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Page added on December 24, 2018

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What’s Got Oil So Spooked? It’s the Economy, Stupid

Consumption

It wasn’t meant to be like this.

Not only are oil prices down nearly 40 percent since early October, they’re below where they were when the OPEC+ group of producers began their first round of output cuts in January 2017.

There are two main factors behind this pessimism. The first stems from an undue skepticism about the group’s willingness to trim output. The second follows from a negative view about the global outlook that is subject to change – and if it does, a sharp rebound is in store.

The recent Russian-brokered deal to cut around 1.2 million barrels a day from global supply in January should have put a floor under prices. Their drop suggests traders don’t believe the cuts will be implemented.

They should.

The bulk of the reduction from current production levels hinges on Saudi Arabia. Its oil minister pledged in Vienna that the kingdom would go even further than it had promised to reduce output, just as it did in 2017. The history of the OPEC+ deal so far shows that those who really matter (Saudi Arabia, the U.A.E., Russia) came through with the cuts – even if it took them a little time to get there.

Back Where We Began

Brent prices are back below where they were when OPEC+ output cuts began in January 2017

Source: Bloomberg

Production will probably also continue to fall in Venezuela, as workers flee the country and a lack of maintenance on wells, pumps and pipelines eats away at capacity. The sanctions on Iran will almost certainly be tightened when the current waivers expire in May, reducing its output further.

So you have to assume that OPEC+ output will come down by something close to the promised 1.2 million barrels a day over the early part of next year, even if the target isn’t reached on Jan. 1.

Surprise Surge

U.S. oil production grew much more than expected over the summer, adding to the over-supply

Source: EIA

Some of the impetus for the sell-off has almost certainly come from revised assessments of U.S. production. The slide in prices began just after the Department of Energy published its production numbers for August, which showed a large and unexpected jump in U.S. output.

Conventional wisdom had it that offtake capacity constraints (a lack of pipelines) would limit production growth until mid-2019. But figures for U.S. oil production in the second half of 2018 have been revised up by more than 500,000 barrels a day in October and November. Those revisions certainly helped to turn sentiment bearish and end concerns around a lack of spare OPEC production capacity.

But those higher production numbers have now been incorporated into supply/demand projections for 2019. And those forecasts show that, if OPEC+ cuts production as promised, the market will be just about balanced in the first half of next year.

So what else is driving the pessimism?

Small Expectations

Estimates of global oil demand growth in 2019 have been trimmed since the summer, with some analysts more pessimistic than the major agencies

Source: Bloomberg

It’s starting to look a lot like the market is pricing in a much weaker outlook for demand than is currently forecast by the main agencies. All three – the U.S. Energy Information Administration, the Paris-based International Energy Agency and OPEC – have trimmed their oil demand growth forecasts for 2019. And some consultancies are much more pessimistic. Vienna-based JBC Energy, for example, now sees growth of less than a million barrels a day next year.

Growing concerns about the health of the global economy, rumbling trade wars, the disruptive effect of Brexit, the Federal Reserve’s latest rate hike and the threat of a U.S. government shutdown have all played their part in the slide in prices. Those wider concerns have undermined sentiment across asset classes and oil has been caught up in the rout.

Lock Step

In contrast to 2014, crude and stock prices are now locked together in a downward spiral

Source: Bloomberg

Note: Data normailized to Jan. 4 2016=100. Scale multiplied by 4 for S&P 500

That suggests that the solution to the current slump lies outside the industry itself. Slashing production may raise prices briefly, but the higher fuel costs will only add to the negative pressures on the wider economy.

If the economic pessimism persists in 2019, expect oil prices to continue drifting lower as demand forecasts get cut. But if some of those concerns start to ease, the rebound could be swift.

bloomberg



50 Comments on "What’s Got Oil So Spooked? It’s the Economy, Stupid"

  1. rockman on Mon, 24th Dec 2018 9:43 am 

    “If the economic pessimism persists in 2019, expect oil prices to continue drifting lower as demand forecasts get cut.” Whose demand forecast, you ask? Bloomberg? The EIA? OPEC? Your drunk Uncle Fred?

    Actually the only demand forecast that has an impact (on actual oil prices being paid today and not the oil futures prices being tossed around) is that of the oil refineries. They decide the amount of oil they buy…NO ONE ELSE. And refineries project the future prices they anticipate the consumers of their output will pay.

    Of course since many refineries play the futures market that dynamic does have some impact on the price refineries pay for their oil supplies. Yes, the refineries set the actual current price being paid for physical oil. Not OPEC. Not the oil futures market. Not Bloomberg. Refineries buy oil for only one reason: to sell products at a profit. if OPEC et al post a price that doesn’t allow the refineries to project a FUTURE PROFIT for their sales the refineries reduce purchases of oil. And how do al oil sellers respond: they reduce their posted oil price in order to increase sales volumes and thus increase their revenue.

    This is how the dynamic has always functioned and always will. At least until oil producers can figure out how to force motor fuel consumers to pay more then they can afford for the same volume they buy at lower prices.

  2. Frederic Rothman on Mon, 24th Dec 2018 12:55 pm 

    Oil prices go up when people are spooked, not down. These low prices suggest a very blase’ outlook toward supplies by refiners. No worries, mate! in other words.

    Business as usual doesn’t play very well for people who would rather be stoking hysteria. Sorry about that. But using words that don’t apply to a situation just makes an author look illiterate.

  3. Chrome Mags on Mon, 24th Dec 2018 2:12 pm 

    “…refineries project the future prices they anticipate the consumers of their output will pay.”

    Ok, so how does that explain the price of oil dropping from 147 to approx. 34 dollars very quickly in the mortgage meltdown of 08/09? I’m not sure what the timing was, but it was relatively fast and you’re claiming that big of a price drop was the refineries supply usage/future projected supply usage on consumer usage? Did MBD consumption really drop that much, that fast?

  4. Davy on Mon, 24th Dec 2018 2:22 pm 

    Chrome you picked one of the most extreme cases to argue one where the economy was in meltdown mode.

  5. Davy on Mon, 24th Dec 2018 2:59 pm 

    Although I will admit, I have no clue how that explains the price of oil dropping from 147 to approx. 34 dollars very quickly in the US mortgage meltdown of 08/09.

    Maybe it was gremlins? IDK.

  6. Dredd on Mon, 24th Dec 2018 3:16 pm 

    What’s Got Oil So Spooked?

    Donnah Dump sent all his friends in Oil-Qaeda a gift wrapped barrel of “lifeblood of the American Economy” … ?

  7. Dredd on Mon, 24th Dec 2018 3:17 pm 

    … or … The Christmas Eve West Wing Fire of 1929

  8. JuanP on Mon, 24th Dec 2018 3:17 pm 

    Although I will admit, I have no clue how that explains the price of oil dropping from 147 to approx. 34 dollars very quickly in the US mortgage meltdown of 08/09.
    Maybe it was gremlins? IDK.

  9. makati1 on Mon, 24th Dec 2018 5:22 pm 

    HAPPY & SAFE HOLIDAYS to ALL! ^_^

  10. twocats on Mon, 24th Dec 2018 5:29 pm 

    the economy was been in a series of freefalls since October (at least) and deflating in general since earlier in the year – credit, liquidity, redemptions, Italy, China shadow, now stocks, shut down, trade war.

    although peak oil prevents growth from occurring “naturally” by providing excess energy to the society, it isn’t prima causa.

    http://creditbubblebulletin.blogspot.com/2018/12/weekly-commentary-powell-federal.html

    is a good analysis of the unfolding of the popping of the bubble and why its not necessarily all even the Feds fault. is it that radical to say that the bubble was going to end at some point?

    now only remains to be seen if the Fed lets this madness unwind a bit or if it sweeps back in to the rescue. and its not at all clear if this Bubble can be reinflated – given its absolutely massive size.

    the value of the entire oil market just isn’t big enough to withstand these flows.

  11. twocats on Mon, 24th Dec 2018 5:31 pm 

    you too mak – all the rubes at my work have been in a dread / panic all week. I have a couple of bond funds that are doing worse than I was hoping, but all in all I’m immune to market madness – May the Whole Thing Crumble – the best Christmas gift of all – just as Jesus intended.

  12. makati1 on Mon, 24th Dec 2018 5:59 pm 

    twocats, what will be will be. If you have your health, a roof over your head and enough to eat, you are ahead of millions around the world. No one knows what 2019 will bring, but most of us will survive. After all, it’s only money. LOL

  13. Cloggie on Tue, 25th Dec 2018 12:25 am 

    “Pelosi and Schumer: “Trump is plunging the country into chaos””

    Pelosi and Schumer and the rest of the sordid bunch of “holocaust-survivors” want to destroy white America through mass immigration, where Trump wants to protect it with a wall.

    https://m.jpost.com/Opinion/Op-Ed-Contributors/Pelosis-father-and-the-Holocaust

    If Pelosi and Schumer think that this is chaos, they have seen nothing yet. Pittsburg will be everywhere.

  14. Cloggie on Tue, 25th Dec 2018 12:58 am 

    “It’s getting scarier and scarier”

    https://youtu.be/X7ZYkQ2LKBI

    US leftist podcast about the Trump phenomenom. They feel obliged to use the term “civil war”, they fear is coming, yet they keep on using the term “racism” as the holy grail for a “moral society” and insist that “poor opportunity deprived Syrians” should have the chance to come to the US. For these egalitarians, identity does not exist. They soon will find out the hard way that identity very well exists, like in Yugoslavia, Palestine, Ukraine, Iraq, Syria, Kurdistan, to name a few. They also discuss the “JQ-conspiracy theory”.

    Fine lefties, you asked for what is coming next.

    Many here for years used to park their fears for collapse of society in the “peak oil” parking lot. Soon that will no longer be possible. After Trump total inter-ethnic chaos will break out.

  15. Davy on Tue, 25th Dec 2018 2:38 am 

    “HAPPY & SAFE HOLIDAYS to ALL! ^_^”

    Happy & safe holidays to you too Makati1! To Cloggie as well!

    I promise to pull my wiiddle horn in until the 27th.
    Santa’s birthday means an awful lot to me, dumbasses

  16. JuanP on Tue, 25th Dec 2018 4:15 am 

    “HAPPY & SAFE HOLIDAYS to ALL! ^_^”

    Happy & safe holidays to you too Makati1! To Cloggie as well!

    I promise to pull my wiiddle horn in until the 27th.
    Santa’s birthday means an awful lot to me, dumbasses

  17. deadly on Tue, 25th Dec 2018 4:27 am 

    Oil was at 147, then it fell to 34 dollars. No plunge protection team for oil. Wyoming sour was 5.94 ten days ago.

    Oil prices wax and wane. I would suspect the refinery would bulk up when the prices are low, has to have some storage somewhere, buy it.

    People like oil, they use it all of the time.

    I know I do, it gets you to where you want to go and fast. The market is there, nobody is begging you to take gasoline for free. They hold it in tanks and then sell it to you when you need some. That’s how it is done. The number of people who want oil every day numbers in the hundreds of millions. Can’t be denied.

    You could see the correction coming from a country mile. If you didn’t sell something, there is always an opportune time to sell, that’s what it is all about. You can sell at a loss and still make plenty of money. There is that opportunity, sell, realize a loss per share, still profit, it can be done.

    The DOW was at 26,813, now at 21,792, that’s 5000 points gone. Ain’t coming back for a while.

    If you are an owner of an equity, a publicly traded company, you should be paying attention when the time comes, you have to, can’t ignore any of it.

    If you were paying attention, early last week to mid was the time to look and see if there were any red flags.

    You don’t have to have an eagle eye on the ebb and flow all of the time, but last week was one of those times, a real red flag, not one of those fake red flags you hear about.

    If you were really paying attention, you were going to decide to sell or not. Not is out of the question, at some point you decide, and the decision is to sell. What looks like a sell, is a sell.

    So you do sell, you see the liquidity trap, and you are off the hook. Your days of worry are over.

    It was time to sell and last week was the opportunity.

    Had I not sold, I would be hating it today.

    Ain’t no plunge protection team for the stock market either, it seems.

    Regardless of how the DOW waxes and wanes, people are still going to use oil.

    So it is therefore a buying opportunity for crushed oil company stocks that are listed on the exchanges.

    Marathon Oil is at 12.66, it was 23 and change a couple of weeks ago. Oasis the same, 4.74, 52 week low, Whiting Oil, 18.83, the same.

    So, if the DOW falls another 10,000 and it could, Marathon oil could be as low as 4 or 5 dollars.

    Another oil stock I watch is Northern Oil and Gas, it was 30 dollars and more, it closed yesterday at 1.95 USD, up three cents after hours.

    The Plunge Protection Team ain’t looking after your health and welfare, how about that?

    11,900 for The DJIA would still be ok.

    7,000 will spook Goldman Sachs and JP Morgan, the Ghost of Christmas Future will haunt them.

    Hilarious, the stock market is dumping and the Plunge Protection Team is in Full Panic Mode.

    They’re gonna stay that way for a few days. lol

  18. I AM THE MOB on Tue, 25th Dec 2018 4:35 am 

    Clogg

    Enjoy Christmas by yourself you ugly neckbearded Nazi..Don’t worry you will be dead soon..

    https://medium.com/@Cliffhanger1983/the-collapse-of-civilization-manifesto-2039c6a5327

  19. Cloggie on Tue, 25th Dec 2018 4:40 am 

    “Donald Trump blasts the US Federal Reserve, saying it’s the ‘only problem our economy has'”

    https://www.abc.net.au/news/2018-12-25/donald-trump-attacks-us-federal-reserve-as-markets-decline/10667604

    This is what killed JFK.

    Nationalize the Fed!
    End Fed = End ZOG

    https://www.infowars.com/watch/?video=5c21301c5d9ecf3739563742

    “Roger Stone Is Worried They’re Going To Assassinate Trump”

    He should be. The difference with 1963 is that regardless how Trump will end:

    End Trump = CW2

  20. Cloggie on Tue, 25th Dec 2018 4:45 am 

    Enjoy Christmas by yourself you ugly neckbearded Nazi..Don’t worry you will be dead soon..

    That’s mr Nazi to you.

    You are just a commie bad loser, who is going down after a century of terrorizing the planet and you know it. And not because of stoopid “peak oil” superstition. There is enough to fry us all.

  21. Cloggie on Tue, 25th Dec 2018 4:55 am 

    Renault to open trans-Atlantic route’s with SAILBOATS…

    https://deepresource.wordpress.com/2018/12/25/sailing-the-oceans-with-renault/

    …bringing down CO2-emission up to 90%.

  22. Cloggie on Tue, 25th Dec 2018 5:18 am 

    “Yabut, you need fossil fuel to power shipping?!”

    Eh, no.

    https://deepresource.wordpress.com/2018/12/25/hydrogen-fuel-cells-penetrating-shipping/

    “Hydrogen Fuel Cells Penetrating Shipping”

  23. I AM THE MOB on Tue, 25th Dec 2018 7:59 am 

    Ahhhheehhheerrrerer ummmmm ahhhh eereeerr eeeeeee ooooooohh aahhhaerrge

    Yes, you do you fucking moron.

  24. Davy on Tue, 25th Dec 2018 8:13 am 

    “Surplus Energy Economics #142: Past, present and future”
    https://tinyurl.com/juksqyp

    “Reflecting on the essential linkage between debt and growth, you might also wonder why we’re not already seeing the debt edifice crumbling. There are two main answers to this. The first is that the debt structure has been buttressed by de-prioritising another form of futurity – simply put, we’ve already created huge (and burgeoning) gaps in pension provision as part of the price of preserving the edifice of debt. The second answer is simpler still – we’ve not seen the debt edifice start to crumble yet……”

  25. Cloggie on Tue, 25th Dec 2018 8:51 am 

    The storage challenge. The back-of-the-envelope answers:

    https://deepresource.wordpress.com/2018/12/25/how-much-storage-is-needed/

    – below 30-40% penetration of renewable electricity, you do not need to worry about storage at all.

    – up to 55% renewable energy you need to be able to provide 8 hours full capacity electricity from storage (battery, pumped hydro)

    – for a 100% renewable energy economy (modeled after present day Germany), you need to almost double the total annual electricity production [*] and you need a storage of 41% annual electricity production (hydrogen, thermal solar, biomass and a little fraction battery/pumped hydro)

    [*] – this sounds more than it is. We are talking intermittent production here, not installed name plate capacity. And note that this double electricity provides not only for the conventional electricity consumption, but also for space heating (all from heat pumps) and transport.

    For Germany (80 million) the numbers are:

    Current electricity consumption: 514 TWh

    In a 100% renewable energy base with the same level of wealth/comfort:

    Required (intermittent) renewable electricity production: 924 TWh

    Accompanying storage:

    hydrogen 179 TWh
    thermal solar 68+62 TWh
    biomass 50 TWh
    battery 9 TWh
    pumped hydro 7 TWh.

    Total: 375 TWh or 41%.

    Additional requirement: reduce heat leaks from buildings with 2/3.

    The upfront costs are admittedly higher, but after the investment phase, the energy cost of society are the same as the current fossil based one.

  26. I AM THE MOB on Tue, 25th Dec 2018 9:09 am 

    A false flag is very easy to orchestrate..You simply tell the boss at the top of the ladder you want a job done..And then he passes it down the line..See simple really..

  27. I AM THE MOB on Tue, 25th Dec 2018 9:11 am 

    We live in frightening times. It’s my belief that “you personally” will most likely die of starvation or conflict between 2020 to 2040.

    You will experience a collapse of human civilization, a die-off of humans, a destruction of the ecosystem, a loss of access to mined and drilled resources, and a dark age from which your descendent’s will not reemerge.

    https://medium.com/@Cliffhanger1983/the-collapse-of-civilization-manifesto-2039c6a5327

  28. wildbourgman on Tue, 25th Dec 2018 9:20 am 

    I don’t get the supposed production cuts. Who is not going to get the shipment they expected?

    I think that production cuts actually would have to create a long term shortage to be effective. Because short term, buyers know what’s possible, they know what can be easily shipped when necessary and just having that knowledge keeps the price down. It’s similar to when Saudi told the world go ahead and grow all you want we have 2 MBPD excess capacity in order to calm market fears of peak oil, hurricanes or war.

    It also appears that Saudi for instance had ramped up production, so they could have something to cut if this exact scenario came up.

    Kinda like raising interest rates so you have something to cut during a recession?

  29. Davy on Tue, 25th Dec 2018 9:50 am 

    So neder you are saying German is presently 514 TWH which is significantly fossil fuels but you want to get to (100% renewables) 924 TWH + (storage) 375 TWH = 1299 TWH??? In a few years. Where is the money coming from?

  30. I AM THE MOB on Tue, 25th Dec 2018 9:56 am 

    All I want for Christmas is a false flag against Iran or Russia! And a nuclear first strike!

  31. Sissyfuss on Tue, 25th Dec 2018 10:07 am 

    I Is Da Moob, have you ever heard of MAD, mutually assured destruction? It will ever go out of fashion until we disarm, which will never happen even as the ecosphere dispatches us one by one. Thinking the world could survive a nuclear war is charmingly infantile but hey, it’s Christmas so keep sending those letters to Santa. He might send you that hyper-sonic missile you keep asking for.

  32. I AM THE MOB on Tue, 25th Dec 2018 10:17 am 

    Sissy

    The US has installed missile defense systems surrounding Russia..They are fucked..We can now play this game to a win!

  33. I AM THE MOB on Tue, 25th Dec 2018 10:23 am 

    Sissy

    Great Depression 2.0, fascist comeback, WWIII, and nuclear holocaust in 3…2…1…

  34. JuanP on Tue, 25th Dec 2018 10:50 am 

    “Free fall: Oil slips to lowest since 2017” Brent is at US$50.
    https://www.rt.com/business/447349-oil-plunge-economic-slowdown/

  35. Cloggie on Tue, 25th Dec 2018 11:44 am 

    “So neder you are saying German is presently 514 TWH which is significantly fossil fuels but you want to get to (100% renewables) 924 TWH + (storage) 375 TWH = 1299 TWH??? In a few years. Where is the money coming from?”

    Nope.
    924 TWh renewable electricity generation
    375 TWh storage (cost is mostly electrolysis hardware)

    Payment from zero fossil fuel bill.

  36. JuanP on Tue, 25th Dec 2018 11:46 am 

    Cloggie, as usual your numbers don’t add up.

  37. Cloggie on Tue, 25th Dec 2018 11:47 am 

    “All I want for Christmas is a false flag against Iran or Russia! And a nuclear first strike!”

    Putting you in the Schwitz laborcamp, would be too benign.

  38. Davy Identity Theft on Tue, 25th Dec 2018 1:28 pm 

    JuanP on Tue, 25th Dec 2018 11:46 am

    Cloggie, as usual your numbers don’t add up.

  39. Davy Identity Theft on Tue, 25th Dec 2018 1:29 pm 

    JuanP on Tue, 25th Dec 2018 4:15 am

  40. I AM THE MOB on Tue, 25th Dec 2018 4:17 pm 

    Putting you in an Oven would be too benign.

    Mmmm roasted Cloggnuts

  41. makati1 on Tue, 25th Dec 2018 5:58 pm 

    Cloggie, MOB is just another insane American who believes they are immune from reality. Best he is ignored. Momma must be getting tired of his whining and complaining about room service in her basement. Maybe he got a new used couch for Christmas? LOL

  42. makati1 on Tue, 25th Dec 2018 6:09 pm 

    MOB, just because you have a suicidal tendency does not mean the the rest of the world has to go with you. Sorry, snowflake, but the US will go down first.

    Russia has a much better missile defense shield (S400) than the US will ever have and your own military admits it. The graft and corruption in the MIC means all they can build are overpriced things that don’t work. The US antimissile system is over 50 years old. It couldn’t stop a flock of Canadian geese.

    https://www.rt.com/usa/344435-us-nuclear-floppy-disks/

    “One of the legacy technologies identified by GAO is 8-inch floppy disks, which are used by the DoD to operate the functions of American nuclear forces. A computer system, on which deployment of ICBMs, nuclear bombers and tanker aircraft depends, runs on 1970s computers that use the floppy disks. The Pentagon plans to get rid of them by 2017, the report said.” (As of today, they gaven’t.)

    Duck and Cover! LMAO

  43. I AM THE MOB on Tue, 25th Dec 2018 6:16 pm 

    Mak

    China has the worlds largest debt and is the world’s largest oil importer with a global shortage headed their way..Those are the reasons China is falling first..Your claims about the US falling first are baseless..You didnt even know China had the worlds largest debt..You went by their fake government statistics. Maybe next time you should learn to question everything and do your homework..This is why you couldn’t make it in college and had to be a dirty construction worker..

  44. makati1 on Tue, 25th Dec 2018 6:27 pm 

    MOB, you keep pounding the same old bullshit as if saying it makes it true. I keep referring articles that point out that you are wrong and it is the US that is in deep shit, but you ignore them. Typical delusional/brainwashed American. Wishing does not make it so, snowflake.

  45. I AM THE MOB on Tue, 25th Dec 2018 6:45 pm 

    Mak

    Power concedes nothing without a demand. It never did and it never will..

    -Frederick Douglass

  46. makati1 on Tue, 25th Dec 2018 7:25 pm 

    MOB, what does that random quote have to do with my assertion? Think for yourself, or is it too painful?

  47. I AM THE MOB on Tue, 25th Dec 2018 7:36 pm 

    Mak

    You are just a weak old hillbilly..Why dont you go fuck your cousin you ignorant construction worker..

  48. I AM THE MOB on Tue, 25th Dec 2018 7:42 pm 

    Vladimir Putin on nuclear war: U.S. is pushing world ‘closer to a very dangerous line’

    https://www.nbcnews.com/news/world/vladimir-putin-faces-questions-annual-press-conference-n950226?cid=sm_npd_nn_fb_ma

  49. makati1 on Tue, 25th Dec 2018 7:47 pm 

    MOB’s 9 year old persona appears when he cannot sell his bullshit. Typical snowflake. LOL

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