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Page added on January 13, 2016
Oil could crash to $10 a barrel
Petrol prices could fall back to levels last seen in 2009 as major banks say there is no bottom in sight for the world’s lopsided market
Oil prices have crashed to below $30-a-barrel amid warnings the rout could reach as low as $10 and bring down petrol prices to levels last seen in 2009.
Standard Chartered became the latest major bank to downgrade its oil outlook to $10, joining the likes of Goldman Sachs, RBS and Morgan Stanley in making ultra-bearish calls as prices have collapsed by 15pc this year.
Brent crude has now slipped to a fresh 12-year low of $30.41 a barrel, while West Texas Intermediate – the US benchmark – is trading at $29.93 – a level last seen in December 2013. Analysts warned the oil market remains fundmentally out of balance as record over-supply and stagnant demand weighs on traders.
Standard Chartered said there was no bottom in sight until “money managers in the market conceded that matters had gone too far”.
“Given that no fundamental relationship is currently driving the oil market towards any equilibrium, prices are being moved almost entirely by financial flows caused by fluctuations in other asset prices, including the dollar and equity markets,” said Standard Chartered.
Oil last slumped to $10 during the height of the Asian financial crisis in 1998. A $10 world would lead to petrol prices falling back to 86p-per-litre, said Simon Williams at RAC.
“The last time we saw average prices this low was in early 2009”, said Mr Williams. “However, for prices to get this low the pound would have to get no weaker against the dollar than it is today.”
Christine Lagarde, chief of the International Monetary Fund, said supply and demand factors meant commodity prices were “likely to stay low for a sustained period”.
Calling the bottom of the market was “akin to catching a falling knife” in today’s febrile environment, said Michael Hewson at CMC.
“When the clamour for lower prices becomes a stampede, warning signs and alarm bells tend to start going off, which suggests that a more prudent approach might be advisable,” he said.
The warnings came as Opec – the cartel that controls a third of the world’s supply – said it would not cede to requests from some of its members to hold an emergency meeting.
Opec meets twice a year, but its latest gathering in December ended in a fractious stalemate over production targets, as Saudi Arabia and Iran struggle for dominance of the world’s market share.
With the next regular meeting scheduled for June, Nigeria’s oil minister said at least two members had called for an extraordinary gathering to address the price rout. But hopes were quickly dashed after the United Arab Emirates dismissed the prospect.
Energy minister Suhail bin Mohammed al-Mazroui said Opec’s decision to maintain production and crowd out rivals was still bearing dividend, hinting that it would take another 18 months for prices to start picking up.
Mapped: How the world became awash with oil
“I’m not convinced Opec alone can change or can solely, unilaterally, change this strategy just because we have seen a low in the market,” said Mr al-Mazroui.
The 13-member cartel has said it would only agree on lower production targets if non-Opec states – notably Russia – also signed up to reduce their record output.
“Something has to give,” warned analysts at Energy Aspects, who calculate that demand for oil ground to halt due to an unsesaonably warm end to the year.
“The scale of supply declines has to be even higher to kick-start the rebalancing,” they said.
“Even though weather is normalising somewhat, and supplies are starting to decline, the risk of further price falls and weakness in spreads is still on the cards.”
36 Comments on "Oil could crash to $10 a barrel"
Davy on Wed, 13th Jan 2016 12:40 pm
2 articles with a range of prices from $10(above)- $500(here). This is saying something about how strange a time we are in that extremes like this are being discussed.
“War Between Saudi Arabia And Iran Could Send Oil Prices To $250”
http://oilprice.com/Energy/Oil-Prices/War-Between-Saudi-Arabia-And-Iran-Could-Send-Oil-Prices-To-250.html
“If there is a war confronting Iran and Saudi Arabia, oil could overnight go to above $250, but decline [back] down to the $100 level,” said Askari. “If they attack each other’s loading facilities, then we could see oil spike to over $500 and stay around there for some time depending on the extent of the damage.”
“While not impossible, war is speculative at this point. Also, $250 and $500 per barrel are numbers pulled out of thin air, and may seem a bit sensationalist. But despite the glut in global oil production – somewhere around 1 mb/d – the margin from excess to shortage is thinner than most people think. OPEC is producing flat out and spare capacity is actually remarkably low right now. The EIA estimated that OPEC spare capacity stood at just 1.25 mb/d in the third quarter of 2015, the lowest level since 2008.”
“As a result, even though it remains a remote possibility, direct military confrontation between Saudi Arabia and Iran could well put oil back into triple-digit territory in short order.”
JuanP on Wed, 13th Jan 2016 1:25 pm
OPEC oil $27, http://sputniknews.com/world/20160112/1032992030/opec-oil-price-drops.html
shortonoil on Wed, 13th Jan 2016 2:10 pm
“Given that no fundamental relationship is currently driving the oil market towards any equilibrium, prices are being moved almost entirely by financial flows caused by fluctuations in other asset prices, including the dollar and equity markets,” said Standard Chartered.”
There appears to be numerous pundits in the oil price prediction arena. It also appears that most of them couldn’t find their butt with both hands and a full length mirror! There is a bottom to oil prices, and that is dictated by lifting cost. After that point is reached an operation’s cash flow goes negative. It begins to cost them out of pocket to pump oil. Wells are either shut in, or choked back to a minimum level of production where the well is not damaged permanently. These prognosticators are drawing pretty lines on a graph, and completely ignoring fundamental principles of any business. Any business needs a minimum cash flow to stay in business. Average lifting cost are somewhere in the $20 to $30 range. They have not been $10 since 1970! One wonders were these people acquired their knowledge of extractive resource industries. A reasonable guess would be that they didn’t!
$250/ barrel is also equally as absurd. There is a maximum price that any economy can pay for oil. After that point is reached the economy that provides the demand for the oil shuts down. But, if lifting cost baffles these buffoons, maximum pricing would melt out their brains. We’ll leave it there!
http://www.thehillsgroup.org/
jjhman on Wed, 13th Jan 2016 3:16 pm
Short:
Does anyone outside of KSA really know what their lifting costs are? Also I have more than once been in an industrial situation where we manufactured product knowing that we were losing money. We did it to keep our customers and to keep the valuable employees. KSA is sitting on tons of money and, meanwhile, sitting on what must be the most unstable political situation. If were the Saud family I might do just about anything to keep the pretense going just a little longer.
antaris on Wed, 13th Jan 2016 3:47 pm
One of my old employers told me a few recessions ago “that it can take a long time to go broke, if you have cash flow”.
penury on Wed, 13th Jan 2016 3:59 pm
Oil can go up and oil can go down. bigger problem for the U.S. is when oil is sold in other currencies. If Iran sells to India in Rupees the U.S. loses their commission. O.K. flag wavers I know that this has been talked about for two years but things may be occuring. Dream about what happens if SA goes off the dollar standard.
shortonoil on Wed, 13th Jan 2016 4:46 pm
“Short:
Does anyone outside of KSA really know what their lifting costs are?”
I’ve worked in a dozen different extractive industries over the years, and there was not one of them that could not tell you to the penny what it cost per ton, yard, or barrel to dig, pump or mine their production. If an operation couldn’t they would not last very long as an operation! I’m also sure that everyone of them has already decided as to when they will pull the switch.
Apneaman on Wed, 13th Jan 2016 4:55 pm
“I’m also sure that everyone of them has already decided as to when they will pull the switch.”
Why?
Outcast_Searcher on Wed, 13th Jan 2016 5:35 pm
shortonoil wrote:
“$250/ barrel is also equally as absurd. There is a maximum price that any economy can pay for oil. After that point is reached the economy that provides the demand for the oil shuts down. But, if lifting cost baffles these buffoons, maximum pricing would melt out their brains. We’ll leave it there!”
Well, there is, but in first world countries, we have no idea what it is, except we have plenty of evidence it is very high.
First, given the gas tax rates in western Europe, first worlders can and do certainly pay a lot for oil.
Second, $130+ was barely changing behavior in the US in 2008 near the peak. Real estate and bad loans caused the 2008-2009 financial crisis, not the oil price. From what I directly observed living in a poor neighborhood (and as an investor in energy, I was paying lots of attention), driver behavior was only begininng to be marginally impacted — like people starting to park their big SUV’s and buy little runabout cars.
So saying $250 is absurdly high is an uninformed guess. We simply don’t know. And making poor people take the bus will NOT crush the economy, though in the US there will no doubt be plenty of whining.
Also the economy would by no means shut down. Marginal activity would be curtailed — huge difference. The demand for energy is extremely inelastic in the first world.
Outcast_Searcher on Wed, 13th Jan 2016 5:46 pm
Shortonoil wrote:
“Any business needs a minimum cash flow to stay in business. Average lifting cost are somewhere in the $20 to $30 range. They have not been $10 since 1970!”
So if you just ignore any facts that you don’t like, you can assert anything you like. Is that it?
Saudi Arabia has decreed that it will no longer be the swing producer, unlike it has been for decades. It has also implicitly declared financial war on western producers and would love to see them out of business.
Their sovereign wealth fund is huge. They have shown the willingness to use it, to borrow funds against future revenue, and to cut subsidies — to maintain the downward pressure on oil.
So things are different this time. I don’t believe oil could remain near $10 for very long due to lots of production being shut down, but there could be a very nasty and very low V shaped bottom while the weaker hands are shaken out. It’s not like there isn’t lots of oil in storage and lots of drilled wells pumping away. It’s not like oil from the middle east isn’t often dirt cheap.
In the longer run it’s irrelevant. The oil will still be there (in stronger financial hands) awaiting sufficiently high prices to be worth extracting. Global demand will still be there as long as solid long term BAU growth, largely driven by the expanding third world population, continues apace over time.
I don’t know what the low price will be. My main point is neither do you.
Davy on Wed, 13th Jan 2016 5:47 pm
Pen, yeap that is old news and no need to waive flags for you. Today all economies are more worried about stability rather than financial warfare. The biggest problem today is not the hosing the US dollar is doing to the world through the petro dollar, the problem is the yuan devaluation and the relative dollar appreciation. What we are seeing is a shortage of dollars and dollar assets because of carry trade unwinds. Currencies are in dangerous destructive flux.
The petro dollar and the dollar as a reserve currency is second fiddle to what is happening right now with China. The US manufacturing base is getting hammered. EM nations and resource republics are in a state of currency destabilization from the popping of the commodity super cycle. The old petro dollar song and dance is no longer top billing. The Bric blockbuster is long since played out. The global economy is unwinding from the deflation of multiple bubbles. That is what needs to be watched.
Apneaman on Wed, 13th Jan 2016 6:05 pm
Outcast, bad loans, corruption and retard levels of debt have been increasing for decades. It’s papering over net energy decline. Legislative changes, like cancelling the Glass Steagall are systematic responses to declining net energy that led directly to subprime lending and the housing crisis.
I don’t think saying $250 is absurdly high is an uninformed guess. Oil is at $30 and the global economy is unraveling at an ever quicker pace. Folks ain’t got disposable income and would not even have the vehicles in many instances without subprime auto loans and many need payday loans and maxed out credit cards to get through the week. None of that shit was around when I was a young man and energy was cheap and plentiful. To suggest that anything approaching $250 is even remotely viable is the most absurd thing I have heard in awhile. Well, at least since Boats last comment.
Davy on Wed, 13th Jan 2016 6:11 pm
I think someone is embellishing economic history a bit > “Real estate and bad loans caused the 2008-2009 financial crisis, not the oil price”. There is ample evidence that oil price was very much a part of the 2008 destructive cycle that caused the financial crisis. The 2008 crisis was a convergence of several financial instabilities. We know the part derivatives and speculators played. We know there were banks and brokerages that became too big to fail that caused dangerous cross contagion risk. The price of oil was impacting the commuter culture pressuring consumers. Housing price inflation was becoming unsustainable especially with high oil prices impacting consumer’s ability to pay high mortgages. Frothy oil prices were hurting corporate profits. It cannot be dismissed as one of the triggers for the crisis of 08.
twocats on Wed, 13th Jan 2016 7:25 pm
Average lifting cost are somewhere in the $20 to $30 range. They have not been $10 since 1970! [short]
thanks short, i appreciate, again, a solid number. I hear what rock is saying (‘every well is different’ from a previous post, thanks rock) but certainly there have to be some averages out there. He is perhaps a little “too close” to the issue? Would you say this $20 – $30 range covers the bulk of LTO and deepwater, or is that number for the bulk of conventional wells?
I think what Short is saying is that there is also some common sense. $10 for a barrel of oil is incredibly freaking cheap. $10 doesn’t buy SHIT nowadays. On the other hand – just multiple $250 times the number of barrels per day, X365, and compare that to global GDP per year, if it’s too high a percentage of GDP then Short is exactly correct – it can’t be done. Of course, I’m not knowledgeable enough to know what that percentage is. I’ll just throw out 7% as a nice sounding high number. As an example, Americans spend an average of 4% on fuel at the moment.
https://www.eia.gov/todayinenergy/detail.cfm?id=9831
Davy on Wed, 13th Jan 2016 7:30 pm
Here is something we have discussed here for 2 years now.
“Correlation Or Causation: How The Fed Helped Create The Global Oil Glut”
http://www.zerohedge.com/news/2016-01-13/correlation-or-causation-how-fed-helped-create-global-oil-glut-1-simple-chart
“Easy money by The Fed expanding their balance sheet ENABLED tight oil to be produced ‘economically’…But the signals this sent to the market became self-fulfilling (thanks to an endless Fed put) further creating record US crude production (as the oil ‘gold rush’ ensued), forcing a real ‘deflating’ world to be ‘glutted’ with ever-increasing output of mal-investment-driven ‘expensive’ oil…of course until that facade of ‘boom’, busted and crushed the price of the over-produced by 75% (back to ‘reality’) So the question is – If The Fed enables mal-investment booms by mandate (or ignorance), will they ever learn from the inevitable busts? “
marmico on Wed, 13th Jan 2016 7:30 pm
They have not been $10 since 1970! One wonders were quart shy of oil acquired his knowledge of extractive resource industries. A reasonable guess would be that he didn’t!
Oil was $3.60 a barrel in 1970, moron.
Apneaman on Wed, 13th Jan 2016 7:40 pm
$3.60 in 1970 has the same purchasing power as $23.26772 in 2015.
The total inflation rate from 1970 to 2015 is 546.32564%.
The average inflation rate from 1970 to 2015 is 4.23415%.
makati1 on Wed, 13th Jan 2016 8:04 pm
$10 oil? Bring it on! Then keep it there until the whole mess shuts down permanently. No oil, no money, no foreign wars. No production of unnecessary ‘junk’. Better for the planet and the humans that will remain.
shortonoil on Thu, 14th Jan 2016 7:28 am
“So if you just ignore any facts that you don’t like, you can assert anything you like. Is that it?”
The $ cost of producing raw crude as a percentage of world GDP increased by 251% between 1970 and 2013. The energy cost to extract, process, and distribute petroleum and its products increased by 531%. That simply means that as time progresses that there are an ever diminishing number of dollars, or BTU in the economy with which to buy the crude and its products. This results from a natural process called depletion, and depletion is founded in the most basic laws of physics. Unfortunately, neither Saudi Arabia, or the world’s Central Banks have one single thing to say about it; and never will.
http://www.thehillsgroup.org/
marmico on Thu, 14th Jan 2016 8:34 am
$3.60 in 1970 has the same purchasing power as $23.26772 in 2015.
Good point. Now if only the discredited quart shy of oil’s ETP model didn’t suffer from “money illusion” on the demand (“maximum consumer price”) side.
Dubya on Thu, 14th Jan 2016 9:19 am
There are few true manual workers left, but it has been calculated that a lifetime of work (shovelling, cutting sugar cane) 30 x $10,000 can be replaced with 4 barrels of fuel – worth $50 to $500. I’m not going to get any more specific as there are just waaay to many variables; but there is an economic argument for 2 or 3 magnitudes higher oil prices.
On the other hand once we have fully converted to Mr Fusion it may cost several hundred dollars to dispose of all the useless oil in storage.
My guess is oil will remain in the range -$500 to $50,000 per barrel until year 2100
marmico on Thu, 14th Jan 2016 9:35 am
That simply means that as time progresses that there are an ever diminishing number of dollars, or BTU in the economy with which to buy the crude and its products.
Where is the spread sheet? Produce it and I’ll discredit it.
For the umpteenth + 5 times, please cite credible empirical evidence that it takes 48,900 Btus to refine one gallon of oil?
You are a fuctard!
shortonoil on Thu, 14th Jan 2016 9:52 am
“You are a fuctard!
You are troll; go crawl back into your mother’s basement. You don’t have the credibility to discredit pork chops at a Jewish wedding feast. Loser!
marmico on Thu, 14th Jan 2016 10:11 am
For the umpteenth + 6 times, please cite credible empirical evidence that it takes 48,900 Btus to refine one gallon of oil.
Failure to do so means that the ETP model fails, in your own words, on the supply side.
I can hardly wait to discredit your “pork chops” money illusion on the demand side of the model.
You are a fuctard!
wratfink on Thu, 14th Jan 2016 4:00 pm
The reason tight oil is still being lifted at a loss is simply because lines of credit are valued at last years prices by creditors:
http://oilpro.com/post/21427/solving-2016-dilemma-part-two-cascade-effect-here
antaris on Thu, 14th Jan 2016 5:12 pm
Thanks wrat, a very educational link.
Apneaman on Thu, 14th Jan 2016 5:28 pm
Look Boat, they write damage control stories for the Canadian version of suckers like you. Think this NOT that. Everything will be fine in the morning.
Market turmoil: Why instability shouldn’t spark widespread panic among Canadian investors
Make sure investments are ‘consistent with what you thought you had and consistent with your target’
http://www.cbc.ca/news/business/investors-markets-loonie-oil-prices-1.3402893
Apneaman on Thu, 14th Jan 2016 5:30 pm
China’s retail investors make hasty exit from markets in search of safety
http://www.theglobeandmail.com/globe-investor/investment-ideas/chinas-retail-investors-make-hasty-exit-from-markets-in-search-of-safety/article28197523/
BC on Thu, 14th Jan 2016 6:05 pm
@short: “Average lifting cost are somewhere in the $20 to $30 range.”
As someone above implied, WTI at ~$24-$25 (2015US$) is the CPI- and US$-adjusted price during the 1960s-70. With real wages for the bottom 90% no higher than the 1960s, CPI at 0%, post-2007 real GDP per capita at ~0%, and US oil production per capita at the level of the late 1940s, US fundamentals imply WTI in the $20s-$30s, further suggesting that marginal US oil production since 2008-09 is not profitable and thus unsustainable above ~6Mbd.
As I’ve shared frequently since last year, there is a technical projection for WTI in the mid-$20s this winter and wholesale gasoline at a buck or perhaps slightly lower. For all practical purposes, we’re there for gasoline, although WTI has room to fall. We’re there because the US economy is likely at no faster than stall speed, if not recessionary.
Moreover, at the current deceleration of the 4-qtr. SAAR of US real GDP below 2% AND the level of oil consumption to final sales, the US economy cannot afford the price of WTI much above $25-$30. However, that also means that the energy, energy-related transport, and associated industrial and ancillary sectors can’t afford to grow with WTI at the current price.
Currently, commercials/producers/hedgers remain fully hedged in anticipation of lower oil prices.
All of this is consistent with global Peak Oil per capita having occurred in 2005-08.
Apneaman on Thu, 14th Jan 2016 6:06 pm
Michael Klare, The Look of a Badly Oiled Planet
The Oil Pricequake
Political Turmoil in a Time of Low Energy Prices
http://www.tomdispatch.com/post/176089/tomgram%3A_michael_klare%2C_the_look_of_a_badly_oiled_planet/
BC on Thu, 14th Jan 2016 6:08 pm
“You are troll; go crawl back into your mother’s basement. You don’t have the credibility to discredit pork chops at a Jewish wedding feast. Loser!”
Let’s hear it for Jews (and Arabs) for chops!!! 😀
BC on Thu, 14th Jan 2016 6:11 pm
@Dubya:
http://www.skil.org/
https://www.youtube.com/watch?v=QfYCrLq1DJU&feature=youtu.be
Put the liquor and firearms away before viewing the site/videos. 😀
BC on Thu, 14th Jan 2016 6:30 pm
@apnea: “$3.60 in 1970 has the same purchasing power as $23.26772 in 2015.
The total inflation rate from 1970 to 2015 is 546.32564%.
The average inflation rate from 1970 to 2015 is 4.23415%.”
Apnea, good point.
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=397N
Nominal GDP is a better proxy than CPI for the change in the “cost of living” over time. As such, WTI at $30 is below the GDP-adjusted price in 1970 when the US was at peak oil production per capita.
https://app.box.com/s/h0p6s4ye96k6cx7smn0r2te0giganyy1
https://app.box.com/s/s0wyvm4xh7kvd4fxcwyxx3mfevtf8yub
https://app.box.com/s/xcult10g1qfq3qi9wobow4j4l6j0pu0o
But more interestingly, the previous periods during which the US was experiencing the 10-year change rate of real GDP per capita where we are today, the average price of oil in 2015US$ was $10-$15, including in the late 1940s to early 1950s, which is where the US is WRT oil production per capita. 🙂
https://app.box.com/s/vvt8ywyh6w3xxtgvv39myfny2jhgnu0e
https://app.box.com/s/xywlbqm8wswzhfmxh0paiil9cysh8cmk
There is a very clear fundamental reason why the price of oil has collapsed: we’re in a Schumpeterian slow-motion depression of the debt-deflationary regime of the Long Wave Trough.
https://app.box.com/s/8rqnbk0mqgctg7vlt04su71711vumjs9
That is, $25-$30 oil is what the US economy can afford to consume at a post-2007 trend rate of real GDP per capita of ~0% and a negative rate of oil production per capita.
To those who don’t yet “get it”, it’s “Peak Oil, stupid!” 😀
BC on Thu, 14th Jan 2016 6:36 pm
@apnea: WRT Klare, he is capably articulating the factors reflecting the emerging last-man-standing contest between the West and China (and anyone else on the other side, Putin’s Russia included) for the remaining scarce resources of a finite, spherical planet in deep population overshoot of human apes facing the exacerbating effects of climate change, excessive indebtedness to wages and GDP, extreme inequality, low labor share of GDP, regressive taxation of labor, decelerating productivity, fiscal constraints per capita, and a detached, disengaged, and self-satisfied rentier-socialist Power Elite top 0.001% (and within the group, the top 0.00001%).
Boat on Thu, 14th Jan 2016 6:53 pm
BC,
We’re there because the US economy is likely at no faster than stall speed, if not recessionary.
Glad to see you speaking a little more sanely. BTW, your six months is up and the world did not crash. Take your time, count to ten, reassess and give us your new projection.
GregT on Thu, 14th Jan 2016 8:17 pm
Boat,
“We’re there because the US economy is likely at no faster than stall speed, if not recessionary.”
For a second there I thought that you’d been working on your writing skills, until I realized that you once again forgot to use quotation marks.