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Why $50 is more likely to be a ceiling than a floor for the oil price

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OPEC’s production cut agreement is not yet succeeding in driving down supply, suggesting that $50 per barrel oil may turn out to be a market top, industry experts told CNBC on Thursday.

The predictions follow Wednesday’s slump in oil prices when the benchmark WTI and Brent indices both tumbled over 5 percent to close the session at $50.28 and $53.11, respectively. For WTI, the level represented its biggest one-day fall since February 2016 and the lowest closing price since early December.

Both benchmarks had failed to sustain a recovery by mid-morning European trade on Thursday with WTI down a further 2.35 percent for the session to break below $50 and Brent down 1.64 percent as of 10:30 am London time.

The price plunge has been primarily attributed to U.S. data showing domestic stockpiles had recorded a ninth consecutive month of supply rises in February to reach 8.2 million barrels. Adding to the negative sentiment, non-committal comments from OPEC and non-OPEC members on Wednesday indicated that while producers intend to continue pursuing production cuts, they will not pledge at this point to renew their existing six-month agreement once it expires in May.

Indeed, despite claims from participants that the existing agreement is functioning well, it actually has fundamental flaws if you peek behind the headlines, according to Eugen Weinberg, head of commodities research at Commerzbank.

“Compliance within OPEC is less than 50 percent if you exclude Kuwait and Saudi Arabia who cannot shoulder the whole burden over the long-term,” Weinberg told CNBC by phone on Thursday.

Furthermore, while production cuts might be underway on the part of some participants, export numbers have not softened, hence why market supply is still elevated.

“The export numbers are at the same level as last December which demonstrates that the oil production cut is having little effect on market levels,” he added.

“The market is looking for a price recovery from here but as there is still not enough of a cut to send supply into deficit, I think $50 per barrel is more likely to be a ceiling than a floor with prices potentially slipping down to $40 this year,” opined the Commerzbank analyst.

His pricing outlook was supported by Kevin Boscher, chief investment officer, Brooks Macdonald Asset Management, speaking on CNBC’s Squawk Box on Thursday.

“Our view is the oil price is in a trading range. $50 – 55 is more likely to be the ceiling for now than the floor, particularly as part of Trump’s policies is likely to be making the U.S. more self-sufficient from an oil perspective,” he posited.

“We’re likely to see an increase in supply of oil at a time where supply and demand are roughly a little bit more balanced,” Boscher added.

The psychologically critical $50 mark was also within the sights of Sam Wahab, director of oil and gas research at Cantor Fitzgerald Europe, who described continued U.S. upgrades in both inventory and production as the greatest downside risk for now.

“There are also certain doubts as to whether all OPEC members will stick to their quotas (notably Iraq), which combined, could very well see the Brent oil price slip towards $50 over the coming fortnight,” added Wahab.

Yet not everyone shares the bearish view, with analysts at Goldman Sachs publishing a more optimistic note on Monday claiming that oil demand is now poised to overtake supply.

“Our conviction that OECD inventories will steadily decline through 2Q17 remains high…with stocks showing declines over the past two weeks and crude forward curves flattening significantly recently,” reads the research.

“While the shale production rebound has surprised to the upside, the slightly larger production cuts than we had expected and most importantly, the higher 2016 realized demand level, lead us to expect a slightly faster normalization in OECD inventories through 2017 than previously,” the analysts concluded.

MarketWatch



31 Comments on "Why $50 is more likely to be a ceiling than a floor for the oil price"

  1. onlooker on Thu, 9th Mar 2017 6:52 am 

    Once again counting of barrels and matching of supply/demands fails to account for the deeper reality of the reduction of net energy entering Economies which along with chronic systemic economic problems is curtailing economic vitality and quelling demand for oil, dragging prices down

  2. Cloggie on Thu, 9th Mar 2017 6:52 am 

    More bad news for the credibility of Richard Heinberg et al.

    According to the latest rumors he is now into anti-Trumpism.

    TheOildDrum recognized a train wreck when they saw one and called it a day. Just in time.

  3. dave thompson on Thu, 9th Mar 2017 8:30 am 

    The $50 price certainly seems to be the current trend. If oil extracting cannot make any money at this price the invisible hand of fate will take over.

  4. Ghung on Thu, 9th Mar 2017 8:32 am 

    I didn’t see Heinberg mentioned. ADD much, Cloggo?
    As for him being anti-Trump, I consider that an endorsement. Trump is an asshole and a horrible human being. Who couldn’t be anti that? Oh, wait! Another asshole/horrible human being.

  5. Cloggie on Thu, 9th Mar 2017 8:36 am 

    I didn’t see Heinberg mentioned. ADD much, Cloggo?

    Why can’t I bring up this “guru”, fallen from grace?

    You are such a virtuous person, Ghung. What are you going to do with all that virtue? Sell it per kilo on the flee market?

    Seriously, you know what they say in the world of business: “references from yourself or Mum don’t count”.

  6. Ghung on Thu, 9th Mar 2017 8:48 am 

    “You are such a virtuous person, Ghung.”

    Thanks, Clog. I work at it.

  7. Cloggie on Thu, 9th Mar 2017 8:58 am 

    Talking about oil prices, it is a short walk to cars.

    Bentley CEO Wolfgang Dürheimer (where did this Brit get his name; grandson of POW?) has threatened that Bentley will leave the UK in case of a real Brexit.

    http://europe.autonews.com/article/20170309/ANE/170309772/bentley-says-access-to-europe-is-crucial-as-uk-investment-decision

    In unrelated news, UK political old-hand Michael Heseltine (83) has called the Brexit outcome the most disastrous peacetime result we have seen in this country. As a result he got sacked by the British Merkel, May.

    Well, well, well. Where every third worlder loves to enter the Great White World, Britain volunteers to exit said world, just because the commoners were led to believe that the disastrous immigration policies where somehow the work of Brussels and not what it really was: the work of New Labour under Tony Baloney the Bliar.

    It’s going to be quite lonely, rainy and windy in Britain after the Eastern Europeans will have left the building and the poor Brits will be all alone with the Muzzies.

    https://www.youtube.com/watch?v=MtsHoq4W52M

    Here an exchange between an invader and a Pole. The latter actually do work which can be observed from the difference in car quality. The Pole probably drove accidentally into the scenic Muslim, without apparent damage other than perhaps a bumper scratch.

    What is interesting is not the anger of the Muslim, but the words he uses to denounce the Pole and his almost total lack of restraint. His diatribe has a strong identitarian character and leaves little room for guessing of what he really thinks of European infidel in general. And he acts as if he already owns the country.

    https://www.youtube.com/watch?v=WJheODYpuEI

  8. BobInget on Thu, 9th Mar 2017 9:49 am 

    China: 24.5 Million new cars and trucks sold 2015
    20.6 Million new cars and trucks forecast 2020
    17.5 Million new cars added 2016

    USA: 17.5 Million sales http://money.cnn.com/2017/01/04/news/companies/car-sales-2016/ (record sales)

    India: 2.6 Million sold
    http://www.autocarpro.in/analysis-sales/india-sales-analysis-september-2016-22001

  9. BobInget on Thu, 9th Mar 2017 10:02 am 

    It’s best not to pay attention to day trader action vis a vi crude oil pricing.
    Traders need volatility. Stead pricing doesn’t make money.

    Two bedroom apartments in NYC are renting $4,000
    per month.

    Day Care NYC; (average) $16,200 per year.

    I’m not sure about the current price for the Coke that fuels energy traders. For sure, not cheap.

  10. rockman on Thu, 9th Mar 2017 10:11 am 

    Of course $50/bbl could be a ceiling. Just as $30/bbl was…until it wasn’t. Jut as $90/bbl was…until it wasn’t. Just as $145/bbl was…until it wasn’t.

    So $50/bbl will be the ceiling…until it isn’t.

  11. sidzepp on Thu, 9th Mar 2017 10:59 am 

    Crude at 49.07, Tomorrow it will be higher or lower. Take your pick.

  12. JN2 on Thu, 9th Mar 2017 11:38 am 

    sidzepp: lower. $48.79

  13. dave thompson on Thu, 9th Mar 2017 4:40 pm 

    Looks to me like $50-$60 is all the upper end of the economy can handle. Over this price and eco crash wham.

  14. Boat on Thu, 9th Mar 2017 8:42 pm 

    Onlooker,

    Then why do miles driven to continue to rise. You say demand Is down when it has been growing at a steady pace. Kind of like your stream of incorrect of opinion, very steady.

  15. GregT on Thu, 9th Mar 2017 11:05 pm 

    Boat,

    Once again, you display a complete lack of comprehension of exponential growth.

    For about the 20th time:

    https://www.youtube.com/watch?v=DZCm2QQZVYk

    Watch and learn, or STFU.

  16. Cloggie on Fri, 10th Mar 2017 3:40 am 

    What China can, Europe can do better, building artificial islands in the middle of the sea:

    https://www.thelocal.de/20170309/denmark-germany-netherlands-want-to-create-artificial-power-island

    Denmark, Germany, Netherlands want to create ‘artificial power island’

    The plan is not new, but is getting now more concrete with the announced feasibility study.

    Here is the map and the red circle in the Dutch part of the continental shelf indicates the projected location of the energy island:

    http://tinyurl.com/juybb34

    Doggersbank has a depth between 15-36 meter. Doggersbank was dry land during the last ice age and it is still littered with remains of mammoth and rhinoceros, and occasionally Paleolithic hunting artifacts.

    https://en.wikipedia.org/wiki/Dogger_Bank

    Video illustrating the intentions:

    https://www.youtube.com/watch?v=NI0sbiCNXtA

    In the end up to 100 GW of power (100 large scale power stations) could be transported via this island to mainland Europe.

    Where the Dutch have their wind power monopile installation ship Aeolus already operational…

    https://www.youtube.com/watch?v=JV9PykR5bHo

    …the Germans want to top this and install a wind turbine in a single installaton transaction:

    https://www.youtube.com/watch?v=x_pr27mGZ1g

    The ships can carry 6 complete wind turbines in a single ship load.

  17. Cloggie on Fri, 10th Mar 2017 3:59 am 

    Low prices for steel plate, with which you can produce monopiles and towers:

    http://steelbenchmarker.com/files/history.pdf

    In Europe price steel plate is $600/ton.

    Production process of monopiles from steel plate:

    https://www.youtube.com/watch?v=WcrkLQoBLBs

    Essentially roll up plate into a cylinder, apply coating and ram it into the sea bed. Easy does it. For 100 GW max you need 200,000 wind towers (5 MW each) and litter the entire North Sea with them. If you want to achieve a 100% renewable energy base before 2050 (which is the plan) you have 30*365 days = 10,000 days. With installation ships able to install a wind turbine per day, you need 20 installation ships to get the job done. Like Holland 5, Denmark 3, and Germany 12. It is likely that in 5 years time 5 MW turbines will be replaced by 8 MW turbines, so you need less installations accordingly.

    Monopile onshore handling:

    https://www.youtube.com/watch?v=XfyA9loP7yE

  18. Cloggie on Fri, 10th Mar 2017 4:11 am 

    https://www.youtube.com/watch?v=YIAovkexkYo

    This was the previous way with which a Dutch maritime company Ballast Nedam installed monopiles in the Irish Sea (2011).

    Note how rapidly technology is progressing.

    These sort of companies will be like the Seven Sisters in the 20th century.

    https://en.wikipedia.org/wiki/Seven_Sisters_(oil_companies)

    And the examples of Britain (coal 19th century) and USA (oil 20th century) have shown that those political entities that control energy production have the geopolitical power.

    The installation of a 5 MW wind turbine means installing the equivalent of an army of 30,000 virtual human energy slaves.

    200,000 wind turbines in the North Sea mean 6 billion energy slaves or almost double the raw working power of the current world’s male population.

    That’s the power of (renewable) technology.

  19. Cloggie on Fri, 10th Mar 2017 4:43 am 

    Not difficult to see who the lucky bastards are AFTER the oil age:

    http://media.maps101.com/SUB/GITN/ARCHIVES/GIF/1184_020813northsea.gif
    Division North Sea continental shelf

    http://www.doggerbank.nl/bathymetry-doggerbank-chart.jpg
    North Sea depth map.

    Spoiler: Holland, Germany and Denmark.

    Thank God we can now build an EU army after Brexit, just in case.

    100 GW are a prime continental European interest, worth defending with military means.

    http://www.dailymail.co.uk/news/article-4260116/Michael-Heseltine-lead-Lords-Brexit-revolt.html

    Perhaps our British brothers think it over. In the 21st century there is no such thing as “Splendid Isolation.”

    Who are going to be your new buddies? China? The coloreds of North America? The Muslims who control London? Are you not afraid you are going to lose Scotland? Don’t you know that the days of Anglo-Zionism are over for good?

    Questions, questions, questions.

  20. Cloggie on Fri, 10th Mar 2017 5:44 am 

    Tower 1000 ton
    Nacelle 750 ton

    Let’s say 2000 ton steel per wind turbine.

    Against current prices you need $4T in raw steel for 100 GW wind capacity.

    That’s the price of the useless Iraq war.

    That’s 25% of one year EU economic output, smeared out over 30 years. That’s perfectly doable.

  21. makati1 on Fri, 10th Mar 2017 6:27 am 

    Cloggie, an EU army is not going to happen. The EU is dying. Europe is dying. America is dying. Power is moving East.

  22. Antius on Fri, 10th Mar 2017 7:08 am 

    2000 tonnes of steel for a 5MWe turbine? That’s about 1000te per average MW. That presumably doesn’t include any rebar in the monopile and of course, we are ignoring the concrete in the monopile.

    By contrast, a 1970s era light water reactor consumed 40te of steel and 90m3 of concrete per MWe. Some of the newer ESBWR and HTR designs do substantially better.

    So, the equivalent MWe from a wind turbine requires at least 20 times more steel than a nuclear MWe. And we have said nothing so far about transmission or steel consumption in any back-up or storage plant.

    http://fhr.nuc.berkeley.edu/wp-content/uploads/2014/10/05-001-A_Material_input.pdf

    This illustrates the problem you will have attempting to expand a low power density energy source in an energy constrained world.

  23. Cloggie on Fri, 10th Mar 2017 7:36 am 

    Cloggie, an EU army is not going to happen. The EU is dying. Europe is dying. America is dying. Power is moving East.

    That’s what you hope.

    Power will indeed move from NE-USA back to Eurasia.

  24. Antius on Fri, 10th Mar 2017 7:42 am 

    ‘Cloggie, an EU army is not going to happen. The EU is dying. Europe is dying. America is dying. Power is moving East.’

    The problem holding the Western World back is stupid political idealism, which seems to be entrenched within the halls of power. I see more than a little of it on this board.

  25. Cloggie on Fri, 10th Mar 2017 7:50 am 

    2000 tonnes of steel for a 5MWe turbine? That’s about 1000te per average MW. That presumably doesn’t include any rebar in the monopile and of course, we are ignoring the concrete in the monopile.

    True, forgot to include the monopiles.

    Tower 1000 ton
    Nacelle 750 ton
    Monopile 2000 ton

    Total 3750 ton per turbine of 5 MW

    http://www.4coffshore.com/windfarms/monopiles-support-structures-aid4.html

    By contrast, a 1970s era light water reactor consumed 40te of steel and 90m3 of concrete per MWe. Some of the newer ESBWR and HTR designs do substantially better.

    Hmm, the difference is that the steel for the wind turbines can be reused ad infinitum, where the world is already running out of Uranium.

    Your nuclear vision can only be realized with nuclear reprocessing plants, introducing the very dangerous plutonium cycle. Furthermore, the nuclear industry, if accepted world-wide (not going to happen), will produce ever more nuclear waste that needs to be stored somewhere.

    Wind-energy is clean and infinite and installed at sea bothers nobody.

    So, the equivalent MWe from a wind turbine requires at least 20 times more steel than a nuclear MWe.

    Completely irrelevant as there is enough iron in the world, that from now on will be “stored” at sea in purified form to be used by generations to come. And once it is corroded, it can be brought back on shore and reprocessed in a electric arc furnace…

    https://en.wikipedia.org/wiki/Electric_arc_furnace

    …powered by (pay attention GregT) wind power.

  26. Cloggie on Fri, 10th Mar 2017 7:54 am 

    The problem holding the Western World back is stupid political idealism, which seems to be entrenched within the halls of power. I see more than a little of it on this board.

    It is worse than that. It is 2000 years of anti-Darwinian other-cheek Christianity, that after 1945 got hijacked by the Jews and their Frankfurter Schule Leftism, imposed on Europe by ZOG-USA.

    But meanwhile a populist revolt is brewing everywhere and already reached government level in Russia, Hungary, Poland and now the US. Now the waiting is for the first Western European domino to fall, probably France.

  27. Antius on Fri, 10th Mar 2017 9:15 am 

    ‘Power will indeed move from NE-USA back to Eurasia.’

    Cloggie, the Chinese came to dominate the world’s manufacturing base because they had a full spectrum of advantages over the western world: (1) Very cheap labour, much of it at a good educational standard; (2) Cheap energy, largely driven by coal, which could be mined using dirt cheap labour; (3) Cheap transport, thanks to oil and huge infrastructure investment – enormous multilane motorways and a rail transport system that linked into ports on the coast; (4) A nationalist attitude towards industry, by which industry was acquired regardless of environmental or health costs through technology transfers and then goods were effectively dumped on global markets using an artificially low currency; (5) Huge economy of scale – scale economies for literally a billion people in China, not mention much of the rest of the world; (6) No regard whatever for the environment or safety, enabling rapid construction at low cost; (7) No social security or employment rights.

    Do you honestly think Europe would be willing or capable of emulating this? You have expensive labour, expensive energy (which you advocate), expensive transport, burdensome regulation on just about everything. To do what you propose, Europe would need to become a very different place to the one that you know. Many of your own pet obsessions on renewable energy would need to be buried very quickly. Maybe you need to decide which fantasy is more important to you.

  28. Cloggie on Fri, 10th Mar 2017 9:48 am 

    Antius, all your 7 points make sense. We don’t have to emulate the Chinese as we had a head start of two centuries.

    I do NOT advocate expensive energy; renewable energy is world-wide already the largest share of new installed capacity, more than 50% in 2015:

    https://www.greentechmedia.com/articles/read/IEA-Boosts-Renewables-Growth-Forecast-as-Global-Installed-Capacity-Surpasse

    That has to do with competing price as well as finally putting a price tag on a dirty environment and global agreements about pushing back CO2.

    And while renewable energy takes off it will become cheaper and cheaper thanks to economy of scale and hardly any large-scale negative side-effects, unlike fossil and nuclear.

    By the end of this century our descendants will have a “solar economy”.

    The dice have been cast. Fortunately you are still young and able to switch to a more promising career path. Smart folks like you will always be in demand.

  29. Antius on Fri, 10th Mar 2017 10:08 am 

    ‘Hmm, the difference is that the steel for the wind turbines can be reused ad infinitum, where the world is already running out of Uranium.‘

    That is no less true for a nuclear power plant. Only a very small proportion of the steel and concrete is irradiated. And a Gen 2 nuclear power plant lasts up to 80 years. As recycling inevitably has some losses and involves expenditure of energy, the option that uses the least material per unit power wins from a resource efficiency viewpoint.

    ‘Your nuclear vision can only be realized with nuclear reprocessing plants, introducing the very dangerous plutonium cycle.’

    It is not certain that this will be necessary for some time. There has been very little uranium exploration since the 1980s, as the world has not needed it. But the French have practiced a fully closed fuel cycle quite successfully for some time. There are many options available, not all of them require separating plutonium from other actinides and putting it into fresh fuel. The IFR for example used metallic fuel and reprocessing removed the fission products, with all actinides returning to the core. One of the most promising options now is deep burn cycles like the travelling wave reactor. Fuel enters the reactor as natural uranium, is bred into plutonium by neutron leakage and is gradually shuffled into the centre of the core. When it leaves, about 25% of all atoms have fissioned. A 1GW nuclear power plant working on this principal would consume just 4 tonnes of non-enriched uranium per year and will produce an equivalent amount of spent fuel. That is a very small quantity of material.

    ‘Furthermore, the nuclear industry, if accepted world-wide (not going to happen), will produce ever more nuclear waste that needs to be stored somewhere’

    True. But we are talking about a very small quantity of material. Our society produces a lot of toxic waste and nuclear waste is a drop in the ocean in the context of all human waste streams. It is one of the smallest problems that we have. Remember, uranium has about 2 million times the mass energy density of oil. The high level waste generated by 1 person in their entire life would consist of a glass disc small enough to fit into the palm of their hand. What’s more, fission product radioactivity declines rapidly. Within 3 centuries, the toxicity of the waste will be no greater than the ore from which it was mined. So really, whilst nuclear waste is not a non-issue, it isn’t a very big issue.

  30. Antius on Fri, 10th Mar 2017 10:40 am 

    ‘And while renewable energy takes off it will become cheaper and cheaper thanks to economy of scale and hardly any large-scale negative side-effects, unlike fossil and nuclear.

    By the end of this century our descendants will have a “solar economy”.’

    Our energy future will consist of a mixture of technologies. It is highly unlikely that one size will fit all. It is unlikely that Norway will switch away from hydropower, nor is it realistic for Japan to maintain any high living standard without nuclear power.

    What we end up with will depend upon an unpredictable interplay of technological advancement, geopolitics, demographics and economic development. Individual personalities and public attitude will make a difference.

    But I think it unlikely that renewable electricity will provide a cheap option for very many industrial economies in the long term. We have been over the reasons enough times before. Those with hydropower will continue to use it. In the southern US, solar thermal power may experience a take-off and I have no doubt that intermittent renewables will contribute to the grid in most countries. But this process is going to hit limits imposed by the basic limitations of these energy sources.

    We are living through an unusual economic period, in which energy and credit are cheap and raw materials of all kinds are cheaply available thanks to fossil energy. This has coincided with a growing economy of scale for wind and solar and a destruction of profit margins in vendors of these systems. In addition, cost estimates frequently ignore the costs of back-up and storage, which are presently carried by fossil fuel power stations in the form of lost market share. A huge amount of money and political effort has gone into making renewable energy part of the grid electricity system. All of these things tend to make renewable electricity look a lot more viable than it really is.

    Nuclear technology by contrast, has the highest EROI of any energy production technology. Gen 4 power reactors will increase it even further. But the nuclear sector is hamstrung by inefficient regulation, which pushes up costs and build-times without a commensurate improvement in safety. It is disrupted by political interference and continuous legal challenge, usually for silly ideological reasons. The supply chains for LWR technology have largely disappeared since the early 1990s, increasing the cost and build times of new nuclear power plants significantly. But these are artificial problems that we have made for ourselves. They do not suggest a problem with the technology, which has already demonstrated itself to be efficient and affordable in parts of the world that did decline into western levels of stupidity.

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