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Page added on August 20, 2014
Oil ‘super spike’ is coming
Another bad day for traders bullish on energy as WTI crude oil slid 2%, hitting its lowest level since January. Across the pond Brent crude traded at its lowest level in almost 14th months.
From the heady days of mid-2008 when it traded at nearly $150 a barrel, crude oil has had quite a rocky ride. After sliding down to the $30s and rallying back around $120, crude has settled in around the $90 to $110 range for the past two years.
Commodity traders and analysts have wondered why oil hasn’t gone higher. Geopolitical tensions abound across the world; the Middle East seemingly hasn’t been this unstable in years.
In fact, some believe the commodity could actually go lower. Blake Morrow posits that with North American production rising, vehicles becoming more efficient, and crude oil’s inability to rally with global equities, all signs point to a bearish future for oil.
Dan Dicker, president of MercBloc and author of Oil’s Endless Bid says much has changed in the past few years, other factors also explain why oil has stagnated recently:
- Investment banks, particularly Morgan Stanley, Goldman Sachs, and JPMorgan have not only left oil trading but have also abandoned the oil marketing business, which used to bring a steady supply of new players to the energy market.
- Individual oil traders (including Dicker himself) have disappeared as well. Dicker speculates around 3,000 traders have left the industry.
- Remaining funds are trend and algorithmic firms with long-term positions already established.
- The big alpha players remaining in the oil trading business are physical commodity, private firms like Glencore, Vitol, and Trifugura among others.
Dicker believes these changes have all but killed immediate speculative activity, which has been good for consumers in the short term, but will be bad for the prospects of cheaper oil in the long term. Without the liquidity provided by these players in the energy market, a crude oil ‘super-spike’ could be in the cards.
The demise of offshore oil drilling could also be a catalyst in Dicker’s mind, not to mention oil supplies going offline in places like Libya, and decreasing in countries like Iran and Iraq. This is leading to an upcoming oil supply crisis he says, and ultimately with liquidity not what it once was, and with the cost of oil now making it prohibitive to develop new sources, ultimately the fundamentals will have to matter again.
“When you have an oil price that’s hanging around $95, you won’t see a $10 spike, you’ll see a $40 spike, because that’s what will be necessary to get these guys (oil exploration and production companies) ginned up” in order to produce more crude supply.
21 Comments on "Oil ‘super spike’ is coming"
Pops on Wed, 20th Aug 2014 10:48 am
OH! The Doom! The speculators have abandoned the market, whatever shall we do!!!
LOL
Plantagenet on Wed, 20th Aug 2014 10:52 am
Lower oil prices will help the US and global economy. Drill baby drill is working out pretty darn good after all.
rockman on Wed, 20th Aug 2014 12:33 pm
Average annual oil prices adjusted for inflation:
2013 – $91.54
2003 – $35.22
Oil prices in 2013 averaged 2.6X more then they did just 10 years ago. I don’t play the futures market so I don’t care what happens there. I sell oil. Thus I’ve very happy with the current price trend.
Davy on Wed, 20th Aug 2014 12:41 pm
Rock, is the show Dallas realistic. I can picture you kicked back in a nice office making deals then hopping in your big black Danali diesel pickup heading to the latest drill site with a grin on your face. Passing by wind turbines and occasionally dodging a deer on the long stretch of road to the basin.
M1 on Wed, 20th Aug 2014 12:49 pm
Plantagenet you forgot about the algo traders, still in the market. Why goldman left?
1) Obama administration closer look at the CFTC?
2) Algo’s kicking their gas.
Is fraud leaving the market because of higher CFTC scrutiny? Because under the Bush admin Fraud was Legal.
Perk Earl on Wed, 20th Aug 2014 1:56 pm
“From the heady days of mid-2008 when it traded at nearly $150 a barrel, crude oil has had quite a rocky ride. After sliding down to the $30s and rallying back around $120, crude has settled in around the $90 to $110 range for the past two years.”
Forgetting about the drop into the 30’s because that was the result of short term panic selling of stocks and commodities, the price of oil once it hit 147, then later settled in the 120’s, then 110’s and Brent is now fairly close to 100.
In reasoning why there has been this trending down in oil price has a few options:
A. Fewer speculators
B. Greater supply
C. Demand destruction
I opt primarily for C, with the view that oil’s relatively high oil price (compared to the 90’s) is deflating the world economy over time into states of less capability to purchase oil, and as this downward pressure is applied, we will keep trailing down to lower oil prices. This would suggest we are being separated from a basic resource we need to fuel our economy. A Liebig’s Law of the minimum declining.
The article would suggest we are headed for a price spike, and that could temporarily occur, but the long trend I suggest is proven by the above historical oil price decline. Unfortunately as this continues high cost marginal plays will go offline, reducing current and future supply.
Nony on Wed, 20th Aug 2014 5:16 pm
Cue Rock to come in and say that 90>>30, given a story on 90<150.
Oh…wait. He already did. I can predict this Shi'ite so well.
You up for a foosball bet, Rock? RG3 versus Clowney? Battle of the cellar dwellers? Please tell me you are not a Cowboys fan…
shortonoil on Wed, 20th Aug 2014 6:26 pm
“The article would suggest we are headed for a price spike, and that could temporarily occur, but the long trend I suggest is proven by the above historical oil price decline. Unfortunately as this continues high cost marginal plays will go offline, reducing current and future supply.”
http://www.thehillsgroup.org/depletion2_010.htm
This graph was derived from the calculated Total Production Energy (Etp) required to produce petroleum, and its products. Between 1960 and 2009 the average variance from the curve was $0.00. 2014 prices of WTI from the graph are now projected to be $119/barrel. Between 1998 and 2005 the price stated below the curve for seven years. It compensated for that in the following years. The present low price is not a historical anomaly. The Etp model also indicates that from the energy half way point (2012) production costs will increase faster than price will increase. It appears we are witnessing this at the present.
http://www.thehillsgroup.org/
shortonoil on Wed, 20th Aug 2014 6:29 pm
PS: Please note that 1900 is year zero (0). That is, year 100 on the graph = the year 2000.
DMyers on Wed, 20th Aug 2014 7:17 pm
Although I disagreed with Dicker’s claim that “America is awash in oil,” I think overall, he makes a good point. He states that investors have already withdrawn from oil investment. Connecting the dots, yes that will have an impact on future supply, and so a supply/demand phenomenon of spiking prices would seem to be the final species of this particular evolution.
Interesting the withdrawal. Has new information come to light, other than purely financial data? Such as, a recognition of high depletion rates? I’m just asking the question.
We can always dicker about the deflationary and inflationary impacts of oil scarcity, with respect to oil prices. I tend to go with inflation, because that is the most logical result of scarcity combined with explosive currency expansion.
Makati1 on Wed, 20th Aug 2014 8:18 pm
M1, fraud is more rampant and ‘legal’ than ever in most of the world today.
The Stock Market Casino is rigged big time. Currency is manipulated hourly. “News” outlets are owned by a few individuals and tightly controlled by the governments in the Western world. The US main export is chaos and war.
The NATO countries are being bled dry by the DC Mafia in it’s insane quest for world domination at any cost. Now the chaos is coming home to the sheeple in the form of Marshal Law and summary executions by the ‘police’.
Will there be even a sham election in 2016? We shall see.
dissident on Wed, 20th Aug 2014 8:58 pm
The oil price is based on the perceptions of the futures traders and these are created by the media. The media would have everyone believe that the fracking of oil from shale will keep going and going so that the happy times will never end. The price of oil is a meaningless, psychological metric for the oil supply. Don’t expect peak oil to be delayed for decades. It has been stalled for a few more years.
Certain_about_one_thing on Wed, 20th Aug 2014 10:00 pm
That overshoot/collapse and retrace signal is exactly what many of us though would happen. Since then we have increased efficiency, decreased demand, and as they say less speculation. Notice however that gas just won’t flirt with much over $4 per gallon national average. Increasing chinese demand, shale’s eroei problems and near term peak, petrodollar disfavor in the Russian coalition, and the emergence of ISIL could all lead to a price spike emerging write on cue with the Army report of a 2014-2015 window. Not to mention that the US economy is on slow boil in a leaky pot. Eventually something has to give.
rockman on Wed, 20th Aug 2014 10:28 pm
Davey – Actually it’s a much more fuel efficient Kia Sorento. I pay for my own fuel. LOL. Just replaced the old one at 180k miles. Lease roads tend to be rough on vehicles. Plus it was time to go with hand controls so I didn’t want it installed on an old vehicle.
I hope folks realize what a joke it is to the oil patch when people get excited over oil prices “crashing” to under $100/bbl. Oh woe is us! LOL.
Davy on Thu, 21st Aug 2014 6:53 am
Rock, I know Dallas Rock was fantasy but it was fun to think of you as a high flyin JR type with big everything LOL! I agree Rock practical and efficient is the name of the game. When I was the big finance guy at the Family biz I maintained a low profile. I had a big Ford F250 Powerstroke diesel but it was a plain white farm truck I used at the hobby Corn/Soy farm. I dressed simple and acted simple. I treated the employees like I would my friends. I avoided being above them. Some in my family followed the old style of being wealth extroverts which is typical of the 1%ers. I could never adjust to that lifestyle nor could I find spirituality in it. Yet, I will say this, if you are going to play with the big boys you play the part. These 1%ers don’t respect the appearance of humility, plainness, and simplicity, even if they realize this is good public relations. There is a undercurrent in all cultures of admiration of the rich and extravagance of lifestyles. If you are going to have a successful business you follow social norms.
shortonoil on Thu, 21st Aug 2014 7:05 am
What is often over looked is that the lead time on most oil development projects is 5 to 8 years. The industry already has over $91 billion slated for projects, and most of them are not expected to hit their breakeven point until oil is over $130/barrel. Some of them at almost $160/ barrel. Prices will continue to follow our curve, and the industry is willing to bet $91 billion that it does.
In spite of all the hype surrounding shale, shale production, even after 5 years of intense development is still only supplying less than 3.5% of the world’s hydrocarbon production. The entire shale production of the US is about equal to what Nigeria produces. It has kept prices subdued, and that has slowed development of other resources. Slower development translates to a fuel squeeze at some point, and then some geopolitical event triggers the spike. That graph above has “on average” been dead on accurate for the last half century, and everything points to it remaining that way in the future.
http://www.thehillsgroup.org/
Davy on Thu, 21st Aug 2014 7:34 am
Dmyers said – We can always dicker about the deflationary and inflationary impacts of oil scarcity, with respect to oil prices. I tend to go with inflation, because that is the most logical result of scarcity combined with explosive currency expansion.
Man, D, that is the big question deflation, inflation, and or both. Oil is difficult to comment on and its price relates to the ongoing economy. I make my pitch will production destruction from export reductions, shut in high cost production, and cancelled high cost ED projects hit first? Will demand destruction from a financial crisis, high resources costs, trade wars, hot wars, declining aggregate real growth hit first? In reality these work in tandem but I suspect one of them has the potential to drive the economy at some point more than the other. They seem to be in the goldilocks range at the moment and appear to be on a bumpy supply plateau with a bumpy growth environment. At what point is either production destruction or demand destruction going to be so compressed that one or the other causes their effects to be manifested to the other. IOW will the economy drive production down or will faltering production/supply drive the economy down? Personally I see the economy as the current immediate risk. If the current global CB’s command control of a repressed cost of money, plentiful debt fueled speculative liquidity, bubbly markets, and wealth transfer feeding a cannibalistic growth can maintain confidence then the economy will bump along. IOW Ponzi schemes last as long as they last. Ponzi schemes last as long as people believe in them. We currently have a legalized Ponzi scheme and it could last a long time. When big brother says it is ok, we got you covered, make money then a confidence is created. It is when the unintended consequences of systematic stresses overwhelm this strategy the economy will implode. How bad is debatable. Since 2008 crisis is repressed and never ended this could be the “BIG ONE”. I will not elaborate on what the experts say here about oil production. It is clear from my reading that supply is facing head winds that cannot be overcome in a few years. Depletion of high quality crude, export reductions, unconventional quality/price, unsatisfactory substitution of gas/electric, capex compression, and finally political trade wars will knock oil supply out of the goldilocks range in a few years. This will inject severe systematic risk into the repressed financial system. This oil supply compression from the goldilocks range will cause systematic risk too great for the system to manage. No amount of debt or low cost of money can manage supply shortages because parts of the economy will shut down leaving bankruptcies and deflationary economic trends.
Kenz300 on Thu, 21st Aug 2014 12:39 pm
Buy a bicycle……….and use it.
Perk Earl on Fri, 22nd Aug 2014 1:31 am
Davy, I don’t usually copy & paste this much from another post, but it so closely fits my impression of what is going on and will happen I couldn’t find anything to leave out. Bravo!
“Since 2008 crisis is repressed and never ended this could be the “BIG ONE”. I will not elaborate on what the experts say here about oil production. It is clear from my reading that supply is facing head winds that cannot be overcome in a few years. Depletion of high quality crude, export reductions, unconventional quality/price, unsatisfactory substitution of gas/electric, capex compression, and finally political trade wars will knock oil supply out of the goldilocks range in a few years. This will inject severe systematic risk into the repressed financial system. This oil supply compression from the goldilocks range will cause systematic risk too great for the system to manage. No amount of debt or low cost of money can manage supply shortages because parts of the economy will shut down leaving bankruptcies and deflationary economic trends.”
Among other points made, the ‘oil supply compression’ specifically is what I see is in the works and will continue to move in the opposite direction to what is needed, which should be higher prices to substantiate capex investment to increase supply, near and long term. I’m sort of waiting on this one presuming someone bright will notice and attempt to make some kind of amends with more drilling incentives or added subsidies.
In the final analysis though, any attempts to counter diminishing returns/dropping EROEI will only push the issue to such a sudden breaking point, that your comment “this could be the Big One”, is exactly what I’m wondering. In fact, a better question is how can it not be, since every conceivable attempt to kick the can down the road in spite of declining net energy has been or is close to exhaustion in the developed countries.
The best analogy I can think of is when an athelete knows he/she is injured but the conclusion of the event is close at hand (end of oil age), so the injury is ignored at the expense of causing more damage to complete the event. In this case we are pretending and extending right to the Thelma & Louise cliff edge then scream something on the way down.
Davy on Fri, 22nd Aug 2014 6:55 am
Perk Said – The best analogy I can think of is when an athlete knows he/she is injured but the conclusion of the event is close at hand (end of oil age), so the injury is ignored at the expense of causing more damage to complete the event. In this case we are pretending and extending right to the Thelma & Louise cliff edge then scream something on the way down.
Thanks Perk for grabbing my thoughts and nice ending to the thoughts. The athlete analogy is dead on. Instead of mitigation, adaptation, and alternative lifestyles/attitude education we have a train wreck BAU sprinting ever faster to the Thelma and Louise Cliff edge. If you remember that film at the end these wild women knew their joy ride of mayhem was up but that was their only desired option so they went out with a bang grabbing hands slamming on the gas for that last jolt of adrenalin. Do we have an option? Maybe but the option if taken will end BAU because BAU needs accelerating complexity and energy intensity the option embraces the opposite. If we take the “ICE Bucket” challenge many of us humans may be gone within a short time. Those left will do less with less. Life expectancy will shrink. Think young and old mortality high. The transition period will be hard, ugly, and painful. There is no managing this Mega predicament man faces. There is only the management of the fall. The fall itself is at the mercy of randomness. We can orientate ourselves in the fall so we may land better than otherwise. Can we save some civilization at reboot? Surely we will reboot at some point. “Or” is this the Thelma and Louis cliff?
Kenz300 on Sat, 23rd Aug 2014 7:01 pm
Oil, coal and nuclear keep rising in price and pricing themselves out of the market.
Wind, solar, wave energy, geothermal and second generation biofuels keep getting cheaper every year.
An oil spike will only speed up the conversion to electric, flex-fuel, biofuel, hybrid, CNG, LNG and hydrogen fueled vehicles.
Better yet many people will decide to walk more, bicycle more or take mass transit.