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What Will Drive The Next Oil Price Crash?

What Will Drive The Next Oil Price Crash? thumbnail

As we roll into 2018, analysts and investors are more optimistic that the oil market will further tighten next year and support higher oil prices, but rising U.S. shale production will likely cap any significant price gains.

On the demand side, expectations are that global economic growth will support solid oil demand growth.

On the supply side, Venezuela’s dire situation, possible new sanctions on Iran, and increased tension in the Middle East mostly with the Saudi-Iran issues and the Iraq-Kurdistan standoff may take more barrels off the market than OPEC and friends plan, and send geopolitical jitters through the oil market.

However, according to energy policy expert Michael Lynch, there remain three potential events in the markets that could send oil prices tumbling. These include a large correction in the U.S. stock market that could spread to a sell-off in commodities; one of the OPEC members or Russia breaking away from the unusually strong compliance to the cuts we have seen so far; and U.S. oil production rising so much as to make OPEC see it as a threat to its long-term oil market share.

In markets, there are already some signs that we may be seeing some bubbles, Bitcoin being the most likely candidate, according to Lynch. In addition, the price to earnings ratio of the S&P 500 index is now over 25, well above the mean historical average of just over 15.

Last week, Fed Chair Janet Yellen said, referring to the high valuation in some asset classes, “the fact that those valuations are high doesn’t mean that they are necessarily overvalued.” According to VTB Capital’s Global Macro Strategist Neil MacKinnon, the ultra-low volatility in U.S. equities this year is “very vulnerable” to shocks, and current stability could actually bring future instability.

According to Lynch, if the U.S. market moves into bear territory next year with a big correction, it could spread the financial contagion to commodities such as oil.

Another potential threat to oil prices is that of an OPEC/non-OPEC pact participant beginning cheating outright—Iraq and Russia, for example—which could lead to the Saudis deciding to let the price of oil drop, Lynch argues.

Yet the Saudis have little choice but to support oil prices because of their heavily oil-reliant economy and the planned IPO of Saudi Aramco, Amy Myers Jaffe at the Council on Foreign Relations wrote in the Houston Chronicle last week. According to Myers Jaffe, if Russia makes a U-turn and boosts its oil production, the ultimate battle for market share will be between the U.S. and Russia, despite the fact that Saudi Arabia continues to hold influence in the oil policy of OPEC and its partners.

“For now, Russia seems content to collaborate with Saudi Arabia on oil market stability, which ironically also suits the current U.S. administration, whose America-first jobs message is tied heavily to the economic engine of the shale revolution,” Myers Jaffe said.

The shale revolution and the rise of U.S. oil production is the third possible factor that could lead to an oil price collapse, Lynch argues. If OPEC sees that it needs to defend market share in the long run, chances grow that the cartel may decide to let oil prices drop, Lynch says.

OPEC is now outright acknowledging that U.S. shale outperformed initial expectations, and last week the cartel revised up its projections for non-OPEC supply growth for this year and next.

The International Energy Agency (IEA), for its part, said that while OPEC producers had decided to roll over the production cuts to the end of 2018, non-OPEC supply would increase more than previously expected, and total supply growth could exceed demand growth next year.

The EIA forecasts in its latest Short-Term Energy Outlook (STEO) that total U.S. crude oil production will average 9.2 million bpd this year and 10.0 million bpd in 2018, which would mark the highest annual average production, surpassing the previous record of 9.6 million bpd from 1970.

OPEC is well aware of the second U.S. shale resurgence, and it looks like it’s currently sacrificing short-term market share in the name of higher oil prices—or “oil price stability”, as it loves to call it. As for letting the price of oil slide, OPEC members’ budgets may currently need higher oil prices even more than some U.S. shale drillers do.

While many analysts and OPEC expect the oil market to finally rebalance at some point in late 2018, a sharp correction in the financial markets, a dip in OPEC/non-OPEC compliance, and the market share wars could result in lower oil prices, or in the extreme case—in an oil price crash.

16 Comments on "What Will Drive The Next Oil Price Crash?"

  1. Boat on Fri, 22nd Dec 2017 6:49 pm 

    Experienced fracking crews are all hired out. New crews will be deployed of course but learning on the job will not be nearly as fast or efficient. No way can the US keep up with demand.

  2. Boat on Fri, 22nd Dec 2017 7:24 pm 

    As we usher in a new year we should give the US haters a chance to weigh in on when the US becomes a net Nat gas exporter.

  3. Boat on Fri, 22nd Dec 2017 7:27 pm 

    Following the same energy theme what year will the US become a net oil exporter. May the gas light in front of your house not dim and your light display bring you cheer. Merry Christmas.

  4. Cloggie on Sat, 23rd Dec 2017 9:57 am 

    Autonomous driving to reduce car costs with 90% by 2025:

    Testing autonomous road driving in France in 2019:

    US Offshore wind 2nd lease on life?

    The US currently has a few offshore windturbine, build by European firms, in the Atlantic. Perhaps a few more will be build against the will of Trump.

    As per December 2016, NW-Europe has 3,589 offshore wind turbines.

    Now a year later that number will probably have increased with at least 1,000 or more. Can’t keep track of the real number. The goal is to have tens of thousands of them in the North Sea, Irish Sea and Baltic by 2050.

    The latest development is that developers in Europe no longer require subsidies, neither for building the offshore infrastructure, nor for the kWh. No tax money required anymore. As a government you just have to give permission to the developer to build and good old capitalism will get the job done, based on market-forces. Smart money is attracted by renewable energy and is pushing fossil out of the market.

    In other words, renewable energy, a source that runs on free fuel, has won.

  5. Davy on Sat, 23rd Dec 2017 10:32 am 

    “Autonomous driving to reduce car costs with 90% by 2025:“

    Total friggen rubbish. This is the kind of junk coming out of the board techno optimist fantasy peddlers. Why can’t these people reality test their statements????? I am all for changing the paradigm of the current car culture that is wasteful and destructive but let’s keep it factual.

  6. Davy on Sat, 23rd Dec 2017 10:38 am 

    “The latest development is that developers in Europe no longer require subsidies“

    What a joke. Europe is one big subsidy of state supported efforts directly or indirectly. This is fine but again the board Eurotard pushing an exceptional Euro agenda that is just plain exaggerations of false claims.

  7. Cloggie on Sat, 23rd Dec 2017 10:44 am 

    Again Davy, here are the arguments:

    Get factual and refute the claim that…

    The tender will be based on the procedure without subsidies and companies will compete for a concession permit.

    Poor Davy. His exceptionalist wordview is crumbling. He hates to see the Mother Civilization taking the lead in all thing renewable and climate. Davy wants to shout it out: “b-b-but, we are the best!”

    Uh, no.

  8. Cloggie on Sat, 23rd Dec 2017 10:55 am 

    “Autonomous driving to reduce car costs with 90% by 2025:“

    Total friggen rubbish. This is the kind of junk coming out of the board techno optimist fantasy peddlers.

    I thought you were the fiance guy on this board, helas yet another disappointment. The calculus is extremely easy to follow though. Currently privately owned cars stand idly by 97% of the time or so. If you can put a car on the road for 30% of the time rather than 3% like now, it should be obvious even to Angry Dave that the price per mile will come down considerably. If you add that it is possible to increase the occupation rate by smart distribution of persons over available cars, much higher than the current average of 1.25 person per car, then it should become understandable that a per person-mile price reduction of 90% is not outlandish at all.

    – Far more miles per day per vehicle
    – High occupation rate per vehicle

  9. Boat on Sat, 23rd Dec 2017 11:18 am 


    Let’s all thank Putin for making Europe paranoid about energy security so they pushed wind and Sun before it’s time. Thank you Europe for responding.

  10. Davy on Sat, 23rd Dec 2017 11:35 am 

    Tulip, fantasy assumptions you are famous for are not facts. Car costs are not going to drop 90% except in your techno fantasy world.

  11. Cloggie on Sat, 23rd Dec 2017 11:38 am 

    Let’s all thank Putin for making Europe paranoid about energy security so they pushed wind and Sun before it’s time. Thank you Europe for responding.

    Our renewable energy strategy has NOTHING to do with a wish to hurt Russian interests but EVERYTHING with reducing emissions. Your attempt to set us up against Russia will be in vain.

    That’s not to say that Russia wouldn’t also love to set continental Europe up against America:

    However both attempts will fail. We are going to swallow you both. And you both will love it. We’re in! We are not swallowed by the third world (US) nor by China (Russia).

  12. Cloggie on Sat, 23rd Dec 2017 11:39 am 

    Car costs are not going to drop 90% except in your techno fantasy world.


  13. Davy on Sat, 23rd Dec 2017 12:14 pm 

    Tulip, you can’t use a fantasy future that corresponds to your desired goal seeking and say it is fact. You can hypothesize that car ownership cost of the individual might come down considerably if they do not own a car and only need transport on occasion. The physics and the finance of car depreciation will not change that much going autonomous and as a fleet vehicle. One needs only check out the rental car companies and their costs compared to individuals to see there is no great leap in differences. The world you are trying to infer is a narrow one for maybe the Tulip people but in real life there are many different circumstances that may demand different ownership arrangements. Someone who does not need a vehicle on demand and daily and especially if that person has mass transit available might be able to do away with car ownership. The other huge difference is AI EV vehicles are concepts and not proven yet.

  14. tahoe1780 on Sat, 23rd Dec 2017 2:05 pm 

    So the ice is melting and the methane bomb is ticking. Guy says we’ll all be gone in 10 years.

  15. MASTERMIND on Sat, 23rd Dec 2017 3:16 pm 

    Hey clog how power did solar and wind provide last year? I know the answer I just want to hear you say it!

  16. Harquebus on Sat, 23rd Dec 2017 3:26 pm 

    Renewable energy is subsidized in every required process that uses fossil fueled energy.
    No fossil fuels, no renwewable energy devices. Simple.

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