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Page added on July 24, 2018
The bulls are wrong — here’s why oil could plummet to $45
The oil price rebound that has buoyed many embattled crude producers may not last.
Ed Morse, managing director and global head of commodities research at Wall Street bank Citigroup Inc. and one of the world’s top oil forecasters, believes Brent oil prices – which are currently trading near US$72.50 per barrel and have tried to breach the US$80 per barrel barrier in each of the last three months – will fall back into a band between US$45 to US$65 per barrel in just over a year.
“We think oil is headed back to that range by the end of 2019,” Morse said in an interview with the Financial Post in Calgary, though he is still bullish on Brent oil prices for the remainder of 2018 and the first quarter of next year.
The commodities expert was among the first forecasters to correctly predict the oil price crash of 2014 and now has long-term bearish view of Brent oil prices that runs contrary to calls for US$70 to US$80 per barrel oil by Goldman Sachs Group Inc., US$85 per barrel prices by Morgan Stanley and over US$100 per barrel oil according to Bernstein & Co.
Each of those investment banks, and many other forecasters, made their bull cases citing dynamics that are currently playing out in global markets.
Some rightly point out that oil and gas companies have not invested in new production to keep pace with growing demand for oil, which is now pushing 100 million bpd. Others note that traders have been drawing oil out of storage over the course of the last year, eliminating a negative overhang on crude prices.
Still more highlight that major oil producing nations like Iran have been sanctioned and others, like Venezuela, face domestic crises that have curtailed oil production. Finally, some optimistic forecasts point out that the natural decline rates in oil production has accelerated, further restricting supply.
In each of these bull cases, oil supply is restricted while demand continues to rise.
But Morse isn’t swayed by these arguments. “The bull argument is based on faulty analysis,” he said. Demand for oil has continued to rise, but he does believe supply can keep pace.
Here’s why:
CAPITAL EFFICIENCY HAS IMPROVED DRAMATICALLY
Capital spending has declined across the oilpatch, leading to warnings from both the International Energy Agency and the Organization of Petroleum Exporting Countries (OPEC) earlier this year that an oil price shock could be coming without new investments.
In Canada alone, reinvestment in conventional oil and gas extraction and in the oilsands has yet to return to 2014 levels, data from ARC Energy Research Institute shows. In the oilsands, the amount of money re-invested in the play fell from $33 billion in 2014 to an expected $12.5 billion this year.
But Morse said the money that is being spent on production is significantly more efficient than before. “There should be no debate that the efficiency of capital has improved by at least 50 per cent since at least 2014. The doubts are whether that’s going to continue,” he said.
“So far, those that have predicted cost reflation have been proven wrong, including in the shale plays,” he said.
TECHNOLOGY IMPROVING OIL RECOVERY
At the beginning of the shale revolution, when producers across North America were first fracking horizontal wells, companies were only able to extract a small percentage of the vast quantities of oil and gas in place. As technology has improved and operators have optimized their techniques, however, more oil has been recovered.
“We’ve seen recovery rates go from low single digits to low double digits,” Morse said. “Why is it not going to go to 30 or 40 per cent? Or why, theoretically, won’t it go to the recoverability of conventional oil at 60 per cent?”
Like improvements in capital efficiency, he said, technical improvements are boosting oil production, further improving the supply picture.
“I think you’ve got to be a technology pessimist at a period of time when it’s hard to be a technology pessimist because digitization of the entire supply chain in the oil and gas sector is just beginning,” he said.
DECLINE RATES ARE OVERBLOWN
The IEA and others have predicted the rate at which the production rate of existing oil wells decline over time will accelerate. This is particularly the case with shale oil wells, which are generally gushers in the first months of their life and then decline more quickly than conventional wells thereafter.
But Morse said the bull argument for oil prices incorrectly applies these accelerated decline rates to the current 100 million bpd oil production picture. Morse believes decline rates should only be counted against a fraction of global oil production.
That fraction of global production is between 40 and 45 per cent of the global production of 100 million bpd, which is between 40 million bpd and 45 million bpd.
Why? Morse said that it’s illogical to count oil production that doesn’t decline – like Canadian oilsands production – and production from OPEC, which has shown a consistent ability to produce 35 million bpd over a 50-year time period, or production that isn’t refined.
“So we’re down to 40 million to 45 million bpd,” Morse said. Assuming a 5 per cent decline rate of those barrels, the outcome is an oil supply reduction of 2 million to 3 million bpd, which is considerably smaller than a greater than 5 million bpd supply disruption assumptions.
SPARE CAPACITY ISN’T THE ISSUE, IT’S DELIVERABILITY
Forbes magazine and others have reported that OPEC’s move to increase oil production following their most recent meeting in June would restrict the cartel’s ability to further boost production if necessary, “leaving the oil market on a knife’s edge as it deals with a host of potential supply disruptions.”
Morse said this is the strongest argument for higher oil prices but “even when you get to the spare capacity argument (for higher oil prices), there’s not a sophisticated look at what the deliverability of the Saudi system is.”
Saudi Arabia’s port system’s can handle about 15 million barrels per day, and the country has around 300 million barrels of oil in storage in the kingdom.
Saudi Aramco also has oil stored in Rotterdam, in the Netherlands, Okinawa, China and the U.S. Gulf Coast, Morse said. Given current Saudi production of 10.8 million bpd and the size of the country’s port system, it would take Saudi Arabia six months of delivering 15 million barrels per day to the market to exhaust its own spare capacity.
The faulty analysis (of the oil bulls) applies equally to the issue of spare capacity”, similar to their thesis on accelerated depletion and a downturn in capital spending, Morse said.
15 Comments on "The bulls are wrong — here’s why oil could plummet to $45"
Makati1 on Tue, 24th Jul 2018 8:01 pm
Meaningless bullshit from the authors trying to justify their paycheck.
Meanwhile: “Third-World America: The ‘Bottom Half’ “Bolsters” The Economy By Going Into Debt”
““They are taking on debt that they can’t repay. A drop in savings and rise in delinquencies means you can’t support the (overall) spending,” he said. An oil or trade shock could lead to “a rather dramatic scaling back of consumption,”…
When the inevitable recession hits, the debt remains while income falls, pushing millions of people over the edge.”
https://www.zerohedge.com/news/2018-07-24/third-world-america-bottom-half-bolsters-economy-going-debt
Slip slidin’…
Duncan Idaho on Tue, 24th Jul 2018 9:20 pm
Yep, if you look at the numbers, the end of the year is going to be interesting.
This game is going to get even more interesting.
Makati1 on Tue, 24th Jul 2018 9:31 pm
The economy may bit be the most important news: “A New World Order: That Possible Dream”
“…how often can any reasonable person write about the same thing, the same war propaganda dished out with breakfast, lunch and dinner on every TV channel, every radio channel, every newspaper, time after time, without being numbed by it all…. It’s difficult to keep up with the propaganda the forces for war are putting out on a daily basis….
Turn on the news, read a journal, and what you will see is not news but the ravings of secret service officials, interviewed by criminals with the morality of Julius Streicher, the Nazi propagandist hanged at Nuremberg, telling us they are the voice of truth and the rest of us better just shut up and take it….
… their attempt to create this new order has met resistance in every region of the world and as the situation of the people deteriorates, especially in the USA, the reaction becomes more and more irrational and desperate and dangerous to our survival. Even as our industrial civilization brings us all to the edge of extinction, they bang the drums of war….
Little the war crowd care about the working classes. They are capital. They are the dictatorship. We are the helots who they spit upon with every false word out of their mouths, who steal our money and who steal our lives so they can gorge themselves until they vomit and then gorge themselves the more.”
https://journal-neo.org/2018/07/24/6554-a-new-world-order-that-possible-dream/
“… there is only one world order that I can accept, that can lead us, the working people of the world…” Not likely to happen, but…?
Slip slidin’…
MASTERMIND on Tue, 24th Jul 2018 9:32 pm
Morse said last year he thought we would have an oil shortage this year.
https://www.bloomberg.com/news/articles/2017-09-25/citi-says-get-ready-for-an-oil-squeeze-than-an-opec-supply-surge
Looks like someone told him to change his tune..
LMFAO!
Bloomer on Wed, 25th Jul 2018 12:13 am
Iran oil output will be somewhat diminished due to the sanctions,but I am sure they will find buyers for most of their crude. Oil hungry China definately will, but let’s not forget Russia as the defactor oil broker buying cheap Iranian crude and flipping it for a healthy profit.
I am still not sold on shale oil as most of the oil plays have negetative cash flows and are kept afloat with speculative loose money. This balloon will soon pop as the Fed keeps raising rates. Trump knows this which is why he keeps calling out the Fed chairman. The last thing the Donald wants is for the whole house of cards to collapse on his watch…..cheers
Cloggie on Wed, 25th Jul 2018 12:21 am
I’m praying for $150 oil, to help promoting the renewable energy transition, but I would bet on much lower prices.
Under-investment is a consequence of low oil prices, the industry would be mad to invest if a little waiting could increase oil-prices.
However, I do not believe for a second that global geology is such that only America is “blessed” with huge shale potential. What happened in the US could happen anywhere.
I’m afraid that the arguments put forward in the article could be correct. Most here are underestimating the power of technology. EROI is not a constant factor for most branches of energy production, but a function of technology.
Meanwhile the weather gets hotter and hotter.
Runway Hanover airport:
http://www.spiegel.de/reise/aktuell/nach-hitze-sperrung-flughafen-hannover-ab-mittwoch-6-uhr-wieder-in-betrieb-a-1220039.html
The drought threatens to become a disaster in Holland. We are all most certainly going to surpass the worst year so far 1976:
https://www.nrc.nl/nieuws/2018/07/20/recordjaar-1976-zo-droog-was-het-nog-nooit-geweest-a1610689
Forest fires everywhere: Sweden, Greece. Yesterday tens of people were burned alive in Greece, totally surprised by the fire. 74 and counting, biblical scenes of people fleeing into the sea:
http://www.abc.net.au/news/2018-07-24/greece-fires-survivors-fled-into-sea-to-escape-flames/10031316
Cloggie on Wed, 25th Jul 2018 12:31 am
Predictions for Holland on Friday: 38 degrees Celsius.
https://www.weerplaza.nl/weerinhetnieuws/code-oranje-in-verband-met-hitte/4449/
Dutch record so far: 38.6 C in 1944.
Global record: 58 C in El Azizia in Libië, 13 september 1922
There is doubt about the accuracy, so now the official record is:
Greenland Ranch (Death Valley) in Californië, 10 juli 1913, 56.7 C
European record: 10 juli 1977, Athene. 48 C.
Bob Jonesme th on Wed, 25th Jul 2018 1:53 am
It looks like oil will yo-yo between $40 and $100 bbl until some MAJOR disruption occurs.
At $40, ‘Murica works as an idea and its beer, ball games, and ‘burbs for everyone (who isn’t getting attacked by police). Big Oil is sad, consumers are happy.
At $100, the whole U-S-A experiment fails and demand crashes until it hits the “new” low (slightly higher). Big Oil is happy, and consumers are sad.
When the price range for happiness narrows and sadness grows to the point any price movement creates way more sadness than happiness in both Big Oil AND consumers, this thing is going down the tubes.
At least, that’s how I see it for now.
Let’s say 2020.
MASTERMIND on Wed, 25th Jul 2018 2:05 am
Clogg
150 wouldn’t do help the transition to renewable s’, because reneables’s produce electricity and oil is used for transportation..
You are fucking moron who is ignorant as fuck.
Davy on Wed, 25th Jul 2018 6:14 am
I have been following this issue for years now and come to the conclusion that predicting oil price is folly. That sounds like a no brainer but for a time it appeared oil was going to go very high because of peak oil dynamics but then fracking changed the nature of peak oil dynamics. Post 08 crisis and the continuing rate repression and quantitative easing it was thought by many the economy could not sustain the distortions that rate repression causes with macro price discovery coupled with the risk excessive debt creates from quantitative easing. The wealth transfer distortions and all the yield chasing appear to be like a binge drinking event destine to end. I firmly believe it will end but it may not end for years. With this new global central bank arrangement debt at the macro level can be created and destroyed by policy and as long as they continue to work together reasonably well this can continue until confidence is lost. Confidence is human nature and represents economic liquidity. It is obvious central banks control confidence now. Until the distortion get so bad combined with other shocks related to war or resources the economy might just hum along into the grave. It can end tomorrow but it can also hum along an unknown number of years.
Oil follows the economy these days more than the other way around. This is because peak oil dynamics have changed. This does not mean oil will continue to follow the economy it just means this appears to be the phase it is in now and for some time ahead. If the global central banks and especially China and the US can maintain credit and consumption growth the global economy will produce growth. This does not mean healthy long term growth it just means growth to keep the ship afloat. Everything else will follow this including oil.
BobInget on Wed, 25th Jul 2018 10:05 am
Looks like Trump sanction on Iran will fail
China, India , Japan and Sri Lanka the top 4 importers of Iranian oil still need Iranian oil.
https://www.spglobal.com/platts/en/market-insights/latest-news/oil/072418-interview-japan-seeks-us-sanctions-waiver-for-iran-oil-imports-top-priority?utm_source=twitter&utm_medium=social&utm_term=oil&utm_content=photo&utm_campaign=news&hootpostid=b07c44e49c2cd5e7494a22f82480d8ef
Davy on Wed, 25th Jul 2018 10:19 am
bob, it’s not failure or success it is a grey area of both. Quit your anti-American American extremism and tell the truth not your interpretation of it.
BobInget on Wed, 25th Jul 2018 5:20 pm
SAUDI ENERGY MINISTER SAYS SAUDI ARABIA IS TEMPORARILY HALTING ALL OIL SHIPMENTS THROUGH BAB-EL-MANDEB STRAIT IMMEDIATELY: RTRS.
Well that’s sure interesting.
Good job Iran. I mean houthis.
BobInget on Wed, 25th Jul 2018 5:22 pm
Trump reached an agreement Wednesday with Jean-Claude Juncker of EU..The two sides agreed to expand European imports of U.S. liquefied natural gas…
President Donald Trump reached an agreement Wednesday with European Commission President Jean-Claude Juncker aimed at averting a transatlantic trade war, easing tensions stoked by Trump’s threat to impose tariffs on car imports.
The two sides agreed to expand European imports of U.S. liquified natural gas and soybeans and lower industrial tariffs on both sides, Trump said. The U.S. and European Union will “hold off on other tariffs” while negotiations proceed, Juncker said.
“We had a big day, very big,” Trump said at a joint statement with Juncker at the White House Wednesday. He hailed “a new phase” of trade relations.
https://www.bloomberg.com/news/articles/2018-07-25/trump-juncker-reach-deal-to-ease-trade-tensions-dow-jones-says-jk1jtfs8
BobInget on Wed, 25th Jul 2018 5:40 pm
Saudis suspend Red Sea oil shipments after tanker attacks
Houthi rebels increasingly targeting kingdom’s crude assets
Oil markets are so Ho Hum around this KSA
move.
IMO, Houthi are doing this to draw attention to their ongoing plight.
Clearly, the future of of crude oil sea transport becomes alike Nigerian pipelines.
http://www.livecharts.co.uk/MarketCharts/brent.php