Peak Oil is You
Donate Bitcoins ;-) or Paypal :-)
Page added on September 25, 2015
Michael Lynch: Goldman Sachs Vs. OPEC
Interestingly, two contradictory oil price forecasts have appeared in the past few days, Goldman Sachs predicting that prices would remain “low” for fifteen years, while OPEC has argued that the price should recover to $80 a barrel by 2020. This is interesting because a few years ago, Goldman was considered the greatest price bull (among respectable forecasters) and OPEC actually had one of the lowest long-term oil price projections.
As a student of oil price forecasting, I can attest that this is somewhat surprising, but not shocking. First and foremost, there is a huge amount of uncertainty about many elements of the long-term market, such that diverse opinions should be expected. Twenty years ago, looking at computer models of the world oil market, I found that for the United States, the modelers had widely divergent estimates of the response of demand to price and economic growth (elasticities, as the economists say). Even now, the future demand trend with lower oil prices is highly debated.
Beyond that, there are huge uncertainties about both fundamentals and geopolitical risk. Without a strong economic revival in China, it will be difficult to develop enough demand to absorb likely increases in OPEC production, and it still remains unclear if it will come roaring back or be stuck in a Japanese style long-term slump. The overhang in the real estate market looks impressive, but China still has large financial reserves and a labor force that should be able to show strong improvements in productivity.
Also, the breakeven price of shale oil remains unclear; shale gas boomed at prices far below the estimated breakeven price, and shale oil may do the same, but the jury (and the bankruptcy court) is still out. Further, the question of resource access in countries like Iran, Mexico and Venezuela could be very bullish for supplies, but in no case is it clear that the sailing will be smooth. Mexico is the most likely to see significantly higher production, but it’s always good not to count your wells before they pump.
Geopolitically, Libya, Iraq, and Nigeria all have some degree of threats to their oil supply, or actual disruptions, which could resolve or worsen in the next five years. Other countries, like Iran, Venezuela, and Algeria are all potentially unstable to some extent, and there still remains relatively small amounts of surplus capacity in the market to offset any large disruption.
Alternatively, it is quite possible that Libya and Iran will add significant amounts of oil to the market, up to 2 mb/d, in the next couple of years, and Iraq (including Kurdistan) could meet as much as one-third of global demand growth for years to come. Even a moderately optimistic outlook for supply from these countries means pressure on the other members of OPEC to reduce their production, which could mean another price war.
But what is interesting is that there is now a split between oil price bears and bulls concerning long-term price trends, when historically, oil price forecasters have “made sheep look like independent thinkers” in the words of one industry exec. As mentioned before, my long-term forecast of $60 has met with ridicule in the past few years. Last year’s DOE survey of price forecasts (page CP-2 in the Annual Energy Outlook 2014) was not only the lowest, but only mine showed a declining trend, and only one other was lower than $100. (Okay, another one was $99.10 in 2025).
Hopefully, the divergence amongst forecasters will continue, at least insomuch as it reflects real uncertainty. However, if history is any guide, I would not bet on it. More to come….
15 Comments on "Michael Lynch: Goldman Sachs Vs. OPEC"
makati1 on Fri, 25th Sep 2015 11:08 pm
But GS’ plan is to destroy the middle classes and the world economy so they can run a one world government with GS controlling the purse strings. Or so one theory goes.
I suspect that GS has more say in this oily business than readily appears. OPEC can only cut their throats by cutting production and income. (literally)
I’m sure our panel of debaters will clarify the situation. LOL
Nony on Fri, 25th Sep 2015 11:36 pm
Very good article in listing major areas of uncertainties. Much better than Lynch’s usual–appreciate the historical perspective also. Only criticism is in not discussing futures market and options imputed volatility (EIA funnel).
Bloomer on Fri, 25th Sep 2015 11:48 pm
GS plan is to create wealth by hedging their bets. If its talking down a stock or commodity (long) or the old pump and dump scheme (short) either way they win.
The Saudis plan is to gain market share by flooding the market with their low cost oil. As a result, they are discouraging capital investment in new projects. They will succeed as oil fields start to deplete, oil prices will rise. GS will no doubt also profit with their oil futures. That’s my take Makati!
Truth Has A Liberal Bias on Sat, 26th Sep 2015 1:43 am
GS has naked credit default swaps on the shale oil junk bond market (insure a bond you didn’t buy and when the bond issuer defaults collect the insurance on it) and as well they’re shorting oil derivatives (borrow a contract from someone who has, sell it, buy it back later when it’s cheaper and then repay what was borrowed pocketing the difference). GS is playing the casino game as well as manipulating the sentiment via their PR i.e. market forecasts. It’s a good little scam. Totally legal too. Good old USA.
Davy on Sat, 26th Sep 2015 7:14 am
It is increasingly clear whatever oil prices do it will be in a declining rate of growth environment in the shorter term. Demand and supply are clearly under pressure currently. Economic demand and commodity supply are in a disequilibrium from a healthy operating level they both need in their codependence.
Demand needs to be growing at around 3% globally. This number is well known. We appear to be lower than that especially when one admits China’s growth numbers are a sham. Without this higher growth rate debt service issues develop, currencies destabilize, national budgets are under pressure. You can include in currently the negative consequences of easing and repressed interest rates and one can see declining growth rates are deadly if not arrested soon.
Supply is clearly out of balance in the commodity sector. The commodity super cycle is over. This was driven by a combination of massive credit creation and low rates coupled with a Chinese economy that was structured to grow fast without regards to quality of growth and dismissive of the environment and social damages.
Commodities were a bubble and now they are deflating. Oil was profoundly a part of that bubble and we could say the foundation of it. Oil price influences all other commodity prices. Now we have a lack of demand driving an oil supply surplus. This surplus has a significant component of high priced oil both above ground and below ground.
Middle Eastern countries are politically dependent on oil revenue creating a need to sell oil in volume in a low price environment to maintain market share and aggregate revenue. High cost LTO and unconventionals have corporations under similar pressure. Their pressure is to sell high price oil at low prices to maintain cash flow to stay alive. These companies have creditors willing to stick it out hoping prices will rise and with a return to profitability. The alternative is selling off assets at depressed prices and taking dangerous hits themselves.
This destructive demand and supply environment is now cancerous and spread throughout the system. Just as cancer metastasizes throughout the body this economic disequilibrium from demand destruction in the real economy and deflation in the financial economy is settling out in multiple areas. Debt is so high throughout the global economy we see debt service issues everywhere.
On the financial side risk was dispersed throughout the system by hyper financialization. We now see counterparty risk with contagions. Hence the Chinese market crash casing a cold on Wall Street. In simple terms folks this is a super cycle bubble deflating across the board within an environment of a real global economy that never recovered from the 08 global crash witnessed by the fact the Fed is unable to normalize.
This was caused by the effects of repressed financial environment post 08 crash. This money easing and rate repression cause malinvestment across the board. It caused markets to become unnaturally inflated in relation to the real and physical. Normal price discovery was repressed allowing poor financial decisions macro and mico. It allowed bad debt to be extended and pretended into the future. It allowed for massive overcapacity and unneeded development especially in China and to a lesser degree the US. Unneeded development is another name for bad debt. China is covered with it.
When one considers the size of China and the US economically then one realizes this is a global condition. All other power are codependent on China and the US. We now have China in a nose dive and the US to follow. The brics and other emerging markets are clearly in currency stress. Europe and Japan are in their usual mess. There is nothing looking good out there.
In this kind of environment I see little chance of positive developments in the oil complex. Depletion ticks on every month. Financially vital companies responsible for supply management are damaged by a low price environment. National economies dependent on oil are slowly bled to death. This scenario points to irreparably harm to our oil supply base at a time of growing population and consumption pressures.
It is unlikely demand is going to recover ever because when demand pressures start there is a shock. Even panics of over supply disruptions issues will be met with the hammer of deflation and demand destruction rejection. The disequilibrium is so high now an oil price spike will cause significant pain. Supply has been damaged so it will not be able to respond to demand pressures if they would ever return.
We are in the end game of globalism. The question is how long will this play out. This matters because degree and duration will have a profound effect on how we adapt and adjust to the final global depression.
ennui2 on Sat, 26th Sep 2015 9:04 am
Mataki, I’ll clarify it for you.
You’re a tinfoil-hatter.
JuanP on Sat, 26th Sep 2015 9:23 am
Where to start with this mess of an article? I will do it one baby step at a time so I don’t get overwhelmed by all the crap in it.
“Without a strong economic revival in China, it will be difficult to develop enough demand to absorb likely increases in OPEC production, and it still remains unclear if it will come roaring back or be stuck in a Japanese style long-term slump.” There will never be a strong economic revival in China. The chances of China’s economy roaring back are nil. China’s economic growth wil keep decelerating as it has for years, this trend is very clear. There are no likely increases in future OPEC oil extraction either. Any increases that some particular countries like Iran may experience will be more than offset by declines in other OPEC memebers. Future increases in overall OPEC extraction are unlikely, and increases in OPEC exports are highly unlikely.
“Also, the breakeven price of shale oil remains unclear; shale gas boomed at prices far below the estimated breakeven price, and shale oil may do the same, but the jury (and the bankruptcy court) is still out.” This is an extremely ignorant comment. Shale oil and shale gas production can’t be compared. The only reason shale gas production boomed at low prices was the value of associated liquids. I guess if gas prices increased to $20, then we may pump those wells for the gas rather than the liquids. How many people think this ridiculous idea may be possible? I definitely don’t.
“Further, the question of resource access in countries like Iran, Mexico and Venezuela could be very bullish for supplies, but in no case is it clear that the sailing will be smooth. Mexico is the most likely to see significantly higher production” fuck this crap, I couldn’t even skip one word. Mexico’s and Venezuela’s production have been falling for year, where would their increased supply come from? The Orinoco belt? Give me a break. Iran may increase extraction some due to the end of sanctions, but I seriously doubt this increase could be enough to offset declines from other OPEC countries. With oil at today’s prices where would the necessary investment money come from? Iran is very short of cash right now and running a huge deficit.
“Alternatively, it is quite possible that Libya and Iran will add significant amounts of oil to the market, up to 2 mb/d, in the next couple of years, and Iraq (including Kurdistan) could meet as much as one-third of global demand growth for years to come.” Please raise your hand if you think that Libya will significantly increase production ever. Thanks to Western efforts to bring freedom, capitalism, and democracy, Libya, which used to be Africa’s most developed country under Gadaffi, is now a failed, collapsing state rapidly devolving into warring tribal fiefdoms. I already addressed Iran’s issues above.
I could have said more, but I didn’t want to copy and paste the whole thing. This article is a load of foul smelling substance that came out of somebody’s behind.
JuanP on Sat, 26th Sep 2015 9:29 am
And I’ve been waiting for Iraq’s production to grow to 12 mbpd for many years now, but time has proved my guess that that was a load of crap, too.
There is no way that any potential increases anywhere will offset the natural decline of existing production, which is around 4-6 mbpd. We are very likely at global peak liquid fuel production this year, and production is already declining.
Boat on Sat, 26th Sep 2015 9:57 am
JuanP,
I see the disinformation continues. The world is in the middle of an oil glut while the worlds consumption of oil continues to rise
And I’ve been waiting for Iraq’s production to grow to 12 mbpd for many years now, but time has proved my guess that that was a load of crap, too.
There is no way that any potential increases anywhere will offset the natural decline of existing production, which is around 4-6 mbpd. We are very likely at global peak liquid fuel production this year, and production is already declining.
JuanP, Consider buying another crystal ball. Yours is obviously broke
JuanP on Sat, 26th Sep 2015 10:03 am
Boat, You are full of shit! Have a nice day. 😉
joe on Sat, 26th Sep 2015 10:25 am
Not sure there is much room for ‘productivity’ gains in China. They are already on low wages, that and low value currency is where US services companies derive their profits.
Boat on Sat, 26th Sep 2015 10:37 am
Try reading this Juan P. The numbers are not yours to make up.
http://www.eia.gov/forecasts/steo/report/global_oil.cfm
JuanP on Sat, 26th Sep 2015 11:05 am
Boat, As I’ve said before, if you choose to read and believe EIA’s forecasts that is your problem not mine. To me that just proves how stupid and ignorant you are.
makati1 on Sun, 27th Sep 2015 12:11 am
My ‘tinfoil’ hat was turned in for a clear vision, ennui2. Who has their employees in most every bank, corporation or government in the world today? Goldman Sacs. It is a revolving door that cycles their plans in and out of government and corporations. But, ignore me if you want. Makes no difference to me or to GS. They want to be ignored.
http://www.huffingtonpost.com/2009/06/02/government-sachs-goldmans_n_210561.html
And the grand leveling goes on…
Nony on Sun, 27th Sep 2015 7:53 am
Juan:
He’s listing these things as questions, so you shouldn’t react so negatively.
1. Natural gas is in the 2.50s in the US. This is after a 40% growth in consumption over the last decade. There definitely was some liquids driven gas volume, but places like the Utica and Marcellus have massive amounts of dry gas available at cheap prices (it sells for ~$1 in the region). Just need pipes to bring it to the Gulf. And closer to the Gulf, the Haynesville has renewed interest and is basically flat over the last 2 years (decline halted) even at ~$3 pricing of the last few years.
2. Iran and Iraq are definitely questions in terms of getting their shit together and the investment needed for new production. But Iraq is up quite a bit over the last year. And they both have the resource for significant expansion.
3. Libya: it’s a geopolitical issue, sure. But there is the chance of them getting back to 1 MM bpd very quickly if some faction gains control.
4. If China doesn’t grow (or grows slowly) than it helps price.
—————
Net/net: the article is about listing factors of unknown. Don’t be sanguine about knowing everything. Did you predict the shale gas boom? Shale oil boom? Price crash? How do you know what comes next? Options pricing shows significant uncertainty just a few months out.
http://www.eia.gov/forecasts/steo/uncertainty/ (see figure 7)