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Page added on February 24, 2015

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Is Oil Returning To $100 Or Dropping To $10?

Consumption

If you have been following the price of oil over the last few months, the chances are you’re a little confused. On the one hand you have the likes of A. Gary Shilling who, in this Bloomberg article, loudly trumpets the prospect of oil at $10/Barrel, and on the other there is T. Boone Pickens, who, at the end of last year was predicting a return to $100 within 12-18 months. Pickens prediction has moderated somewhat as WTI and Brent crude have continued to fall, but in January he was still saying that oil would return to $70 or $80/barrelin the near future. So, who is correct 

The answer is neither one. As with most things in life it is unlikely that the truth lies at either extreme. Pickens, and Shilling and other commentators suggesting that oil will fall to levels not seen since 1998, purport to have sound reasons for saying what they do, but the real reasons for such comments are most likely the two oldest human motivations in the book, greed and hubris. “Talking your book” is nothing new in financial markets and, while Pickens has an insider’s knowledge of the oil business, he also has a massive stake in driving oil higher however he can. Shilling is in the business of garnering eyeballs and clicks, hence the competition for the most outrageous prediction among the bears. 

I know it isn’t sexy and it probably breaks some unwritten rule of internet hackery to say it, but the most likely scenario is that WTI futures will bounce around current levels for a while before gradually recovering to the $60-$70/Barrel level. It could even reach Pickens’ revised $70 or $80 level before too long, but we are unlikely to see $100 in the near future without some major external influences. 

Now that the dust has settled somewhat, the reasons for the big drop are becoming clearer, and it is clear that supply was not the only factor. It was obvious for a while that as fracking unlocked oil deposits in shale and sand that had previously been thought unreachable, supply, particularly in the U.S. would grow considerably. That wasn’t seen as too much of a problem by the market, though, until questions about slowing global economic growth and a rapidly appreciating Dollar were added to the mix in the middle of last year. Once that happened and OPEC made it clear that they would not immediately cut supply and hand power to the upstart U.S. shale producers, the collapse began. 

The drop halted at a logical level. In 2008 and 2009 when a complete global economic collapse looked on the cards oil was trading in the mid $40s and that is where support was eventually found. According to EIA data, global oil production in 2008 was an average 74.016 million barrels per day and in the first 10 months of 2014 averaged 77.427 million barrels, an increase of around 5%. Consumption in 2008 was 86.045 million barrels per day and in 2014 was 92.13 million, an increase of 1.2%. 

Put simply, supply has increased faster than demand, so a rapid return to oil over $100/Barrel looks extremely unlikely. That said though, in order to believe that the price will fall much further you have to believe that the economic outlook today is worse than it was at the beginning of the deepest recession since 1929. That too seems like a bit of a stretch. 

The only logical conclusion then is that in the near term oil will trade in an approximate range of $50-$70. Incidentally, the bottom end of that range represents the inflation adjusted 100 year average price, according to one Morgan Stanley analyst quoted in another Bloomberg article. We shouldn’t, therefore, be shocked that oil is here any more than we should be shocked that publicity hungry columnists and heavily invested oilmen are predicting further wild swings.

oilprice.com



22 Comments on "Is Oil Returning To $100 Or Dropping To $10?"

  1. Plantagenet on Tue, 24th Feb 2015 1:36 am 

    The price of oil will go up when the glut of oil ends. Given the collapse of fracking activity in the US, I’d look for a move up to higher oil price in 6-12 months.

  2. Makati1 on Tue, 24th Feb 2015 3:34 am 

    Oil glut to continue until the non-profitable sites/fields are out of business. Reserves at max so the glut can only increase. I think $10 oil is closer to reality than $100 in the foreseeable future. Baring a major war.

  3. meld on Tue, 24th Feb 2015 5:29 am 

    Oil prices to go down until they go up again, and then to go up until they go down again. The shorter the time between flip flops the closer we are to a shit storm. Think cardiac arrest.

  4. Davy on Tue, 24th Feb 2015 6:06 am 

    So much for the Planter oil glut.

    http://www.zerohedge.com/news/2015-02-23/whats-next-oil-and-gold-thoughts-eric-sprott-rick-rule-and-marc-faber

    Weak economies around the world offer weak demand for commodities and for capital. The effect is to keep interest rates extremely low and to push commodity prices down.

    The same logic applies to oil, which has long been priced with the expectation of ever-increasing demand and ever-declining supply. We can therefore view the oil price as a symptom of poor global economic growth, which is a long-term problem – and not just as a short-lived consequence of a slight oversupply of oil.

    Falling oil prices are yet another sign that the world economy may be more fragile than before the Great Recession.

    Why is this important? Well, many write off the oil price drop as merely the machinations of Saudi Arabia to throw a monkey wrench in the wheels of the US shale industry – or perhaps a market that’s over-reacting to a slight supply and demand imbalance. You would then naturally expect a quick recovery after the market worked through the problem of oversupply, or once OPEC and Saudi Arabia had adequately bludgeoned its rivals. On the other hand, if you attribute the oil price decline to a more significant underlying issue within the world economy, then the oil price drop starts to look like the harbinger of a more long-term trend.

  5. Dredd on Tue, 24th Feb 2015 8:28 am 

    Is Oil Returning To $100 Or Dropping To $10?

    Yep.

  6. Davy on Tue, 24th Feb 2015 8:58 am 

    I sure hope the substitution regression for oil is not whale oil. We have done enough rape of or brother critters.

  7. rockman on Tue, 24th Feb 2015 11:22 am 

    meld – Since you brought up time spans I’ll risk repeating myself. You mean like this:

    Consider the price spike of 1980 and the subsequent global recession that didn’t yield a significant improvement in prices for a better part of 15 years. And then after prices recovered to about $30/bbl the price collapsed by almost 50% to $17/bbl. Not caused by the shales plays or Deep Water fields coming on at several hundred thousand bopd each but by the inability for economies to thrive at the higher price level. And OPEC/KSA didn’t close the spigots then either. And yet oil prices took only 3 years to recover to former levels.

    Not only recover but double in just another 3 years to $60/bbl as the global economy improved thanks to a fair degree by that period of lower prices. In fact, recover so well that that the global economy was able to sustain itself for 4 years at prices that eventually reached $100/bbl. And then once again global demand weakens quickly and prices fell almost 50%…again. And this time, again with no major reduction in global oil production the economy caught its breath and once again managed to deal with $90/bbl oil. But it did take more than a year for the economies to recover: the world consumed slightly less $58/bbl oil in ’09 than it did $98/bbl oil in’08. But just a few years later economies rebounded and were able to cope with high price oil again.

    Until the last 6 months. Of course, history doesn’t always repeat itself. But sometimes it does: over the last 4 decades oil prices spiked, economies degraded, oil prices collapsed, economies recovered and oil prices spiked once again. But there is a clear pattern that the time span between the phases has great diminished.

  8. Bob Owens on Tue, 24th Feb 2015 11:29 am 

    Predicting the price of oil is a fool’s errand. To illustrate: We are only 1 truck bomb in SA away from $100 oil and only 1 AIG meltdown from $20 oil. Is there anyone here (except the author) that thinks neither of those events will happen over the next 18 months? Thought so. PS: ISIL is quite able to take care of the truck bomb part and is probably planning to do so as I type.

  9. Energydebt on Tue, 24th Feb 2015 11:40 am 

    We had oil for almost USD 80 in 2006. Then came a plunge to USD 60 in 2007. And then the historical spike above USD 140 in 2008.

    http://upload.wikimedia.org/wikipedia/commons/c/c7/Crude_oil_price_WTI_EIA_since_2000.svg

    Guess what happens? The oil can not go up above USD 60. Then it plunges again. QE brought the price above USD 100. The following glut and the end of QE have shown, where is the upper limit, that was already outlined in 2007.

    The price can go only down, we do not need costly oil for everyday life, as our civilization was built around the cheap oil as its blood.

    We need a cheaper energy source than the costly oil. When this is not present, the oil price must go down. This is the beginning of the end of the abundant oil usage. We can not afford costly oil. We are already becoming too poor for it. As the lack of cheap oil itself undermines our existence…

  10. GregT on Tue, 24th Feb 2015 11:56 am 

    “We need a cheaper energy source than the costly oil.”

    We already have that energy source. It is commonly referred to as the Sun.

    Modern industrial society is an experiment gone horribly wrong. We either abandon MIS, or the Earth will abandon us. Either way we are in for a great deal of suffering. We should have listened to the warnings from back in the 60s. There was an opportunity to change our direction back then. Now it is too late.

  11. Nigel on Tue, 24th Feb 2015 1:36 pm 

    Unfortunately electric tractors won’t plough much land or till, sow, top dress, cut, thresh or anything else really…

  12. GregT on Tue, 24th Feb 2015 1:41 pm 

    Even more unfortunately, without chemical fertilizers, GMO seeds, herbicides and pesticides, electric tractors would be of limited usefulness.

    Much of our soil is already, for all intents and purposes, dead.

  13. ghung on Tue, 24th Feb 2015 1:48 pm 

    Nigel: “Unfortunately electric tractors won’t plough much land or till, sow, top dress, cut, thresh or anything else really…”

    My tractor runs well on B100 biodiesel; only a slight loss of power. If diesel becomes too expensive or in short supply, I expect farmers will produce biodiesel using a small portion of their crops. It ain’t rocket science. Fuel is unlikely to be the main problem agriculture will have. It’s the other supply chains and climate that’ll hit food production hardest.

  14. marko on Tue, 24th Feb 2015 2:26 pm 

    owens
    excellent comment

  15. jjhman on Tue, 24th Feb 2015 3:17 pm 

    “I expect farmers will produce biodiesel using a small portion of their crops.”

    The question is “What do you mean by ‘a small portion” “?

    When farmers used animal power to pull their plows and wagons that small portion was about 1/3. I’m not convinced that you could do much better than that with bio diesel and giving up 1/3 of the world’s farmland would probably bankrupt and starve a great many people.

  16. Apneaman on Tue, 24th Feb 2015 4:15 pm 

    Regular price, 5 bucks, 5 bucks.

  17. antaris on Tue, 24th Feb 2015 4:19 pm 

    How many acres does it take to feed a horse and would you get the same work out of a tractor using the same area of land to grow biodiesel crops? Does a person need to go “horse” or “biodiesel tractor”.

  18. antaris on Tue, 24th Feb 2015 4:22 pm 

    And if things got really shitty you could always eat the horse, but not the tractor.

  19. ghung on Tue, 24th Feb 2015 4:47 pm 

    We call it FROFI (food returned on food invested). Considering how much farm production goes into ethanol for gasoline blend, I imagine the ratio could be pretty high, especially if production was diverted from ethanol and animal feed. If they don’t , there won’t be much ethanol or animal feed anyway (in this purely academic discussion).

  20. ghung on Tue, 24th Feb 2015 4:57 pm 

    jjhman: “….1/3 of the world’s farmland would probably bankrupt and starve a great many people.”

    Beats the shit out of taking, what?, 80% production loss by not using machines to farm at scale. A lot of folks probably starve either way. Save as many as you can… Anyway, it seems like a typical industrial age response; sacrifice some of your production to fuel more production.

    As systemic as this thing is, many folks will probably spend a lot of time looking up a mules ass anyway. Stinks back there, but it’s good for the soil.

  21. Davy on Tue, 24th Feb 2015 5:42 pm 

    JJ/G-man, me thinks both need to be used. Hybrid new and old is the name of the game. There are different applications for both horse and tractor as well as overlap. The big issue with tractor is serviceability will go through entropic decay. Parts will not be found eventually. Lots of salvage and cannibalization for a time though.

    I think you need 5 acres forage for a horse to live on so to speak. You really need a team of horses to plow and harvest if you want to get to early 19th century productivity. We are going to have to use anything and everything to replace what we have now. It is going to be a monumental change that needs to be initiated now. Of course the corporate farm lobby would never allow something to counter their broad acre corporate farm effort. We need a Manhattan project size effort to move significant amounts of people to small farms but that will not happen until people are forced into it sadly.

  22. Makati1 on Tue, 24th Feb 2015 9:28 pm 

    Hmm… Last I heard, biodiesel is a negative net energy idea. So, you would likely not get enough fuel out of your crops to even plant the same amount of new fuel crops the next year. And the whole game depends on the weakest link in the system … the weather. There is no excess energy for planting food crops for the farmer.

    Buy a mule, but remember, they cannot reproduce so you need to buy a horse and a donkey if you want more mules.

    “…A mule is the product of two different species (a horse and a donkey) mating with each other. Mules are always sterile because horses and donkeys have different chromosome numbers…”

    Running a successful farm is not easy or something you decide to do the day before the SHTF. Buckle Up!

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