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Page added on July 25, 2016

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Oil Heads Back To $30, And Probably Lower

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Summary

Financial players are now bailing out of their bullish positions in oil markets.

The US dollar’s recovery means they have no need for a “store of value”.

They are leaving behind mounting chaos.

Prices will probably need to go well below $30/bbl to enable the market to rebalance.

There was never any fundamental reason why oil prices should have doubled between January and June this year. There were no physical shortages of product, or long-term outages at key producers. But of course, there was never any fundamental reason for prices to treble between 2009 – 2011 in the Stimulus rally, or to jump nearly 50% between January – May last year.

  • Instead, prices once again rose because financial players expected the US$ to decline
  • They realised this meant they could make money by buying oil on the futures market as a “store of value”
  • Now, as the US$ has started to recover, they are selling off these positions
  • And so oil prices are falling again

The problem is that the financial volumes swamp the physical market – they were 7x physical volume at their 2011 peak- and so they destroy the oil market’s key role of price discovery based on the fundamentals of supply and demand.

And so, once again, oil prices have been in a bull market along with prices for other major commodities such as iron ore and copper, as well as Emerging Market equities and bonds. In turn, this forced companies to buy raw materials at unrealistically high prices, as the rally coincided with the seasonally strong Q2 period.

Now, as Reuters reports, the funds have already “slashed positive bets on US crude oil to a 4-month low“, and are leaving chaos behind them. Companies are finding that they “bought high and will have to sell low”, as they need to work off high-priced inventory in the seasonally weak Q3. Adding to the change in mood:

  • Russia has confirmed the myth of an OPEC/Russia oil production freeze is now officially dead
  • US oil and product inventories have hit an all-time high of almost 1.39bn barrels
  • China’s gasoline exports have doubled over the past year, and its diesel exports tripled in H1
  • Saudi Arabia’s Oil Minister has warned “There are still excess stocks on the market – hundreds of millions of barrels of surplus oil. It will take a long time to reduce this inventory overhang”

Even worse is that the world is now running out of places to store all this unwanted product, as Reuters reported earlier this month:

“Storage tanks for diesel and heating oil are already so full in Germany, Europe’s largest diesel consumer, that barges looking to discharge their oil product cargoes along the Rhine are being delayed”.

Similarly, the International Energy Agency has reported a major backup of gasoline tankers at New York harbor, due to storage being full, whilst Reuters added that tankers are being diverted to Florida and the US Gulf Coast to discharge.

Plus, of course, the recent rally has proved a lifeline for hard-pressed oil producers, who have been able to hedge their output at $50/bbl into 2017. As a result, companies have started to increase their drilling activity again, and are expected to open up many of the 4000 “untapped wells” – where the well has been drilled, but was waiting for higher prices before it was sold.

Yet wishful thinking still dominates oil price forecasts, with the consensus still believing that $50/bbl is a sustainable price. Yet even in February this year, only 3.5% of global oil production was cash-negative at $35/bbl – just 3.4mbd. Today’s figure is likely even lower, as costs continue to tumble.

And in the real world, oil prices have already fallen more than 10% from their $50/bbl peak. Unless the US$ starts to fall sharply again, it seems highly likely that prices will now revisit the $30/bbl level seen earlier this year. Given the immense supply glut that has now developed, logic would suggest they will need to go much lower before the currently supply overhang starts to rebalance.

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27 Comments on "Oil Heads Back To $30, And Probably Lower"

  1. Roger on Mon, 25th Jul 2016 7:51 pm 

    Or, the paradigm will shift…what was driven by the USDX, will be driven by the (ever increasing) understanding that peak oil is in the rear view mirror. The game of paper for oil is almost up…

  2. shortonoil on Mon, 25th Jul 2016 7:53 pm 

    ” But of course, there was never any fundamental reason for prices to treble between 2009 – 2011 in the Stimulus rally, or to jump nearly 50% between January – May last year.”

    Yes there is! The author would understand if they were counting net energy, rather than barrels. Barrels counts are only useful to oil companies that sell barrels of oil. The economy responds to the energy, not the number of barrels that show up. If they could shove all that energy into a teaspoon, you would only have to stop at a gas station once a year.

  3. Rick Bronson on Mon, 25th Jul 2016 8:37 pm 

    Just 2 days ago there was an article that Saudis are calling for ceasefire.

    And everyone expected the oil prices to rise. But again its falling. Its very difficult to predict, but the Saudis seems to be losing control of the Oil market.

    http://peakoil.com/publicpolicy/saudi-arabia-declares-cease-fire-in-oil-war

  4. dissident on Mon, 25th Jul 2016 9:16 pm 

    The global recession is not over and actually looks like it is getting worse. Oil prices will vary accordingly.

  5. Plantagenet on Mon, 25th Jul 2016 10:00 pm 

    The oil glut never ended. Oil prices were bid up on speculation, but now things are returning to normal as the continuing oil glut drives the oil price lower.

    Cheers!

  6. GregT on Tue, 26th Jul 2016 12:47 am 

    “Oil prices were bid up on speculation, but now things are returning to normal as the continuing oil glut drives the oil price lower.”

    Strange that, when there wasn’t an oil glut, going back for the better part of a century, the average inflation adjusted price of oil was much cheaper than it is right now.

    Cheers!

  7. GregT on Tue, 26th Jul 2016 12:56 am 

    “The global recession is not over and actually looks like it is getting worse. Oil prices will vary accordingly.”

    ^^^This^^^

  8. brough on Tue, 26th Jul 2016 4:00 am 

    The days of following our daily obsession of checking the WTI and Brent Crude price are nearly over. If Trump gets his way the US will subsidise the fracking industry until the US is self-sufficent in oil, irrespective of what the rest of the world is doing. Up to date fracking has been subsidised by proxy through the US banking system, which is about to come to its final conclusion. I must point out I’m not a US citizen but the show is going to be very interesting from a spectators point of view.

  9. ILoveGregAnswer on Tue, 26th Jul 2016 6:23 am 

    Wow, good response Greg, You are very deep thought

  10. Kenz300 on Tue, 26th Jul 2016 8:54 am 

    Banks have stopped loaning money to the oil patch………… oil related bankruptcies continue……….

    Those that can continue to pump hoping to bring in cash and outlast the down turn…………hope springs eternal

    The world is slowly moving away from fossil fuels…….. the pace will quicken over time………..

    Watch The Climate Change Ad Fox News Didn’t Want Its Viewers To See

    http://www.huffingtonpost.com/entry/climate-change-ad-fox-news_us_57892a37e4b03fc3ee50c207?section=.

  11. Davy on Tue, 26th Jul 2016 9:26 am 

    Post 08 financial crisis and resulting downturn needs to be looked at differently than we are in recovery or recession. It is really both because of the fundamental changes to the economics of globalism from central bank easing and repressions of price discovery through interest rates. We had a 08 bifurcated traditional economic arrangement turn into a multilayered new normal arrangement where economic repression along with debt has boosted the asset class and those connected to the money flow. The general public often called main street is left to get the trickle down. Some from Main Street have prospered but the vast majority has seen stagnation and decline. Fixed income dependent and the working poor have been the hardest hit.

    Deflation with its corresponding decline in the velocity of money is a real issue now. The debt injections allow for significant activity in many sectors but at the same time stunted others not in the flow of money. We had a brief commodity supper cycle that boosted oil especially. This multilayered economic arrangement can be characterized as a Ponzi arrangement with a house of cards foundation. It is at the top of the money chain that the activities are the greatest. These top layer activities are often parasitic and yield seeking malinvestment. This is creating malinvestment and inflated asset values relative to real earning. Malinvestment is bad debt and in the real world those investments become non preforming loans. Extensive extend and pretend polices continue to keep this arrangement going. Leverage is stoked to keep liquidity functioning to keep confidence stable.

    What cannot be maintained is real productivity that comes with a sound holistic economic arrangement of a spectrum of healthy sectors contributing to strong generalized growth. Instead we have a top side bubble and a bottom side decay. The top side bubble is enough to keep the facade of economic vitality a narrative. The associated trend is moral hazard of the breakdown of traditional fundamentals of law and accounting. We see a new revolving door of public and private fiduciary responsibilities becoming corrupted into private profit at the public’s expense. As the real pie shrinks along with dangerous debt deflation from years of unsound economic policy we see the elites of the global world conspiring systematically to maintain their status quo at the expense of the vast majority that are increasingly being marginalized and disenfranchised.

    Oil is a part of this at every level. It is no wonder it is suffering the effects of oversupply but also underinvestment. It is no longer the hot commodity sector so the new economic arrangement is not pumping yield seeking capex into the sector. The E&P is in significant and dangerous decline per the realities of a global economy attempting growth. Oil producing nations are being bled of their oil lifeblood needed for social stability. We see a petrodollar arrangement in strong decline indicating oil producing nations in financial decline. This economic deflation of the oil industry is happening at the same time that depletion takes its toll. When you combine the two you create a dangerous declining demand and supply dynamics that is slowly and continuously eroding the oil industry and the global economy. Oil is a foundational commodity so this cannot end well. Our economic foundation of a productive main street has been in a dangerous demand destructive decline for longer. Combine the two and all you have is the bubble of the top along with its corresponding moral hazards of corruption and malinvestment.

    This is a systematic trending so there is no specific place for this problem to be dealt with. This is now a self-organizing predicament of decay and decline that has no solution as is common in decaying civilizations. The central banks are now talking direct cash injections and negative rate which indicated they have run out of tools. The social fabric is fraying across the board with an angry disenfranchised masses. Fixed income related industry and dependent’s are in a dysfunctional economic arrangement with zero interest rates. Traditionally they had their economic source of income from fixed income. We have an entire system in dysfunction and decay. This together with climate and ecosystem in its own dangerous and increasingly cascading decline and failure.

    This arrangement can muddle along because there is momentum of a system of billions of efforts for survival invested in the arrangement. All locals and all participants in this global arrangement have no other choice. There is no option nor any plan B’s. We are all in and the alternative is collapse and a die off. This arrangement has decadal limits of peak oil dynamics and likely abrupt climate change both of which will be too massive a disruption for the economy to survive in the current global arrangement. In the meantime the human element of the economy and social fabric is fraying of its own accord. It is the approach to these longer term issues of peak oil and abrupt climate change that will destroy the economy and the social fabric. The global system is still functioning but the trend is decay and deflation. The global system cannot survive decay and deflation for long. In the next few years we will see the end of the global system and an unknown resulting economic and social arrangement. It is likely we will also see the beginning of a die off of some kind at least the beginnings of a trend of excess deaths over births. This is the end game with no solution. It is natural law in action and any attempt to change this trend only makes it worse. Humans will do everything in their power to attempt to change it and avoid it so we can expect dysfunction and irrational decisions that make the situation worse.

  12. shortonoil on Tue, 26th Jul 2016 11:19 am 

    “Strange that, when there wasn’t an oil glut, going back for the better part of a century, the average inflation adjusted price of oil was much cheaper than it is right now. “

    Yes, if we look at the energy density curve (complements of the EIA and World Bank):

    http://www.thehillsgroup.org/depletion2_008.htm

    In 1975 $1 would have bought 42,348 BTU. In 2015 $1 dollar would have bought 5,671 BTU.
    In 1975 the price of oil was $3.81/ barrel. In 2015 the price was $48.67.

    In 1975 the economy was getting 11,115 BTU for a dollar of crude.
    In 2015 the economy was getting 117 BTU for a dollar of crude.

    In actual, real terms, the price of oil has increased 95 times in the last 40 years. The BTU is the only constant term in the above calculations. Printing a dollar puts a dollar’s worth of debt on the other side of the ledger. When creditors begin to believe that they will not get repayed the system stops. There can hardly be a doubt about our claim that the pursuit to acquire oil is bankrupting the world.

    http://www.thehillsgroup.org/

  13. Speculawyer on Tue, 26th Jul 2016 12:14 pm 

    The glut looks like it will persist. The frackers have been effective at slowing the decline rate of fracked wells such that the tight oil is not declining as fast as many thought it would.

    Well, in view of the 28 pages, I can’t say I’m sorry to see the Saudis struggling with these low prices. 😉

  14. HARM on Tue, 26th Jul 2016 12:47 pm 

    “The oil glut never ended. Oil prices were bid up on speculation, but now things are returning to normal as the continuing oil glut drives the oil price lower.”

    This seems to be the most logical explanation, as fracking, offshore drilling and other unconventional oil continues to drive global production ever higher. What it also means is that Peak Oil has been postponed for years if not decades, and that any pressure to move to ecologically more friendly/sustainable fuels has –for the moment– evaporated.

  15. marmico on Tue, 26th Jul 2016 2:27 pm 

    In actual, real terms, the price of oil has increased 95 times in the last 40 years

    You are so full of shit that it defies grammer school arithmetic lessons. That’s why you are known as the ETP fuctard.

    In real terms, I needed ~2100 BTUs of oil to buy a $1 of GDP in 2015 and I needed ~6000 BTUs to buy a $1 of GDP in 1975.

    Figure out how to determine BTU/$ in Tables 1.3 and 1.7 in the EIA Total Energy data set, you moron.

  16. shortonoil on Tue, 26th Jul 2016 7:39 pm 

    It has been 2 1/2 years, and the surplus keeps growing. First in crude, and now in finished product. The oil age does not end when the world runs out of oil; there is still 2,900 Gb of liquid hydrocarbons buried in the earth. The world runs out of oil when produces can no longer make a profit producing oil. That day is here, and the loses are staggering. How much longer before the illusion of market rebalancing disappears under an avalanche of bankruptcies, and collapsing economies?

    Rebalancing will not come; what is coming is the end of the oil age.

    http://thegreatrecession.info/blog/crude-oil-price-rally-destroyed/

  17. antaris on Tue, 26th Jul 2016 10:11 pm 

    Thanks for the link short. Good blog.

  18. Kenz300 on Wed, 27th Jul 2016 7:05 am 

    And Iran and Libya are increasing production………….

    How do high cost tar sands producers in Canada stay in business………….. deep pockets can only last so long before even they throw in the towel…………..

    Bring on the electric vehicles………no more WARS for OIL

  19. shortonoil on Wed, 27th Jul 2016 12:12 pm 

    Our site is down:
    http://www.thehillsgroup.org/

    Our web host has apparently disintegrated. The site is down, and no one is answering the phone. We have contracted with a new host and should be back up within a day or two.

    BW Hill

  20. Joe D on Wed, 27th Jul 2016 12:24 pm 

    Short, sorry to hear that your website is down. I hope you get back up and running smoothly and swiftly. Your information is of great value to us all!

  21. JuanP on Wed, 27th Jul 2016 2:21 pm 

    Marmi, Do you really believe that the US dollar is worth what the US government tells you? Do you also believe in US unemployment numbers? How about their inflation ones? Ah, that explains why you get so much wrong. Only a fool could believe data published by the US government and institutions associated with them; those guys only tell the truth by mistake or accident, Marmi. If you believe their lies then you will NEVER UNDERSTAND the truth!

  22. JuanP on Wed, 27th Jul 2016 2:25 pm 

    And, Marmi, GDP is completely meaningless, as far as I am concerned. How much of US GDP is useless or counterproductive? Do you believe in the Real Estate, stock, bond, and Dollar bubbles, too? You are in for an waful lot of pain. You ahould focus on shelter, water, food, energy, and personal defense preparations.

  23. JuanP on Wed, 27th Jul 2016 2:26 pm 

    That should have read awful! LOL!

  24. Boat on Wed, 27th Jul 2016 3:28 pm 

    short,

    “It has been 2 1/2 years, and the surplus keeps growing. First in crude, and now in finished product. The oil age does not end when the world runs out of oil; there is still 2,900 Gb of liquid hydrocarbons buried in the earth. The world runs out of oil when produces can no longer make a profit producing oil.”

    Countries are out there drilling for more all the time.

  25. Northwest Resident on Thu, 28th Jul 2016 12:42 am 

    “Countries are out there drilling for more all the time.”

    But the question again, in case you didn’t get it the first time, is are they making a profit? And if they are making a profit, is it sufficient profit on a global average to grow the economy?

    Answers: Most likely not and definitely not.

    ZIRP, massive ongoing debt creation and healthy doses of hopium are what keeps most of the countries out there drilling for more all the time. Good luck with that.

  26. GregT on Thu, 28th Jul 2016 1:02 am 

    Boat does not have the capacity to understand exponential growth, or how fiat monetary systems work. There’s no point in trying to explain such simple concepts to someone who is completely brain dead.

  27. Kenz300 on Fri, 29th Jul 2016 4:09 am 

    The world is moving to safer, cleaner and cheaper alternative energy sources like wind and solar energy production and electric vehicle energy consumption…….

    3 Sure Signs of Texas’ Emerging Solar Market

    http://www.renewableenergyworld.com/ugc-content/2016/07/22/3-sure-signs-of-texas-emerging-solar-market.html

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