/2014/11/27/junk-bond-carnage-one-company-at-a-time/
Ralph on Thu, 27th Nov 2014 10:22 am
OPEC says no change.
WTI says $70? anybody?
Davy on Thu, 27th Nov 2014 10:28 am
Greg, they are calling out the posse and the sherif that is calling them out goes by the name of reality.
ghung on Thu, 27th Nov 2014 10:58 am
WTI about 68 dollars. 35? Halfway there.
GregT on Thu, 27th Nov 2014 11:00 am
Midnight Oil- Shakers and Movers
Won’t you come on down the line, away from barren ground
The harlot and the autocrat, are they driving you further down
The season’s rhymes, they anchor me, against the raging tide
Take you to the last wild place, skin and the stars they embrace
A caveman could a saint become, on a hospital ward on the Somme
We can dive into distant amoebas, our wings could melt in the sun
I can shake, I can move, but I live can’t without your love
I can break, Over you, but I live without your love
Our poet Henry Lawson, he named them, the lay’em out brigade
Here they come, there they go, oh great god of development
Don’t really know you yet
Coastline hosed down washed away, economics now there’s nothing left
Tomorrow’s child takes concrete footsteps
And they’ll drink champagne or be damned
And the storm is breaking now, yes the storm is crashing down
shortonoil on Thu, 27th Nov 2014 11:09 am
I wonder what will happen when and-or-if production is cut and nothing happens.
Reducing production can not increase oil prices past the point that the economy can afford to pay for it. We are most likely now at that point. OPEC’s only power would now be to create shortages. The price is now being controlled by the economic, and thermodynamics of the petroleum production, consumption equation. The maximum price for a unit of petroleum is set by the molecular structure of the substance, not some guy in a turbine, or some central banker. The maximum value of petroleum was set 5.7 to 570 million years ago when it was formed. The sooner we come to terms with the realization that we are dealing with a finite substance, with finite properties, the better off we will be.
http://www.thehillsgroup.org/
rockman on Thu, 27th Nov 2014 11:12 am
Dan – “Well luckily Texas has the power to legally do just that. The Texas Railroad Commission can issue a statewide proration order.” I’m pretty sure we’re a long way from that day. Some know: every month the TRRC sets the “allowable”: the percentage all Texas oil wells can produce. Since the early 70’s the allowable has been continually set at 100%. The TRRC used the allowable LAW to control the price of oil prior to the 70’s when the US was THE oil cartel.
But this isn’t the 50’s anymore. I don’t know how bad it would ever get for the TRRC to cut the allowable. But if they try I would imagine it would to the Mother of All States’ Rights battles with the federal gov’t.
GregT on Thu, 27th Nov 2014 11:13 am
“The sooner we come to terms with the realization that we are dealing with a finite substance, with finite properties, the better off we will be.”
So in other words, we’re screwed.
Pveroi on Thu, 27th Nov 2014 11:40 am
I think it would be useful to note that US corps assume African shale is theirs (duh). Add Africa to America and their narrative is more plausible in the short term.
antaris on Thu, 27th Nov 2014 11:46 am
Short if you are right, baldness will increase all over the world from people scratching their heads.
rockman on Thu, 27th Nov 2014 1:18 pm
“I think it would be useful to note that US corps assume African shale is theirs (duh).” Actually there are a number of US companies chasing oil/NG in Africa but most projects are being conducted by foreign companies…especially China.
shortonoil on Thu, 27th Nov 2014 2:42 pm
So in other words, we’re screwed.
We have had 35 years to start doing something about the inevitable outcome of the course that our civilization is following. Yesterday, I almost got run over by an old lady driving an SUV that was large enough to house an entire family of Ethiopians, and their herd of goats. She must have been using a periscope to see over the steering wheel. She was driving 6 tons of steel, 20 miles to get a can of cranberry sauce, and a few “things” for Thanks Giving diner.
I’ve been in the extractive resource industry all of my life. I’ve seen strip miners tear the tops off mountains to get to 3 feet of coal. I’ve seen structural stone operators blow a quarry that had been running for 150 years all to smithereens just to make a quick buck. Never with any regard for what was going to come tomorrow; not the slightest realization as to what they were taking, or who was going to have to pay the price.
Of all the resources available to us oil has been the most important. It gave us the power to reduce disease, eliminate hunger, live comfortable lives free of pain, and toll. So we took it, and took it, and used it for any notion that immediately fulfilled our fancy. Never with the slightest realization as to what we were taking, or who was going to have to pay the price. Yes, the bill is coming due, and the price will be stamped on the receipt; if that’s what you mean by “we’re screwed”.
penury on Thu, 27th Nov 2014 3:09 pm
It is probably just me, but I have noticed an apparent change in the tone of some articles both here and on other sites just in the last twenty-four hours. I agree with NWR and Short that perhaps reality is showing up. Lets hope for one more merry Christmas, Hanukkah. or EID before we really need to face the oncoming darkness.
GregT on Thu, 27th Nov 2014 10:37 pm
“if that’s what you mean by “we’re screwed””
Yes Short, that and a myriad of other problems that we have created for ourselves while we partied like there was no tomorrow.
MKohnen on Thu, 27th Nov 2014 11:38 pm
danlxyz, thank you for stating what should be obvious. I’ve been wondering why everyone expects OPEC or Russia to bail out a situation caused by an oil glut. What about shale oil and tar sands? Oh no, that can’t happen! That would be a tragedy. Good Canadians or US’ers (I don’t want to call them Americans, since Canadians and Mexicans are Americans, too) will lose their jobs! Everyone knows that’s what those damn Russians and Arabs are for. They don’t *need* stuff like we do, so they should bite the bullet and cut back right now. After all, haven’t we been good to them? Don’t they feel grateful at all?
I guess if Russia doesn’t collect any taxes from oil, they’ll be right back where they were in 1991. And remember the big Russian Revolution that happened? No? It’s cause it didn’t! But many in my family are heavily dependent on the Canadian oil industry. They’re buying houses in Florida, they’re trading notes on their latest trips to Mexico, Bahamas, etc. Tell them that they won’t starve, but they’ll have to give that shit up … and I guarantee you you’ll see Big Trouble in Little Canada.
Dave Thompson on Fri, 28th Nov 2014 1:29 am
I still say oil will ratchet back up after the consumer rush season is over. Some time in mid January. The PTB are in cahoots and know that crashing the system now serves no profit.
Makati1 on Fri, 28th Nov 2014 3:01 am
I suspect that there is more to the sudden drop in oil prices than a sudden glut on the market. If glut is the truth, then there should NOT be a spike in prices when the next ME exporter goes offline due to internal problems. We shall see.
Kenz300 on Sun, 30th Nov 2014 11:05 am
Oil currently has a monopoly on transportation fuels…….
China has made a commitment to support electric and hybrid vehicles…….
What China does will have a huge impact on the auto industry and the rest of the world.
kushal kumar on Sun, 30th Nov 2014 5:30 pm
The oil and gas turmoil just begun in November 2014 impacting global economy was well predicted on 2 June 2014 to begin in November this year by this writer in article – ” Stressful times ahead for world economy in 2015 and 2016″ – published online at http://www.astrologyweekly.com. The purpose was and is to serve as a guide to investors and economy think tanks/policy makers. Hopefully, the purpose is being served.