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Page added on November 13, 2016
Oil Is Heading Back To $20s
Oil bulls had a good ride in the last eight months. The black gold rallied, from mid-$20s in January to the mid-$50s in late October. But economic fundamentals have turned bumpy for oil bulls in the last couple of weeks, with oil heading towards the $40-mark rather than the $60-mark as some had expected.
And things will continue to be bumpy in the near future. Oil is heading back to the January lows, as hopes of an OPEC output freeze have been fading. In fact, OPEC members like Iran, Libya, Iraq, and Nigeria have been raising rather than cutting oil output since the Algiers meeting, according to recent industry reports.
Then there are American frackers, the new “swing producers” in the oil market—a role previously played by Saudi Arabia. And they are ready to fill in any supply slack, as soon as prices head north, by bringing oilrigs back on line.
That’s what happened back in July, as oil prices hovered near the $50 mark. Oil rigs were up for four weeks, according to Baker Hughes, which keeps a weekly tally on the number of rigs in operation—a trend that accelerated as oil continued to trade around $50 in September and October. Overall, 165 oil rigs came back to operation since the late January, helping raise US output and cut foreign oil imports in recent weeks.
American frackers’ role as swing producers will become even more important under the new administration, which is expected to ease fracking regulations.
To make matters worse for the bulls, global oil demand remains sluggish at best. The world economy continues to grow at a slow pace under an increasing debt burden.
We’re talking about debt accumulated in the aftermath of 2008-9 financial crisis (Great Recession), on top of debt that had been accumulated before the crisis with the help of the Federal Reserve and other central bankers.
And things may get worse on this end of the market, too. US long-term interest rates have been heading sharply higher recently—the US Treasury note yield reached 2.13%. And short-term rates are expected to follow suit, as the Fed is expected to raise the Federal Funds rate in the December FOMC meeting.
| Financial Product | 1-Month Price Change |
| iPath S&P GSCI Crude Oil (NYSE:OIL) | -15.26% |
| Energy Select SPDR Fund (NYSE:XLE) | -1.61 |
| Market Vector Oil Services (NYSE:OIH) | -3.27 |
Source: Finance.yahoo.com 11/11/2016
13 Comments on "Oil Is Heading Back To $20s"
onlooker on Sun, 13th Nov 2016 12:37 pm
well well, Short and his ETP model is looking ever more accurate
rockman on Sun, 13th Nov 2016 1:33 pm
“Short and his ETP model is looking ever more accurate”. Why, because Forbes that is routinely touted as idiots (often by model believers themselves) sees the possibility of much lower oil prices? If you want to place your bets of Forbes’s predictive abilities have at it…it’s your money. LOL.
BTW if oil is going down to $20/bbl in just a few years shouldn’t we be seeing a steady and relentless decline start very soon? Or is the model predicting oil prices to drop 50% in just a few months time? Seems like every week that passes without that steady fall off it begins to hurt its credibility…don’t you agree?
Northwest Resident on Sun, 13th Nov 2016 1:40 pm
The ONLY THING that has kept oil prices at current levels is debt-fueled demand, especially from China. This is a short-lived unsustainable phenomenon that is nearing the end of its multi-year streak, one that has served to pull enormous amounts of future consumption into the present. Reserves are not being replaced at current price levels, and claimed reserves will drop off the books as oil price declines. In other words, our future is assured to have significantly less fossil fuel consumption. The best that Trump could hope to do is to goose oil production by a minor fraction for a short duration by injecting another massive round of debt. We’ve been buying time all along, and there is very little time left to buy, and what little time remains to be bought comes at an exorbitant price. Reality is knocking on the oil industry’s door, and the Grim Reaper is lurking in the shadows.
Northwest Resident on Sun, 13th Nov 2016 1:43 pm
rockman — We’ll see a steady and relentless decline in oil production when the world’s central banks STOP subsidizing consumption with massive infusions of unsustainable debt. Or, a 2% – 3% increase in interest rates ought to do the trick too.
onlooker on Sun, 13th Nov 2016 2:04 pm
Great analysis NW. The debt monster keeps growing even as depletion continues and EROEI is getting worse. The last gasps of a dying Industry and by extension a dying civilization
rockman on Sun, 13th Nov 2016 3:38 pm
NR – “…when the world’s central banks STOP subsidizing consumption…”. So then for tghe model to prove to be correct that has to start happening pretty soon, right? When do you predict that to begin?
“…and EROEI is getting worse.” As explained in detail before: thanks to lower oil prices the EROEI of projects being drilled now has significantly increased over what it was 3 years ago. And if oil drops to $20/bbl the EROEI of future drilling efforts will be even higher.
Boat on Sun, 13th Nov 2016 5:23 pm
The latest surge in production came from Lybia and Nigeria which set a world production record in Oct. Peak. yea we have a new peak.
Harquebus on Sun, 13th Nov 2016 6:14 pm
NWR
I totally agree with you.
Rockman.
Soon mate, soon.
rockman on Sun, 13th Nov 2016 11:10 pm
H – But that’s the time line I’m looking for: how soon is soon? I’m not sure if folks appreciate that it’s almost 2017. If oil prices are going to permanently go down the toilet by 202O that’s only about 3 years away. So IMHO if this “end of the oil age” is that close shouldn’t “soon” be really f*cking soon? LOL.
IOW how close will it get to 2020 without seeing signs of end before you question the model? Also good to remember that the current price of oil is still above the average price from the early 80’s to 2005. True even if we adjust prices for inflation.
So if “the beginning of the end” is upon us shouldn’t we at least see prices back down to where they were a couple of decades ago? Folks shouldn’t be confused: the oil patch is still getting a good price for our oil. Not as phenomenally good as a few yeasrs ago but still damn good.
Davy on Mon, 14th Nov 2016 6:24 am
“The end of the oil age” is happening at more than one level. We see evidence economically there is demand destruction. One need only to look at global finance to understand this. This is clearly showing itself with oil price, supply, and demand. The depletion of economic oil is clear at another level. Unconventional oil sources have lower value. If you combine these two forces we then ask ourselves is 3-5 years a timeline for the end? I would say it “could” be. This is an important point. Not that it “will” be which is defining. At this point in time defining predictions that venture out very far are not valid. How far is far? Far is a fog at this point.
We can say it is possible because of systematic forces of economic demand destruction combined with the forces of depletion with economic oil that are then conspiring against globalism. Globalism is powerful but it is fragile to declining growth. This situation then establishes the environment of prediction. Globalism is dangerously close to or within dangerous demand destructive deflation because of a multi-dimensional laundry list of problems. Bad debt combining with a further increase of malinvestment policies because of this bad debt is rotting the system from within is high on the list. This is clear but there are so many other issues. How long can a systematic rot continue. The USSR took years to fail from within. When it started to fail it was quick.
When you practice financial repression, manipulation of healthy price discovery dynamics, and artificial liquidity you introduce dysfunction to a system that allocates scarce resources. When the allocation of scarce resources is being done with a highly complexed engine of growth we call globalism that can’t end well. “When” is an unknown because this is a self-organizing and self-adaptive engine. It is driven also by policy from leadership that is increasingly inadequate and illegitimate which is introducing an irrational and dysfunctional component. Trump is an irrational card in this respect.
We should acknowledge a range of bifurcation for the global system’s end. The global system’s end and the end of the oil age should be interchangeable. Oil will lose significance once globalism is done. We will likely still have oil but not with the dynamics of globalism which will be a very different oil age. We should also ask ourselves what will destruct first and the degree and duration of this. Will emerging markets or developed markets be first to fail. How will this failure progress. When will food and fuel go into shortage? We could have mountains of grain and inventories of oil but fail to delivery that properly in a cascade of failures.
The problem with people today is they assume too much. We assume in the discussion of oil dynamics a constant for the economy. Discussions of the economy assume energy as a constant. This is as if we are always going to have these foundations as constants to base our assumptions. This is hopium and delusional. We have a human Ponzi scheme called globalism. Ponzi work until they don’t. It is usually human nature that destroys them once confidence is affected. We may stumble into a collapse process with a system that manages to keep itself going with the disenfranchisement of elements of that system. Countries, peoples, and industries will be eliminated as needed by a self-organizing self-adaptive system because people make choices in mass and less so because of leadership charting a course. The real strength of the global system is the fact that no one is fully in charge today. This is also a real danger because if we have a flawed social narrative driving the human nature component of globalism that will not end well
I imagine we are going to be surprised when the wheel come off the cart of globalism. It will be a surprise because it may occur in the oddest of places and time. This is the nature of decline with randomness and the irrational. The important point then is for any prediction to be valid it must include a range of scenarios at this point. It must acknowledge there are no constants like an oil or the economy. We do not have the ability with models, equations, and fancy studies to predict outcomes at the global level very far into the future today. This is because we are on the cusp of change and there is turbulence at that point. There are no equations to solve for turbulence. This is why I chuckle at these academic predictions of EV penetration or oil growth that reach out 25 years. How absurd to think we can skate along that amount of time with so many constants. We have enough oil and we have enough economy to go on but without an underlying foundation of strength. So in this situation we must be very cautious about predicting the end or a future. It will likely be a complete surprise and a deadly one.
makati1 on Mon, 14th Nov 2016 6:47 am
Rockman, what will the price be tomorrow or next week or…? When the market crashes, and it will, what will the price of oil be the next day? To laugh because 2020 is 3 years way is foolish. Three years is a lifetime at the speed of today’s changes.
Boat on Mon, 14th Nov 2016 7:16 am
October just set a peak oil production record. The US stock market just set a record high. US is at historical low unemployment rates. Home values have recovered to pre crash lows. Energy costs world wide are low. Cleaner energy sourses and tech continue to drive energy intensity down. Interest rates are at historical lows. It’s hard to bet on doom.
rockman on Mon, 14th Nov 2016 9:12 am
Mak – “Three years is a lifetime at the speed of today’s changes.” OK then: so you expect oil to stay around $45-$50 per bbl for the next 36 months and then in Jan 2020 it will drop to about $20/bbl. IOW you’ll et al will still have faith in the model if oil is still $50/bbl in Dec 2019?
Three years is a “life time”? All in the eye of the beholder I suppose. BTW it took 19 months for oil to drop from $100/bbl to bottoming out $32/bbl. So I’m still looking for anyone’s projection of oil prices between now and $20/bbl in 2020. No need for great detail…just every 6 months: June 2017; Jan 2018; June 2018; Jan 2019; June 2019; Jan 2020. Oh, wait, don’t need that last one…it will be about $20/bbl then. This should be easy, right? Can’t you just pluck those 5 data points from the model? After all anyone can say prices will crater and the “end of the oil age” is close. But with the model you have actual numbers we can track, right?
Thanks in advance.