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Page added on January 22, 2016
Oil enters irrational territory
World oil markets quietly breached an important barrier as they crashed nearly 30 percent to below $30 a barrel in the opening weeks of 2016, crossing the fuzzy line separating a rational response to fundamentals from an irrational fear where the only way forward is down, down, down.
Animal spirits have taken over the futures markets of New York and London, with momentum-driven algorithmic traders and big hedge funds driving oil prices far beyond the point that even once-bearish analysts say is justified – at least in the medium-term – by supply and demand.
That marks a change from most of the past 18 months, when oil’s long descent from $100 a barrel was broadly viewed as an often painful, sometimes lumpy adjustment to a fundamentally “new normal” in which OPEC would no longer restrain its supply, leaving U.S. shale drillers to balance the market.
The process has taken far longer than expected as shale firms proved remarkably agile, slashing costs and drilling in sweet spots to keep the oil flowing. As they did so, prices lurched lower, first in the summer and again this month.
But now things have gone too far, many say. Data due on Friday are likely to show that big funds and speculators in the U.S. oil market added to short positions that had doubled to a record 200 million barrels over the past three months.
“The price itself is irrational if you ask me,” Khalid al-Falih, the new chairman of the Saudi state oil company Aramco and one of the Kingdom’s most influential energy figures, said at the World Economic Forum annual meeting in Davos.
“Prices are supposed to be set by the marginal barrel. The marginal barrel is certainly way higher than $30 a barrel.”
Few traders expect a quick recovery from this year’s slump amid pressure from the deep supply glut and signs of economic weakness in China – the world’s No. 2 oil consumer.
Still, the evidence of oil’s unsustainable future at below $30 is mounting. U.S. shale drillers are teetering on the brink of bankruptcy; Canadian oil sands producers are losing money with every barrel as their crude trades at $15; heavy oil from Venezuela and Colombia is also underwater. Some $380 billion in oil and gas projects have been postponed or canceled since 2014, according to consultants Wood Mackenzie.
“It’s not just the price, it’s the incessant selling, every day. That surprised me,” says Amrita Sen Chief Oil Analyst at Energy Aspects. “We are really in the realm of irrationality.”
Not that the market has lacked excuses to sell: the rising U.S. dollar; China’s stock market meltdown; a vague worry that the diplomatic breakdown between Saudi Arabia and Iran had eliminated the already wafer-thin chance of an OPEC deal.
Some of them have been fundamental in nature – such as the warmest December weather on record and easing of sanctions on Iran – though neither should have been news to traders.
More likely is that much of the selloff is driven by commodity funds who use algorithms to detect profitable trends – and often accelerate those trends at the extreme. Many programmatic traders fared far better than human fund managers last year, industry sources have said. [L8N14A1F3]
A MONKEY’S GAME
After a series of false plateaus since oil began falling from $100 a barrel in mid-2014, potential bulls have been so badly burned that they have stopped trying to pick a bottom.
Until recently most OPEC officials had generally addressed the rout as a painful but necessary measure to shut down high-cost competitors who were taking market share.
The fact that analysts and executives are now publicly calling out the market’s ‘irrationality’ – many of them doing so for the first time since the surprisingly deep and prolonged downturn began 18 months ago – may yet influence prices.
If oil prices are now viewed as detached from fundamentals, they must surely rebound to higher ground, the thinking goes. By that logic, distressed oil producers may choose to hold out just a little longer rather than throw in the towel – postponing the point of maximum pain that bearish traders are waiting for.
In early January, top executives from major shale drillers told a private Goldman Sachs conference in Florida that they were planning on the basis of $50 oil this year, an optimistic view that contributed to the price slide.
OVERREACTION
To be sure, overreaction in oil markets tends to be the norm rather than the exception, and the view that oil is now far oversold does not mean that a recovery is imminent.
One of the more bullish banks, Standard Chartered, said last week that relentless selling could push oil as low as $10 a barrel. John Maynard Keynes’ warning that a market “can stay irrational longer than you can stay solvent” is well heeded.
There is no indication that Saudi Arabia, the driving force behind of OPEC’s decision to quit supporting the oil price, is ready to consider abandoning its shock therapy.[L8N1542XS]
And not everyone agrees that markets have overshot. Consultants Rapidan Group told clients this week they cut their Brent crude 2016 forecast from $38 to $30 a barrel, among the lowest of major banks, citing weaker economic growth and a quicker recovery in Iran’s exports.
“This is what an authentic boom-bust is like – perfectly rational,” said President Bob McNally.
Irrationality can also cut both ways. On Thursday, prices surged more than 6 percent to back above $30 a barrel – despite the fact that U.S. crude and gasoline stockpiles reached a record high. Brokers said short-covering was to blame.[O/R]
The best advice for now, according to some, is to stay out of the way and wait for some of the smoke to clear, says Citigroup’s global head of commodities research Ed Morse, who had warned last August that U.S. crude could drop to the then-unthinkable level of $30 a barrel early this year.s
“What one does, rationally, is abstain,” he said.
23 Comments on "Oil enters irrational territory"
makati1 on Sat, 23rd Jan 2016 1:29 am
Irrational now. Insanity soon. Enjoy the show. It promises to be a blockbuster. ^_^
Davy on Sat, 23rd Jan 2016 5:59 am
Nothing irrational about rational. The markets are behaving rational because the markets are in significant disequilibrium with continued distortions, volatility, and financial pressures. The markets are doing what they do in a disturbed environment react in a way that appear irrational but in reality reflects an underlying economy in disequilibrium. We know the price deviation from a proper demand/supply dynamics is significant. This is going to impact the markets with futures and physical side of oil. Arbitrage continues and speculation is always there. What we are seeing now is just a reflection of the global economy which is one big bubble of bubbles deflating. Oil is one of those bubbles albeit the most significant.
Apneaman on Sat, 23rd Jan 2016 6:06 am
I thought “markets” are rational by nature. Isn’t that what they teach at econ school? A true market fundamentalist would simply except the dictates of the market. How come none of these mouth breathers ever accuses the markets of being irrational during a boom?
What’s irrational is the millions of apes (mostly white males) who think there is something called a “free market” guided by an “invisible hand”. If it wasn’t for massive intervention and winner picking via bank bail outs, industry bailouts, trillions in industry subsidies, mass corruption, propaganda, austerity, debt, debt, debt and all backed by military force and the police state, industrial civilization would already have ended at the last crash.
bug on Sat, 23rd Jan 2016 7:06 am
True Apnea, but “free market” talk is all the same propaganda as all the other crap. Humans can’t get enough propaganda, hence all the useless talk about superbowl adds, 2017 trucks coming out,
and drugs that are required to poop, not pee and get a hardon. Ape humans love and need propaganda to survive.
Davy on Sat, 23rd Jan 2016 7:18 am
Nothing irrational about losing money when a sucker is born everyday.
“Watch Out for Those Falling, Oil-Soaked Angels”
“About $155 billion worth of energy bonds could be downgraded.”
http://www.bloomberg.com/news/articles/2016-01-22/watch-out-for-those-falling-oil-soaked-angels
“The threat of fallen angels—or bonds that were once rated investment grade but have since come plummeting down to junk territory—is not a new one, but it does seem to be gathering momentum as the price of oil remains stuck in the doldrums.”
“there are second-order effects to consider from the seraphic slump—namely, the technical impact on the all-important bond indexes as well as on investor portfolios. Large asset managers mandated to buy investment-grade debt will most likely not enjoy finding themselves suddenly holding junk-rated assets. Meanwhile, high-yield investors may not appreciate the influx of erstwhile investment-grade into their benchmarks (nor will the bonds necessarily prove suitable for their portfolios, either).”
“The sharp increase in amount outstanding, combined with the fund outflows the asset class has experienced over the past year, could drive technical selling pressure in high-yield,” the Barclays analysts conclude. “Ultimately, we believe that this means that the correlation between energy and the broader high-yield market is likely to remain high. In the near to medium term, it remains to be seen when or if the two markets may de-link.”
Apneaman on Sat, 23rd Jan 2016 7:22 am
bug, I prefer the old school stories, like Greek mythology. This modern hollywood corporate state propaganda is so fucking boring and unoriginal.
ghung on Sat, 23rd Jan 2016 7:44 am
Yeah, Davy, I took some flack several years ago when I told people it wouldn’t be long until North Dakota will feel like it’s been gang-raped and left in a ditch. Seems the gold rush mentality isn’t limited to those selling junk bonds. My former employer here in North Carolina, after defaulting on $millions from the 2008 real estate crash, scurried off to the Bakken to make a quick fortune building ‘man camps’. Got involved with these guys: ‘All rip-offs great and small’…..
The Sales Pitch
How the suckers made out.
The Ponzi scheme.
The sales pitch is quite good, especially the part about the Bakken “booming” for the next 60-80 years, fracking, etc. Sign me up for a full share! NOT…..
JuanP on Sat, 23rd Jan 2016 7:56 am
Ap, I find it perfectly reasonable that people who believe in gods that made the Multiverse also believe in invisible hands that guide the financial markets. As far as I can tell there is no leap of faith there. 😉
Since most humans believe in gods, I would expect most humans to believe in invisible hands, too. Believing in the ones is just as irrational as believing in the others.
bug on Sat, 23rd Jan 2016 8:21 am
Very well said Juan, Since many repubs/capitalists believe in sky king and whatnot, it seems they should believe in invisible hands also.They go hand in hand.
Boat on Sat, 23rd Jan 2016 8:42 am
bug,
Just as the doomers think 1%ers rule the world and steal our freedoms. lol Let’s face it. Humans don’t know to much about anything except running wild with their imagination and speculations.
bug on Sat, 23rd Jan 2016 9:18 am
Boat, who rules the world then? Did I say the 1% did? I am free as far as I can manage to be.
twocats on Sat, 23rd Jan 2016 11:18 am
Just as the doomers think 1%ers rule the world and steal our freedoms. lol Let’s face it. Humans don’t know to much about anything except running wild with their imagination and speculations. [boat]
there are probably some on this site that believe every aspect of what happens today is controlled by some illuminati-like force, but its probably a minority. Chaos is primarily in charge I wager, followed by factions of politicians around the world backed by 1%ers to varying degrees. Boat would you have us believe we are independent agents that can accomplish any task if we just will it hard enough? Or do you think God is pulling the strings? or the invisible hand?
twocats on Sat, 23rd Jan 2016 11:23 am
Did I say the 1% did? [bug]
good job bug, that’s boats primary communication strategy, he starts shifting the terms of the debate, setting up straw men, and serving up a platter of red herring. He hijacks most of the conversations on the thread and people fall for it, myself included.
I was reading an article the other day that was talking about Obama having called the Saudis and told them to pull the trigger on the global economic collapse. I guess in Boats defense you could say that this kind of stuff “is out there”, but he just arbitrarily attributes it to everyone on the site.
GregT on Sat, 23rd Jan 2016 12:41 pm
“Just as the doomers think 1%ers rule the world and steal our freedoms.”
The global 1% happen to be those people who make over ~$40,000 per year Boat. If you believe that “the doomers think” that the average retail clerk runs the world, you have even more serious issues than I thought.
onlooker on Sat, 23rd Jan 2016 12:50 pm
“What’s irrational is the millions of apes (mostly white males) who think there is something called a “free market” guided by an “invisible hand”. If it wasn’t for massive intervention and winner picking via bank bail outs, industry bailouts, trillions in industry subsidies, mass corruption, propaganda, austerity, debt, debt, debt and all backed by military force and the police state, industrial civilization would already have ended at the last crash.” Nothing more to add wonderfully stated. Oh maybe just that this wonderful industrial civilization is hardly working for anyone anymore other than the 1%ers.
Boat on Sat, 23rd Jan 2016 1:12 pm
twocats,
“Boat would you have us believe we are independent agents that can accomplish any task if we just will it hard enough”?
Were pretty independant when it comes to brushing your own teeth. But can a single person will women to vote in Saudi land.No. No guiding hand will make it happen either.
Boat on Sat, 23rd Jan 2016 1:20 pm
onlooker,
In this world of the 1%ers you talk about the poor have access to health care emergency help better than the richest ever did just a few decades ago.
A ride by carriage, elephant or man carried platform the poor has it much better on a bus. Air conditioning even. The poor through subsidies have heat, cooling, TV air conditioning and housing. Most have the latest x-box or Playstation. The idea that only the 1%ers have it made is ridiculous. Go to any high school and count the number of cars parked there by students. Not many are 1%ers.
onlooker on Sat, 23rd Jan 2016 1:29 pm
Boat, I refer you to Greg post
“The global 1% happen to be those people who make over ~$40,000 per year Boat.” That leaves billions not enjoying those amenities you are describing.
Apneaman on Sat, 23rd Jan 2016 1:41 pm
Boat, enjoy your x-box/alternate reality.
Six Paths to Near-term Human Extinction
“Loss of habitat for human animals could result from at least six different factors rooted in civilization. Some are nearer than others. Half fall under the broad category of abrupt climate change. Two of the remaining three fall under the heading of ionizing radiation, hence lethal mutations.
I’m doubtless missing a few factors. In addition, I’m not mentioning the interactions between them, which surely will accelerate the process by which humans exit the planetary stage. But, as always, any number can play.
The usual initial response to the notion that Homo sapiens will become extinct is swift denial. As with every other species on the planet, lack of habitat will doom us, too. I welcome rational evidence to the contrary. In contrast, I expect irrational commentary free from the shackles of evidence (if not in this space, then certainly elsewhere). In general, denial-based commentary will exhibit ignorance of biology and ecology, despite the importance of these disciplines to understanding extinction.”
http://guymcpherson.com/2016/01/six-paths-to-near-term-human-extinction/#comments
Boat on Sat, 23rd Jan 2016 3:25 pm
apeman,
You act like a loss of habitat is a surprise to anybody. It is not. You act like war over oil is a suprise, it is not. Most of us know the dangers of the world and it’s environment. Most of know the dangers of the upcoming climate change. You like I can do little to nothing to change the future.
I personally have never denied any of these problems. But facts are facts. Capitalism will ride it out till the end. There will be no other choice. To think otherwise is like denying death. As mentioned before to survive you still have to pay bills to survive in it. I am also so much of a doomer like you. But I see no need to prep or prepare. If we crash big there will be very few to no survivors. I live very close to Houston but Dallas is a mere 3 hours away. There will be no place to survive. Unlike you I think this will happen decades after I am dead anyway. I also see no need to worry or fear the end. That serves no purpose.
In the meantime I continue to root for the humans as long they last and root for any tech that slows the process.
There is nothing wrong with fact checking wild statements from doomers. There is nothing wrong with looking at what happens with the world clear eyes. Your opinion is ok with me and consistant. You point out events as they happen and are true. I don’t see you get into timelines. So your opinion can’t be challenged. The only problem I have with you is your rudeness. But no problems, I grew up in a factory. We were all rude.
99% of all your posts are a waste of my time because you don’t put them into historical context but they are correct they happened. But hey, to each his own.
Apneaman on Sat, 23rd Jan 2016 5:01 pm
Boat, are you hammered? I don’t have a clue as to what that babble was.
Apneaman on Sat, 23rd Jan 2016 6:12 pm
Boat, the future is now. That East coast infrastructure is going to take another shit kicking. Still have not completely recovered/rebuilt from Sandy or the SC floods. The consequence of AGW will break the system. Less will get rebuilt and repaired after every disaster and they are becoming more frequent, intense and destructive. The big dramatic body counts will come after.
Blizzard Fueled By Ocean Heat Cripples Eastern US, Floods Coast With Historic Storm Surge
“We knew the weather this weekend would be wicked. A predicted extreme winter storm kicked into a much higher gear by an atmosphere warmed by human greenhouse gas emissions and by a record heat and moisture bleed coming off an anomalously hot Atlantic Ocean kind of wicked. A severe Blizzard featuring 12-40 inch snows, near record to record storm surges, and hurricane force wind gusts that has been showing up in model forecasts since earlier this week. And it appears that’s exactly what we’re getting.”
http://robertscribbler.com/2016/01/23/blizzard-fueled-by-ocean-heat-cripples-eastern-us-floods-coast-with-historic-storm-surge/
twocats on Sat, 23rd Jan 2016 6:45 pm
“The global 1% happen to be those people who make over ~$40,000 per year Boat.” That leaves billions not enjoying those amenities you are describing. [onlooker, gregt]
I’m not a huge fan of that metric, I think its meant to undercut the occupy movement. It’s better to look at assets,
“Worldwide, there are 34 million people who have a U.S. dollar net worth of at least $1 million, or 0.7% of the global adult population, and they account for 45% of global wealth.”
http://fortune.com/2015/10/14/1-percent-global-wealth-credit-suisse/
and I’m pretty sure to get to that 1% mark you’re in the high 750k region for assets. Just having a 40k a year job but living any of the major US cities, trust me, you are lower middle class. You may be consuming a lot of energy as a subsidy of being part of US empire (bask in the glow boys) but trust me, you don’t feel powerful.