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Oil To $70? Or Down To $30?


Will oil prices rise to $70 per barrel this year or fall to $30? Depends on who you ask.

Oil price forecasts are always all over the map, but the exceptional disparity between some projections for 2017 is pretty stunning.

On the one hand, you have Citibank, which sees oil shooting up to $70 this year as supply continues to tighten even as demand rises.

Citi acknowledges the headwinds in the near-term. “Oil prices are not likely to stray far from their current $53-58 per barrel range in the near term as record investor net length and bearish inventory data will likely cap prices until more tangible evidence of a tighter market emerges,” Citi analysts wrote in a recent research note. However, they see oil prices posting much stronger gains in the second half of the year.

But the bearish threats to oil prices on the downside seem to be a lot more visible right now than the bullish ones. Aside from rising shale production, a dagger looms over oil prices in the very near-term. Hedge funds and money managers have pushed bullish bets to a new record high, equivalent to over 1 billion barrels of oil. The massive one-sided bet leaves the oil market dangerously exposed. When the herd suddenly realizes that they are all making the same bet, there could be a stampede back in the other direction. The buildup in bullish bets is all the more remarkable because it occurred at a time when oil prices were stagnant, stuck in the mid- to low-$50s per barrel.

The world is awash with oil at the moment and there continues to be endless supply so therefore I don’t see a real reason for prices to rise above $60 or $70…so I’m really seeing probably the risks of the prices falling below $50 for a considerable period of time and probably even touching the levels of $40 to $45 this year,” Eugen Weinberg, Head of Commodity Research at Commerzbank, told CNBC’s Street Signs on February 21.

Some oil watchers are even more pessimistic. Unless OPEC extends its production cut for another six months or so, crude prices could plummet to $30 per barrel, according to ABN Amro Bank NV. The OPEC deal has succeeded in already taking roughly 1 million barrels per day off of the market, but the supply/demand balance is not as tight as OPEC members had hoped it would be at this point.

Prices have firmed up, but oil and refined product inventories are still rising in the U.S., with crude stocks at record highs and gasoline inventories also at their highest level in decades. The OPEC deal is helping, but new output from the U.S., Brazil, Canada, and even OPEC members like Libya and Nigeria are offsetting some of those reductions. If OPEC were to abandon its deal in June, and begin producing back at the levels seen in 2016, the market could crash.

If they don’t continue with this trend, then the oil price could drop back to where it was two years ago,” Hans van Cleef, ABN Amro’s senior energy economist, told Bloomberg’s Oil Buyer’s Guide in an interview. “Oil prices could easily go back to the low $30s.”

Prices are in exceptional danger because the gains stemming from the OPEC deal are already priced into the market. A further tightening of supply is baked into today’s price, so even if OPEC maintains a high compliance rate over the next few months, the oil market might not see any more large price increases. “[W]e don’t see any upside from OPEC anymore,” van Cleef told Bloomberg. The downside risk, on the other hand, is very real.

Which brings us back to the extraordinary buildup in bullish bets on oil futures. Hedge funds and money managers are near unanimous in their belief that oil prices have more room to grow. But since there is little sign that more supply will be taken off the market beyond what OPEC is cutting, then the adjustment may continue at a painfully slow pace. At some point, investors might grow wary of this protracted process and abandon their bullish bets. If crude and gasoline inventories continue to rise, that could force bulls out of the market. The WSJ cited an estimate from JP Morgan analyst David Martin, oil prices could suffer a swift decline of $5 to $10 per barrel if the U.S. sees another few weeks of strong inventory gains, a sharp loss that would occur as investors unwind their bullish bets.

15 Comments on "Oil To $70? Or Down To $30?"

  1. BobInget on Thu, 23rd Feb 2017 11:44 am 

    While most Americans didn’t take DJT seriously, some did. The notion of “to the victor so spoils” has a tempting ring for Lupin. While an impossible dream for over educated, getting mitts on all that ME oil is a tempting prospect…. indeed.

    So far, ya gotta admit, DJT did his best to keep campaign promises.

    Israel and Saudi Arabia (America’s Great Allies) are gearing up for hot war with Iran. Russia will defend
    the Iranian branch of OPEC. DJT will defend Trump Towers.

    What about Trump’s promises to “bomb the shit out of ’em” and “take the oil?” What about Bannon’s desire to bring on WorldWar III? Will that really happen? It might, and sooner than we think.

    Oh, there was no ‘strong’ inventory gain in today’s EIA repore.

    There’s so much disinformation in this Trump Era,
    we need to treasure the data we know to be as factual as possible.

  2. Midnight Oil on Thu, 23rd Feb 2017 11:59 am 

    Boy, the price is all over the place?
    Wonder how the traders will set this market to make some money? Well, we know who is in Shorts corner and in the long spread corner.
    Goldman Saks or Citibank?

  3. rockman on Thu, 23rd Feb 2017 2:48 pm 

    “Wonder how the traders will set this market to make some money?” The refineries set the price of oil. Always have and always will…except for govt price controls. Those trading in the futures market set the prices of oil futures contracts…with half the betters eventually been correct and make money and the other half betting wrong…and losing money.

  4. Nony on Thu, 23rd Feb 2017 3:46 pm 

    Traders don’t create the oil price. They just facilitate flows and get a little money on the margin. Supply and demand sets prices. Refineries are actually pretty aggressive about scrounging around for lower prices. Will even buy from rather untrustworthy shippers (just cash terms and soundings and lab checks of the contents.)

    The truth is oil price has a LARGE AMOUNT of uncertainty. Nobody knows if it is going to be 70 or 30!

    The financial markets predict about $55 going forward. (Think of it as Vegas odds for a football game. Nobody knows the result and it can vary a lot from the line. Still, there is a betting likelihood.)

    However, you can VERY EASILY buy options that will pay out if oil is at 70 or 30. People are actually putting money on this. Yes, it is less likely than 55. But you make more money if it does. Just like going for a longshot versus going for a favorite horse at the track. Lower likelihood to happen. Higher payout.

    Here is a picture of the 90% funnel (confidence interval) of likely prices for oil from EIA. Note, this is not an expert based estimate. It’s just taking the horserace “odds” from people betting on futures options and converting them into % likelihood.

    Anything less than the bottom of the funnel has a less than 5% chance of happening. Anything higher than the top has a less than 5% chance of happening.

  5. penury on Thu, 23rd Feb 2017 4:19 pm 

    just read an article which showed EIA says gasoline sales fell again this week. Could be a problem coming down the road.

  6. makati1 on Thu, 23rd Feb 2017 5:34 pm 

    Penury, I have read several articles lately about gasoline inventories building due to the inability of consumers to buy. I also read one yesterday that said that NG use is way down due to the warmer U$ winter. I suspect a lot of “problems” are coming and oil and NG prices will drop again.

  7. Sissyfuss on Thu, 23rd Feb 2017 5:37 pm 

    I predict the price will gravitate between $10 and $200 for the next year. Look, I just became an oil price expert. If I had a website you could subscribe to it for between $10 and $200.

  8. Midnight Oil on Thu, 23rd Feb 2017 7:26 pm 

    No, Rockman, Traders would NEVER dare do that…yes sarcasm again

    Rigging The Oil Market: ‘Perhaps 60% of Today’s Oil Price is Pure Speculation

    First published in August 2008, this article is of utmost relevance to an understanding of the dramatic drop in the price of crude oil.

    The oil market is rigged. Speculators push it up (as described in this article) and then push it down. The recent and abrupt downward movement of the price of oil is also motivated by geopolitical objectives. It is directed against Russia, Venezuela, Iran.

    (M. Ch. GR Editor).

    * * *

    The price of crude oil today is not made according to any traditional relation of supply to demand. It’s controlled by an elaborate financial market system as well as by the four major Anglo-American oil companies. As much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds. It has nothing to do with the convenient myths of Peak Oil. It has to do with control of oil and its price. How?

    No, and the Banks will NEVER get greedy again and cause another financial crisis.
    Everyone learned their lesson and took their lumps…honest
    Yes, actually being sarcastic again. Dang

  9. Outcast_Searcher on Thu, 23rd Feb 2017 8:34 pm 

    Midnight Oil:

    Typical babblespeak about how some elite cabal of speculators “controls” the oil market.

    The oil market is HUGE compared to the speculators. It is dominated over time by major oil producers and consumers.

    This has about as much logic as the idea that the 2008-2009 crash was caused by peak oil instead of a financial panic induced by a global real estate (mal)investment bubble.

  10. Antius on Fri, 24th Feb 2017 12:36 am 

    Bit of a Hobson’s choice. If oil goes down to $30 for even another year, the US oil industry faces bankruptcy. If it goes up to $70, we face inflationary pressures and likely another financial crisis.

    There doesn’t appear to be a price that will satisfy everyone. At prices the consumer can afford, the oil industry goes broke and vice versa.

  11. peakyeast on Fri, 24th Feb 2017 3:20 am 

    @antius: Which is exactly what ShortOnOils ETP model says.

    You can like or not and the timing can be inaccurate, but the logic is difficult to refute.

  12. Davy on Fri, 24th Feb 2017 5:44 am 

    “Typical babblespeak about how some elite cabal of speculators “controls” the oil market.”

    I think someone is being naïve to what the establishment is capable of and the moral hazard for the past decade of disregard for the rule of law and generally accepted accounting principles. I have seen a few articles on how the oil market can be slightly manipulated to yield big gains. We saw this with gold, silver, and LIBOR. The thing is today the effects are minimized by the oversupply with oil over the past couple of years. This does not mean the parasites are not creaming the market some just that at this point oil prices are depressed per what oil needs to be at to make the markets healthier.

  13. Revi on Fri, 24th Feb 2017 6:08 am 

    According to Art Berman the price of oil right now is about $7 too high. We are probably going to see it go down, not up:

  14. Davy on Fri, 24th Feb 2017 6:36 am 

    We should acknowledge the forces that influence the ETP model as well as the effects of demand destruction within the economy as existential systematic forces draining our civilization of sustainability ever so slowly. We are seeing broad based stagflation rendering the global system less economic. The ETP model shows the declining economic force of oil over time. Both are systematic internal forces that are part of a decline process of decay, deflation, and depletion. These forces are continuously at work. Other conditions like financial repression and money supply easing mask their effects but these forces are the underlying currents that are compressing our minimum operating levels of civilization. Data manipulation and psychological effects of social propaganda are also forces allowing disregard for this underlying destructive reality.

    The economy and oil are foundational to the just-in-time economies of scale and macro return on investment necessary to service social debt. Debt is little more than promises and confidence. Without it there is not the liquidity to operate a global economy. Debt today is dysfunctional because it is so large a factor in the economy. Debt has become a tool of moral hazard. It allows malinvestment and extending and pretending of bad debt from being realized. This distorts our true picture of reality and allows continued bad behavior. These forces are systematically destructive change and like low level noise are too often disregarded. When disregarded long enough the pressures eventually build and creep into the general economy in random ways. It is hard to pinpoint these effects. Price is one place effects are realized but also trade and investment.

    It is these slow destructive erosions of health that continually depress our ability to grow and progress. There is likely nothing we can do to change this because of scale and time. We have committed to a way of life without a future and taken it too far out to return or adapt. Planetary limits and systematic diminishing returns are now increasingly inertial factors to growth. Growth based systems such as ours survive on growth and this becomes a vicious circle of a catch 22. Growth is both requires for survival and responsible for our decline. These conditions have gone too far into overshoot to adapt and transition to alternatives both energy related and financial. These forces also include the destruction of our planetary system and the effects of too many people. This condition represent the end of civilization as we know it in a slow process of collapse that at any time could become a catastrophic bifurcation.

    These forces taken together represent a trap that we unconsciously are denying through optimism and shortermism as systematic subterfuge. We are tricking ourselves into believing our progress is progress instead of dysfunction. This is how civilizations end. At one time it may have been related to soil fertility loss or overexploitation of timber resources. Now it is the systematic basis of our modern civilization being eroded and today this is planetary adding a new dimension to civilizational decline

  15. Nony on Mon, 27th Feb 2017 6:49 pm 

    “According to Art Berman the price of oil right now is about $7 too high.”

    Is he putting his money on the line and buying options behind that insight?

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