Peak Oil is You

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Page added on September 25, 2018

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Even the people with the most to gain from $100-a-barrel oil have a lot to lose


Another eye in the back of your head might be useful this week.

Investors are watching the trade situation, a two-day Fed meeting that starts Tuesday, rising bond yields and now, climbing oil prices.

LCOX8, -0.45%  was pushing $82 a barrel early Tuesday, extending its climb to a four-year high from Monday. Gains came after a weekend meeting of major oil producers failed to yield any promises on higher production, something POTUS has been pounding the table over lately. Helping out prices is the fact an oil-supportive Iran embargo also grows closer by the day.

See: Iranian official to Trump: Want lower oil prices? Keep quiet and stop tweeting

Amid the fresh enthusiasm, some have even been talking about a return to $100-a-barrel oil.

Careful what you wish for, says our call of the day from Fitch Solutions Macro Research. They warn that sentiment for crude right now is so bullish it could leave the market “heavily exposed should risk-off sentiment spill over into oil.”

Fitch analysts explain that while there are plenty of reasons for oil to move higher tied to further tightening on the supply side,” that comes amid more challenging macroeconomic conditions. “Much of this revolves around the escalating U.S.-China trade dispute and fears of contagion among emerging markets (EMs), but also ties into underlying trends in oil prices, the dollar, and global liquidity,” explain the analysts.

Here’s a chart from Saxo Bank’s Ole Hansen showing that net long positions on oil have just reached a 10-week high.

Further caution was heard this morning from Commerzbank analysts, who noted a couple of pretty bullish calls from commodities traders laying out the case for $100-a-barrel oil by early 2019, driven by the loss of up to 2 million barrels of oil a day from Iran once November sanctions kick in.

“We regard this as the extreme scenario, which would require all countries apart from China to completely stop buying Iranian oil, which we believe is unlikely,” said a team of Commerzbank analysts led by Eugen Weinberg, who say China could respond to U.S. tariffs by buying even more Iran oil.

More cold water: “If the price were to surge to such an extent, the U.S. would probably grant exemptions to the sanctions and/or release strategic oil reserves, as such a high price would hardly be in its interests given the development of its own economy,” says Commerzbank, noting that emerging market demand would take a hit and U.S. producers probably couldn’t boost production fast enough in response.


7 Comments on "Even the people with the most to gain from $100-a-barrel oil have a lot to lose"

  1. Duncan Idaho on Tue, 25th Sep 2018 9:40 pm
    Wrong season–
    I like the Fall.

  2. Jaz on Wed, 26th Sep 2018 5:03 am 

    A great deal of press coverage has been given to US Shale oil, which has increased tremendously over the last 7 years.

    However global oil prices are set by the production of every single country.
    If one country goes into decline, that amount has to be made up by those still able to increase.

    This post shows how many countries have increased since 2005.

    The situation has become even worse over the last few years.

    Angola peaked in 2010.

    Colombia peaked in 2015

    India peaked in 2011

    China peaked in 2015

    Azerbaijan in 2010

    Out of 50 oil producing countries,only 10 can increase production. In 1995 45 could deliver more oil if needed. I think the figures speak for themselves and are very stark.

  3. Antius on Wed, 26th Sep 2018 5:46 am 

    True Jaz. What is paradoxical, is that emerging supply shortfalls may not lead to high sustained prices. This is because expensive energy reduces disposable income, which in turn reduces demand for new products and investments. In other words, high prices lead to recessions and loss of jobs and reduced wealth.

    This is what complicates any attempt to mitigate peak conventional oil with unconventional sources. There is a limit to what people can afford and debt levels are already rising at unsustainable rates.

    Many people look at the worlds stated hydrocarbon reserves and see no near term shortfall in resources. What they should be interested in is how much can be produced at $30/barrel.

  4. Sissyfuss on Wed, 26th Sep 2018 9:28 am 

    Chinas oil production has crashed in the last few years as they continue to add copious amounts of new autos to their cities. Scrap the 5 year plans and settle for maybe a week or two.

  5. Jaz on Wed, 26th Sep 2018 10:15 am 


    There is obviously a price which would lead to a slowdown in the economy but no one knows what that may be.

    We had oil prices of over $100 per barrel for 3 and a half years 2011 to 2014 and the global economy kept on growing. Debt did increase but not much more than in previous years.
    Oil is only 5% of GDP and that 5% is spread out over the whole economy, including transport of all goods, food. shipping, aviation and private transport.

    The increased cost of oil is damaging but as long as oil production increased, the world could always add a bit more debt to smooth things over.
    What will destroy the economy is when new oil production cannot make up for all the declining oil.
    No one has explained how an economy which needs at least 1 million barrels per day, extra each year to grow, can grow with no extra oil.

    If we do’t have the fuel for the extra 50 million vehicles, there is no getting around that. Countries will do anything to get the oil they need.

  6. Antius on Wed, 26th Sep 2018 10:52 am 

    It is amazing what the economy can tolerate when interest rates are zero and reserve ratios are practically unlimited. You can afford practically anything and delay payments until inflation diminishes the value of the debt to virtually zero.

    The downside comes when interest rates go up and you have unpayable debts, or when inflation is so low that the value of the debt stops going down.

  7. Jaz on Wed, 26th Sep 2018 11:16 am 


    We have made a world economy so complex, no one can fix it.

    It looks to me that if house prices go up young people cannot afford them, and if they go down that will cause building companies to go out of business and negative equity.

    We need more debt to pay for health care, schools and police. But that debt is costing more and more to finance.

    I cannot see a rise in interest rates as an option for high inflation. But stupidity and governments are closely related.

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