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Page added on February 16, 2015
Why The Price Of Oil Is More Likely To Fall To 20 Rather Than Rise To 80
This is just the beginning of the oil crisis. Over the past couple of weeks, the price of U.S. oil has rallied back above 50 dollars a barrel. In fact, as I write this, it is sitting at $52.93. But this rally will not last. In fact, analysts at the big banks are warning that we could soon see U.S. oil hit the $20 mark. The reason for this is that the production of oil globally is still way above the current level of demand. Things have gotten so bad that millions of barrels of oil are being stored at sea as companies wait for the price of oil to go back up. But the price is not going to go back up any time soon. Even though rigs are being shut down in the United States at the fastest pace since the last financial crisis, oil production continues to go up. In fact, last week more oil was produced in the U.S. than at any time since the 1970s. This is really bad news for the economy, because the price of oil is already at a catastrophically low level for the global financial system. If the price of oil stays at this level for the rest of the year, we are going to see a whole bunch of energy companies fail, billions of dollars of debt issued by energy companies could go bad, and trillions of dollars of derivatives related to the energy industry could implode. In other words, this is a recipe for a financial meltdown, and the longer the price of oil stays at this level (or lower), the more damage it is going to do.
The way things stand, there is simply just way too much oil sitting out there. And anyone that has taken Economics 101 knows that when supply far exceeds demand, prices go down…
Oil prices have gotten crushed for the last six months. The extent to which that was caused by an excess of supply or by a slowdown in demand has big implications for where prices will head next. People wishing for a big rebound may not want to read farther.
Goldman Sachs released an intriguing analysis on Wednesday that shows what many already suspected: The big culprit in the oil crash has been an abundance of oil flooding the market. A massive supply shock in the second half of last year accounted for most of the decline. In December and January, slowing demand contributed to the continued sell-off.
At this point so much oil has already been stored up that companies are running out of places to put in all. Just consider the words of Goldman Sachs executive Gary Cohn…
“I think the oil market is trying to figure out an equilibrium price. The danger here, as we try and find an equilibrium price, at some point we may end up in a situation where storage capacity gets very, very limited. We may have too much physical oil for the available storage in certain locations. And it may be a locational issue.”
“And you may just see lots of oil in certain locations around the world where oil will have to price to such a cheap discount vis-a-vis the forward price that you make second tier, and third tier and fourth tier storage available.”
[…] “You could see the price fall relatively quickly to make that storage work in the market.”
The market for oil has fundamentally changed, and that means that the price of oil is not going to go back to where it used to be. In fact, Goldman Sachs economist Sven Jari Stehn says that we are probably heading for permanently lower prices…
The big take-away: “[T]he decline in oil has been driven by an oversupplied global oil market,” wrote Goldman economist Sven Jari Stehn. As a result, “the new equilibrium price of oil will likely be much lower than over the past decade.”
So how low could prices ultimately go?
As I mentioned above, some analysts are throwing around $20 as a target number…
The recent surge in oil prices is just a “head-fake,” and oil as cheap as $20 a barrel may soon be on the way, Citigroup said in a report on Monday as it lowered its forecast for crude.
Despite global declines in spending that have driven up oil prices in recent weeks, oil production in the U.S. is still rising, wrote Edward Morse, Citigroup’s global head of commodity research. Brazil and Russia are pumping oil at record levels, and Saudi Arabia, Iraq and Iran have been fighting to maintain their market share by cutting prices to Asia. The market is oversupplied, and storage tanks are topping out.
A pullback in production isn’t likely until the third quarter, Morse said. In the meantime, West Texas Intermediate Crude, which currently trades at around $52 a barrel, could fall to the $20 range “for a while,” according to the report.
Keep in mind that the price of oil is already low enough to be a total nightmare for the global financial system if it stays here for the rest of 2015.
If we go down to $20 and stay there, a global financial meltdown is virtually guaranteed.
Meanwhile, the “fracking boom” in the United States that generated so many jobs, so much investment and so much economic activity is now turning into a “fracking bust”…
The fracking-for-oil boom started in 2005, collapsed by 60% during the Financial Crisis when money ran out, but got going in earnest after the Fed had begun spreading its newly created money around the land. From the trough in May 2009 to its peak in October 2014, rigs drilling for oil soared from 180 to 1,609: multiplied by a factor of 9 in five years! And oil production soared, to reach 9.2 million barrels a day in January.
It was a great run, but now it is over.
In the months ahead, the trickle of good paying oil industry jobs that are being lost right now is going to turn into a flood.
And this boom was funded with lots and lots of really cheap money from Wall Street. I like how Wolf Richter described this in a recent article…
That’s what real booms look like. They’re fed by limitless low-cost money – exuberant investors that buy the riskiest IPOs, junk bonds, leveraged loans, and CLOs usually indirectly without knowing it via their bond funds, stock funds, leveraged-loan funds, by being part of a public pension system that invests in private equity firms that invest in the boom…. You get the idea.
As all of this bad paper unwinds, a lot of people are going to lose an extraordinary amount of money.
Don’t get caught with your pants down. You will want your money to be well away from the energy industry long before this thing collapses.
And of course in so many ways what we are facing right now if very reminiscent of 2008. So many of the same patterns that have played out just prior to previous financial crashesare happening once again. Right now, oil rigs are shutting down at a pace that is almost unprecedented. The only time in recent memory that we have seen anything like this was just before the financial crisis in the fall of 2008. Here is more from Wolf Richter…
In the latest reporting week, drillers idled another 84 rigs, the second biggest weekly cut ever, after idling 83 and 94 rigs in the two prior weeks. Only 1056 rigs are still drilling for oil, down 443 for the seven reporting weeks so far this year and down 553 – or 34%! – from the peak in October.
Never before has the rig count plunged this fast this far:
What if the fracking bust, on a percentage basis, does what it did during the Financial Crisis when the oil rig count collapsed by 60% from peak to trough? It would take the rig count down to 642!
But even though rigs are shutting down like crazy, U.S. production of oil has continued to rise…
Rig counts have long been used to help predict future oil and gas production. In the past week drillers idled 98 rigs, marking the 10th consecutive decline. The total U.S. rig count is down 30 percent since October, an unprecedented retreat. The theory goes that when oil rigs decline, fewer wells are drilled, less new oil is discovered, and oil production slows.
But production isn’t slowing yet. In fact, last week the U.S. pumped more crude than at any time since the 1970s. “The headline U.S. oil rig count offers little insight into the outlook for U.S. oil production growth,” Goldman Sachs analyst Damien Courvalin wrote in a Feb. 10 report.
Look, it should be obvious to anyone with even a basic knowledge of economics that the stage is being set for a massive financial meltdown.
This is just the kind of thing that can plunge us into a deflationary depression. And when you combine this with the ongoing problems in Europe and in Asia, it is easy to see that a “perfect storm” is brewing on the horizon.
Sadly, a lot of people out there will choose not to believe until the day the crisis arrives.
By then, it will be too late to do anything about it.
by MICHAEL SNYDER | ECONOMIC COLLAPSE
20 Comments on "Why The Price Of Oil Is More Likely To Fall To 20 Rather Than Rise To 80"
Plantagenet on Mon, 16th Feb 2015 11:56 am
The glut of oil in the market has already driven the price of oil down by 50%—its hard to believe oil will tumble all the way down to $20 bbl, but if the oil glut continues month after month then price will have to fall even farther to sop up the glut in supply and to curtail further drilling until the oil price firms up.
steve on Mon, 16th Feb 2015 12:25 pm
These arguments are just a waste of time….If you can callfuture prices then you are way more advanced than anyone on earth…I for one think that prices will go up and prices will go down…a lot of us have predicted that the system would collapse years ago and it has not yet….
Calling tops and bottoms is a fools game.
shortonoil on Mon, 16th Feb 2015 12:38 pm
The recent surge in oil prices is just a “head-fake,” and oil as cheap as $20 a barrel may soon be on the way, Citigroup said in a report on Monday as it lowered its forecast for crude.
A bunch of economist playing with their supply demand/curves. The only problem is that they are playing with the supply/demand of the wrong thing. This is not a volumetric problem, it is an energy problem. Oil is going down because its ability to power the economy is going down. What they are saying is that there is too much oil, when actually there is too much oil of too low a quality to be of any value to the economy.
http://www.thehillsgroup.org/depletion2_022.htm
We are already very close to 3 std deviations from the curve, if oil goes to $20 we will be 7 std. deviations from the curve. That will probably be enough to cause a catastrophic collapse of industrial society. Let’s hope they are wrong.
http://www.thehillsgroup.org/
Dredd on Mon, 16th Feb 2015 1:02 pm
“This is just the beginning of the oil crisis.”
The definition of “oil crisis” is: “the results of choosing to use crude oil as the lifeblood of civilization.”
Discussing the price of what is in reality the poisoning of civilization is barbaric, insensitive, and sadistic.
Jerry McManus on Mon, 16th Feb 2015 1:10 pm
I know it is counter intuitive, but if the American Empire had been smart they would have banned all domestic production a long time ago.
Burn everyone else’s oil up first and we end up as last man standing in an otherwise energy starved world.
Yes, prices would have been considerably higher, but that would have been massive incentive to build out mass transit and a world class train system. Instead we all we got was strip malls, parking lots, and freeways.
Even if some techno-miracle had been pulled out of a hat rendering fossil fuels obsolete, we would still be benefiting from the reduction in carbon emissions and our breadbaskets would not be turning into deserts.
Plantagenet on Mon, 16th Feb 2015 1:19 pm
Hi Jerry:
Much of the strength of the American economy has come from the US energy industry. Your fantasy that the US could ban the US energy industry but still have a vibrant economy isn’t very logical. The whole reason the US came to be the world’s dominant economy comes from the fact that the US was the world’s largest energy producer during the middle of the 20th century.
Davy on Mon, 16th Feb 2015 1:26 pm
Jerry, why isn’t KSA saving its oil like the late king said they should for the next generation? The reason is the economics are not there. Have you read some of Short’s posts?
As for your other malinvestments of suburbia that is a cultural defect of the exceptionalist greed driven American industrial elite. That is a cultural issues not a oil related issue.
shortonoil on Mon, 16th Feb 2015 4:14 pm
The recent surge in oil prices is just a “head-fake,” and oil as cheap as $20 a barrel may soon be on the way, Citigroup said in a report on Monday as it lowered its forecast for crude.
Lifting costs are extremely sensitive to water cut. A 98% water cut means that 45 barrels of water must be pump out of a well to retrieve one barrel of oil. More than half of US conventional production now has a water cut greater than 90%.
This is not only the situation in the US, it is true throughout the world. Lukoil is one of the few world producers that publishes a full set of production statistics, including water cut:
http://www.lukoil.com/materials/doc/DataBook/DBP/2011/part_03.pdf
Most of the world’s extractable conventional crude deposits lay in 3500 to 4500 foot range. The lifting cost for a 4000 foot well with a 90% water cut is about $20/ barrel. If prices fell to $20/barrel it would shut in at least half of the world’s production. That is not likely to happen this year!
Citi, Goldman, and others have been bantering around with the claim of $20 oil recently. Either they are very poor engineers, or they are prepping the market for some financial agenda of their own. Considering the sources it is likely to be both.
http://www.thehillsgroup.org/
Northwest Resident on Mon, 16th Feb 2015 4:41 pm
“Either they are very poor engineers, or they are prepping the market for some financial agenda of their own.”
My guess is that “oil as cheap as $20 a barrel may soon be on the way” is code speak for “get your ducks in order now boys, lock and load, the shit is about to hit the fan”.
Davy on Mon, 16th Feb 2015 5:12 pm
Short, most understand the motived of GS. Their exploits are well documented along with JPM. They seed the airwaves with beneficial news either to long or short. They have infiltrated government with their insiders here and abroad. C.S. Lewis terms might have been talking about GS in this short quote:
“I live in the Managerial Age, in a world of “Admin.” The greatest evil is not now done in those sordid “dens of crime” that Dickens loved to paint. It is not done even in concentration camps and labour camps. In those we see its final result. But it is conceived and ordered (moved, seconded, carried, and minuted) in clean, carpeted, warmed and well-lighted offices, by quiet men with white collars and cut fingernails and smooth-shaven cheeks who do not need to raise their voices. Hence, naturally enough, my symbol for Hell is something like the bureaucracy of a police state or the office of a thoroughly nasty business concern.”
shortonoil on Mon, 16th Feb 2015 5:46 pm
“Hence, naturally enough, my symbol for Hell is something like the bureaucracy of a police state or the office of a thoroughly nasty business concern.”
Do you mean something like this:
http://www.zerohedge.com/news/2015-02-16/hsbc-bank-secret-origins-laundering-worlds-drug-money
steve on Mon, 16th Feb 2015 9:49 pm
Look….. oil is not going to fall to $20 a barrel until the game is over…If “they” want the price to go up “they” push a button and it goes up….I am not saying what short is saying is not true…but if his opinions ever made it to mainstream he would quickly disappear. Everything is being manipulated right now even the stock market…… we are only seeing half of the story because that is all they will let us see…
Perk Earl on Tue, 17th Feb 2015 3:11 am
“I am not saying what short is saying is not true…but if his opinions ever made it to mainstream he would quickly disappear.”
You need to read more carefully. Short was saying it isn’t going to $20 a barrel, at least not right now. His website’s chart’s have oil at about $76 a barrel for this year and $60 in 2016.
I think $20. is some sort of attempted manipulation by Citi for purposes of squeezing some profit, because not only has oil priced stabilized, it’s risen to Brent being about 61 something a barrel now.
Davy on Tue, 17th Feb 2015 5:51 am
Perk, I would say your are correct the $20 remarks by Citi & GS are surely market making. They want to induce short sellers while they do their market longs. These folks are notorious for speaking their mind with the selective use of facts for their agenda of profit. We know here $20 would last a very short time and just as likely $100 would not last. We know the speculative side of the oil complex locked into the demand side. Yet we also know what price is far too low for supply to not react precipitously. Many feel the neighborhood of $40 is that number.
These finance wonks have little care for POD & ETP of oil. These people like our resident Marm find the realities of POD & ETP get in the way of nice graphs with their nice trends and averages. These concepts don’t fit into growth based econ 101. These people are keyed into the markets, Algo’s and the herd of investors. This environment has a separate reality. The digital is real in a sense that these folks believe and operate as if it is real. The price discovery we talk about here is related to dynamics systems and thermodynamic realities. That is a far cry from the Wall Streeters digital creations. This is further seen with economists and financial wonks in general and further by extension to MSM and the bought off infected politicians.
There are two elements going on within demand one is real and the other is the digital. On the supply side the two are actual physical realities of production of oil and the speculative production of oil. This is why the “Planter” glut is so fascinating. We had for a short time a mal-investment boom occur based primarily on a central bank and Wall Street speculative boom. There is nothing much new about the technology and much of the infrastructure was in place ready to capitalize on huge amounts of central bank supplied liquidity in an environment of repressed rates. Wall Streeters could take cheap money and invest in the oil complex at significant returns.
For these finance wonks this boom was a win win. I can see the underlying attitudes of irrational exuberance with USA USA, drill baby drill, Saudi America, and down with OPEC and Russia What could be more apple pie than that. The fly in the punch bowl is the realities of POD & ETP of oil. These physical and systematic dynamics do not turn on and off because a flag is waived and debt is created. They continue to follow a quantifiable path. POD & ETP price results and supply cannot be manipulated physically only digitally for a short time by jawboning the market. The digital is a representation of human nature not physical reality. The physical reality does not change.
I am going to redundantly mention my view of the bumpy plateau of diminishing returns of oil’s economic value has likely plateau around 2005. This physical reality is now in a bumpy descent. This shift is likewise likely true of the financial system with the huge overhead of debt. The financial system and the oil complex are two foundational elements of society if at limits and if in diminishing returns then we are in descent. There is no substitution at these levels. The bumpy descent is being masked by freddy numbers and central bank jawboning but the clear reality from multiple respectable sources is a disconnect between a physical economy and a digital economy.
There is a clear environment of deteriorating physical economies from excessive macro debt, wealth transfer policies, cannibalization of the public for individual profit, corruption of politics and industry, geopolitical trade tensions, global proxy wars, and huge FX volatility ($). If you see the real economy and the real oil complex in this systematic dynamics then we see a clear disconnect between GS and Citi realities.
This descent can bang around for a time because the system is fully corrupted from the top down. The infiltration of these financial concerns is complete. Russia is an exception with Putin and a few others that are bucking this trend but they are not succeeding at the moment. If BAU falls apart maybe Putin will coopt them but now the global financial plutocratic organizations are firmly in control globally and have no intent on reform.
steve on Tue, 17th Feb 2015 10:42 am
No disrespect to Short but his analysis is based on an “open honest” system. That is not what we have. We have a manipulated closed system that is controlled by a few. The hard drives of computers have spy ware on them…didn’t you see the super bowl totally rigged….
steve on Tue, 17th Feb 2015 10:45 am
I like this site but I seem to get more honest news and opinions from zero hedge…maybe it is a generational thing most of the people on here are retired with fixed….I would say the major demographic here is former liberal age 30 to 75 and “well to do” not a very broad audience base…a very myopic view of things…
Davy on Tue, 17th Feb 2015 11:24 am
Steve, why have an opinion on either. Gleen the needed facts from both. I read both daily. They are oriented in slightly different directions. I find good alternative financial info off of ZH. The oil complex side is covered well on PO.
steve on Tue, 17th Feb 2015 2:22 pm
Well maybe you are right Davy…but I always look around at “groups” and am wary of Group think…this group is very…very homogenous….I would say about as white as 2percent milk! It is good to take all that is said here but with a certain amount of skepticism …I see the main meme here taken as gospel. Just an observation. Maybe it is a cultural thing but it seems people from the United States look at everything from a Me..me…me angle….When I go to the States I am amazed at the waste and the Orwellian state there…. I can’t see how this continues but I can see the resentment towards the U.S…..using 20 percent of the earths resources…!
Davy on Tue, 17th Feb 2015 4:17 pm
Steve, I have a Spanish daughter and my fiancée is Italian. I know the resentment you are talking about from being in Europe as a European. It is not excessive in Europe like elsewhere though.
This consumption situation will change and soon. It won’t be long and the world will only remember how prosperous the Americans once were. We will all be poor soon. I hope most of us will be poor but alive. I am certain we will all be poor. I wish I could say the same for being alive.
GregT on Tue, 17th Feb 2015 5:11 pm
steve,
“I see the main meme here taken as gospel.”
What would that meme be, if you don’t mind me asking?