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Page added on December 7, 2014
The Case for $35 a Barrel Oil
Oil prices have plunged by $40 a barrel since late June, to about $66 last week. Some say the selloff is overdone, but Steve Briese, writer and publisher of the Bullish Review of Commodity Insiders, says crude’s decline is only three-fifths completed.
Briese (pronounced “breezy”), whose bearish view of oil helped inform our March 31 cover story, “Here Comes $75 Oil,” now projects a low of $35 a barrel, a price last seen in February 2009. Oil fetched more than $100 a barrel when our story was published.
In March, we predicted oil could fall to $75 a barrel. The new forecast: a bottom as low as $35 and settling at about $60.
Based on his analysis of the most recent Commitments of Traders report, released weekly by the Commodity Futures Trading Commission, Briese notes that the market’s large speculators, mostly commodity funds, still have a huge long position in futures and options on West Texas Intermediate crude traded on the New York Mercantile Exchange.
These funds tend to follow trends, riding bull and bear markets in either direction. Since the price of WTI peaked in late June at $108 a barrel, the funds have liquidated only a quarter of that long position; their sales helped drive the price south.
With three-quarters of the position remaining, further liquidation could take the oil price down another $30. A similar pattern of long liquidation by the funds accompanied the prior plunge in WTI crude to $35, notes Briese, who also predicted that decline, based on similar grounds.
His latest forecast can be viewed as the oil market’s downside risk; it could take awhile before the market bottoms out. The price of Brent crude, which normally sells at a premium of several dollars over WTI, could still come close, over an extended period, to averaging the $60 level that the Saudis reportedly can accept. But more important, as the Barron’s story predicted, a new normal now dominates the oil market, due to tectonic shifts in the forces of supply and demand.
ON THE SUPPLY SIDE, more than a trillion barrels of crude oil from unconventional sources—the equivalent of more than 30 years of extra supply—have been discovered in the past five years, mostly recoverable at $70 a barrel or less. About a third are from shale, a third from deepwater drilling, and a third from oil sands.
The U.S. is in the lead of this supply surge. According to Edward Morse, Citigroup’s global head of commodity research, “Even if West Texas Intermediate prices fell below $75 for a while, production growth in the U.S. would continue at relatively high levels for years to come.”
On the demand side, at $70 crude, the internal combustion engine can now be run more cheaply on alternate sources of fuel, including much cheaper natural gas—a conversion that is already under way for trucking fleets.
With conversions also advantageous for buses, ships, and eventually passenger vehicles, the growth in global consumption of oil could slow in the next several years, and then flatten out.
The net result: The $90 floor on the oil price has become the new ceiling, although it will likely be pierced by occasional short-lived spikes. The new floor is probably $70, although with occasional short-lived plunges well below that level.
A crude-oil price running on a sustained basis in the triple digits is probably a thing of the past.
40 Comments on "The Case for $35 a Barrel Oil"
dashster on Sun, 7th Dec 2014 8:34 am
“ON THE SUPPLY SIDE, more than a trillion barrels of crude oil from unconventional sources”
What exactly is that referring to??
shortonoil on Sun, 7th Dec 2014 9:06 am
Will oil hit $35? Eventually, but it will be several years before that happens. Oil is now in its last long term decline phase, and that has nothing to do with short, long positions, or the number of barrels. It has to do with the declining value of petroleum to the economy, and that has to do with depletion.
http://www.thehillsgroup.org/depletion2_022.htm
Of course prices will jump around as traders buy/sell on this rumor, or that bit of news, but the underlying driving force is much more fundamental. It is as assured to happen as an iron bolt left outside will rust, or that a boulder lodged against a mountain side will eventually roll down hill. The market is concerned with today’s profit; nature has a much longer view on things.
http://www.thehillsgroup.org/
bobinget on Sun, 7th Dec 2014 11:16 am
New and pending home sales:
http://www.tradingeconomics.com/united-states/new-home-sales
Credit card default rate:
http://www.cardhub.com/edu/2014-credit-card-debt-study/
Besides $147. oil SEVEN years ago the mortgage
markets collapsed. How are mortgages today?
http://dsnews.com/news/09-25-2014/occ-mortgage-performance-foreclosures
During the financial collapse we were losing a million jobs a month (or more) We have had 50 weeks of job growth.
Several Red States (poorest) passed their own higher minimum wage bills going into effect next month.
Banks making more money then ever.
Not saying everything is honky dory, just today’s are not the conditions in place the last time oil was $35.
Lets not get even stupider. That “glut” consists of 700,000 barrels a day. Translated: fifty minutes
supply for the US.. ALONE.
IOW’s traders who make payments on million dollar
two bedroom apartments in NYC & London, pay cash to coke dealers and preschools have managed to short oil markets down 40% on what amounts to a hour or so of “oversupply” ..
.
Plantagenet on Sun, 7th Dec 2014 11:20 am
Is it time to change the name of this site from peakoil.com to oil glut.com?
GregT on Sun, 7th Dec 2014 11:31 am
Great idea Plant!
Cause we all know now that oil is an infinite resource. I wonder, did Obama wave his magic wand and make it so?
Jerry McManus on Sun, 7th Dec 2014 11:38 am
The only glut we have is a surplus of clueless gits who think burning up, as fast as possible, a one time inheritance of fossil sunlight is actually a good idea.
Craig Ruchman on Sun, 7th Dec 2014 11:42 am
shortonoil – What do you think falling oil prices will do to solar stocks in the medium to long term? If oil prices fall because of depletion, I imagine solar still has to come in to fill the void. Or is solar really just a boutique feel good energy source that is powered by carbon in disguise.
shallowsand on Sun, 7th Dec 2014 11:48 am
Bobinget. $35 WTI means almost no US on shore or offshore production is in the black IMO. If that were to last one year, US production would fall off a cliff. If the Bakken differential held they would be at $20. Most producers in Rockies and mid continent would be at $25-30.
Short term I do not doubt a bunch of Type A traders could hammer it there. But that wouldn’t last any longer than it did in 2008-2009, and then we were at 10% unemployment and on the edge of another great depression.
At least I hope. If $35 took hold for year or more, you can stick a fork in most US production. Canada too for that matter. The math just doesn’t work. In fact, I question where outside the middle east that wouldn’t be the case.
Bob Owens on Sun, 7th Dec 2014 12:02 pm
You can’t predict the future price of oil; too many variables. Anyone who tries is on a fool’s errand. Why did the prices collapse? My theory: after years of $100/barrel oil the consumers of the world just can’t afford it any more. It took several years for price increases to work their way through to the consumer and they have now done so. Lower wages, higher prices, higher rents and the cake is baked.
bobinget on Sun, 7th Dec 2014 12:04 pm
Shortonoil simply won’t let go of his theory that oil has gone on some kind of BTU diet. In point of fact
oil is being used more creatively.
Commercial aircraft are lighter and are getting up to 20% better fuel efficiency then even ten years ago.
Automobile milage has improved with the advent of
hi-breds, no idle, diesel, computer enhanced driving.
Gas turbines.. more efficient. Solar/gas/wind hi-bred
power generation. Super grids.
Even such things as smart phones have cut the number of transportation miles enormously.
As a kid do you recall those times when you were not driving someplace or even no place?
Almost all my teenage memories have a direct collation with a series of ‘hot’ cars and cool
women. Sex without automobiles is now not only possible but prevalent.
Today in Asia there are three billion people to whom
a motor driven vehicle is as important as that “69
Olds was to you.
Entering the new (gas) age as we are, oil its closest rival, is bound to look to old markets, where gas
and alternative energies have yet to find foot-holds.
Avation, ground transportation and chemicals to name a few.
Our friends in the UK have been paying $10 bucks a gallon for years. If Brits can manage to wring
productivity from $10 dollar a gallon fuels, I’ll bet we could too. IOW’s we have been leaving most of oil’s productivity ‘on the table’ for years. The trick is ti IMPROVE oil’s usefulness not abandon it.
As for Capitalism, we know, we know, it’s broken.
If a bike needs repair, instead of tossing it,
you fix it.
Plantagenet on Sun, 7th Dec 2014 12:08 pm
@GregT
Oil doesn’t have to be an “infinite resource” for there to be an oil glut. All that is necessary is for supply to exceed demand.
Plantagenet on Sun, 7th Dec 2014 12:11 pm
@Jerry McManusclulessgit:
If there isn’t an oil glut, then please explain why is the price of oil plummeting?
Davy on Sun, 7th Dec 2014 12:17 pm
Craig, gas has a bigger effect on solar. I will say this the HY bond market will effect solar if rates storm up which is happening currently. It is still early in the game though.
bobinget on Sun, 7th Dec 2014 12:22 pm
Craig,
I know your question was directed at shortonoil.
However, I have LT positions in several solar manufactures. Most held up remarkable well.
Google Finance or Yahoo Finance will be happy to put up charts. Type in comparable market worth for both sectors, oil & gas and solar.
Today, small cap oil & gas companies are selling at bankruptcy levels. Major fortunes will be made
as blood flows in the streets.
Stick with solar, you will sleep better.
bobinget on Sun, 7th Dec 2014 12:24 pm
Plant,
Two words; fear and emotions.
ghung on Sun, 7th Dec 2014 12:27 pm
Bob: “As for Capitalism, we know, we know, it’s broken. If a bike needs repair, instead of tossing it, you fix it.”
Unless the roads you plan to ride that bike on have become impassible.
I expect that whatever forms of economics the future sees won’t look anything like what we call capitalism today. Considering the overall environment we’re heading into, whatever we have now isn’t compatible with overshoot. It can’t be fixed; it’s the snake that eats its own tail.
bobinget on Sun, 7th Dec 2014 12:31 pm
OT post: BBC has reported:
Jim Muir reports from Beirut as Syria accuses Israel of carrying out air strikes near Damascus
IS rise
The Syrian military has accused Israel of carrying out two air strikes on Syria, near the capital Damascus.
Israeli planes bombed the area near Damascus international airport and the town of Dimas, the Syrian army said in a statement carried on state television.
No casualties were reported. There has been no confirmation of the air strikes from Israel.
Israel has conducted several air strikes on Syria since 2011.
“This afternoon, the Israeli enemy targeted two safe areas in Damascus province, namely the Dimas area and the Damascus International Airport,” the military statement said.
It described the air strikes as “direct aggression” carried out to help the Syrian government’s opponents.
Some installations had been damaged, it added, without elaborating on what had been hit.
The UK-based Syrian Observatory for Human Rights, which monitors the Syrian conflict, said (in Arabic) that 10 explosions were heard near Dimas, which is located close to the Syria-Lebanon border.
The group also said that there had been eight air raids on areas in the town of Khan al-Sheeh, on the eastern outskirts of the capital, and that a warehouse near Damascus airport had been hit.
Responding to the Syrian accusation, Israel’s military said it did not comment on “foreign reports”.
‘State of war’
The Israeli air force has conducted several air strikes on Syria since the Syrian uprising began in March 2011.
They appear to have been mainly aimed at preventing weapons transfers to Syria’s allies in Lebanon, the militant Hezbollah movement, the BBC’s Jim Muir reports from Beirut.
Israel generally does not comment when it carries out attacks outside its borders, he says.
However, Israeli jets were seen constantly flying over parts of Lebanon on Sunday, about 30km (20 miles) from where the alleged attacks are said to have taken place, our correspondent adds.
The Israeli military has also bombed Syrian military sites in the past in retaliation for attacks on the occupied Golan Heights.
see more on BBC news
shortonoil on Sun, 7th Dec 2014 12:52 pm
Shortonoil simply won’t let go of his theory that oil has gone on some kind of BTU diet. In point of fact
oil is being used more creatively. Shortonoil simply won’t let go of his theory that oil has gone on some kind of BTU diet. In point of fact
oil is being used more creatively.
In 1975 a barrel of oil with a 5.88 million BTU content provided 3.6 million BTU to the end user. A 5.88 million BTU barrel now provides a little less than 1 million to the same end user. Nothing, perhaps an LED light, has increased its efficiency by 360%.
http://www.thehillsgroup.org/
bobinget on Sun, 7th Dec 2014 12:53 pm
To date the IAF/IDF have kept clear of involvement
in what for all intents and purpose a situation of
of far greater importance to Israel then this new coalition President O put together to both fight
ISIS and knock off President Assad of Syria.
Keep in mind, you should have program, Iran and Russia are Assad’s chief supporters. The US and KSA, now Israel, are determined to oust Mr Assad.
These raids if repeated, will end the Assad regime.
Only then will we see a three way DIRECT confrontations between the Saudis, USA ,Iran, Russia and ISIS. Remember, ISIS has already spread into Libya, Algeria and Nigeria. Once
infiltrated into civilian populations in the nations named all the tanks, carriers, F16’s, even drones
in the world are mooted.
Boys and girls, this Israeli escalation marks a turning point in the battle of Syria. Soon, it will be
a Mideast battle of Biblical whatever.
To protect ‘our’ glutted oil the entire region will go up in flame.
Plantagenet on Sun, 7th Dec 2014 1:16 pm
If the US is “determined” to oust Assad, then why is the US bombing the anti-Assad forces in Syria and leaving the Assad forces alone?
Looks like you’ve been deceived by obama’s speeches from two years ago. I suggest you pay more attention to what obama actually does rather than what he says.
ghung on Sun, 7th Dec 2014 1:21 pm
Bob; is this time different?
Oct 31, 2013 … Israeli warplanes struck a Syrian air defense base near the port city of Latakia on Thursday, US official have confirmed to media…
Jan 27, 2014 … A raid on a Syrian stock of Russian-made missiles is being blamed on Israel…
Feb 24, 2014 … Israel bombarded a Hezbollah stronghold on the Lebanon-Syria border twice on Monday night…
Mar 19, 2014 … JERUSALEM — Israeli warplanes attacked Syrian military positions Wednesday in retaliation for a bombing the previous day…
Jun 23, 2014 … Syria: 4 killed, 9 wounded in Israeli airstrikes…“
bobinget on Sun, 7th Dec 2014 1:48 pm
Yeah, in 1975 crude sold for a low of $7.61 and high of $8. a barrel. The problem, those were 1975 dollars. Most cars managed 12 MPG if they were
driven slowly.
Oil was the secondary fuel for electrical generation.
A person could buy a house for $20,000, I did.
Galwar still had fifty years to go.
Cantarell Complex in the GOM will be discovered
NEXT year.
We bought film, exposed it on vacation. Then, somehow got it to one of those drive-up kiosks waited a day then drove back and fetched up our photos.
Sunoco had yet to give up on squeezing oil from so called “tar sands”. Most people said it’s not profitable at $8.
It was nineteen years since the 707 took off from Boeing field in Renton Washington. By 1975 the jet age had replace pistons. While jets were more economical, there were thousands more in the air. Oil demand took off.
shortonoil is forgetting how warfare has changed since 1975. Jet fuel consumption is changing radically. Drones consume a fraction of that F16.
Tanks are almost never unwrapped from new till scrapped, diesel consumption, so great.
Aircraft carriers are all nuclear. Spy satellites put young Gary Powers out of work.
But, Dish Network brought TV to the boonies. We no longer had to drive 25 miles to the ‘Drive In’ even if sadly married with two kids.
(the Pentagon was one of the early ‘Peak Oil’ believers) (and AGW, but that’s another story)
VW is already test marketing a 200 MPG auto.
GregT on Sun, 7th Dec 2014 1:59 pm
@Plant,
This site is called Peakoil.com because oil is a finite resource. It is not called oil glut.com for the same reason.
bobinget on Sun, 7th Dec 2014 2:04 pm
ghung,
I realize Israel continues in a state of war with Syria.
Do you think it strange, since the advent of ISIS
and Obama’s coalition, we’ve heard nothing from Tel Aviv? Israel air-force is without comparison in the region. Canada, fucking Netherlands for crisesake, 62 nations in all bombing ISIS positions, where was the IAF?
Apneaman on Sun, 7th Dec 2014 2:25 pm
bobinget
No amount of cheer leading from a handful of industry rags or lawyered up job/econ stats can change the reality of the limits to growth. Even completely distracted people who have no idea of our 3E’s predicaments are worried and noticing all the changes. They think it’s political. Your denial and contrarianism of the obvious astounds me. Oprah has nothing on you when it come to Hopium. Your awesome dude.
The end of global development as we know it
https://www.engineeringforchange.org/news/2014/11/04/the_end_of_global_development_as_we_know_it.html
abrupt1 on Sun, 7th Dec 2014 2:33 pm
Bobinget
“a person could buy a house for $20,000 , i did”
This is where the “Free Market” meets “Globalisation”
WOOPS!!
Plantagenet on Sun, 7th Dec 2014 3:26 pm
@GregT
Yes, of course — its obvious that oil is a finite resource.
And, of course its equally obvious that we are in an oil glut right now.
Please try to understand both obvious facts.
Craig Ruchman on Sun, 7th Dec 2014 6:08 pm
“Stick with solar, you will sleep better.” – thanks to all for your advice.
Makati1 on Sun, 7th Dec 2014 11:21 pm
I think the Barron;s cover should say “Bad News For the West”, not Putin. But then, the Western corporate elite are drooling over Russia’s natural resources and land like addicted druggies looking at a counter covered in meth, crack and assorted pleasure liquids. Only Putin, and about 6,000 nukes, is keeping them from that plunder.
$35 oil would take out what is left of the Capitalist ponzi scheme, destroy your retirement plans and most of your life style, America. There is NO plus to $35 oil today.
Davy on Mon, 8th Dec 2014 6:58 am
Mak, you are criticizing and engagement in the same activity you participate in. It is called propaganda. I am often amazed watching propagandist in action. They can’t stand each other and fight each other constantly. The fight becomes increasingly heated as the propaganda gets more and more distorted until it is fiction. Mak, you are close to being fictional. Snap out of it. Your will soon be making poor decisions. Activity follows thinking and soon you will be acting out your fiction.
rockman on Mon, 8th Dec 2014 9:00 am
$35/bbl…why stop there? The average inflation adjusted price for oil in 1998 was $17.10/bbl. Not that long ago…we’re not talking about the price in your grandpa’s days. How much different are the production and economic dynamics different today then it was then?
Hmm, I can only think of one big metric change at the moment: in 1998 the world was only producing 76 million bbls of oil per day. And according to the EIA we were doing 90.1 million bbls of oil per day in 2013.
So:
1998 – 76 million bopd @ $17/bbl
2013 – 90 million bopd @ $70/bbl
2015 prediction – X Million bopd @ $35/bbl
Kenz300 on Mon, 8th Dec 2014 9:30 am
Ride a bicycle….. worry less about the price of oil….
It is time for society to move away from fossil fuels and look to a more sustainable future.
Climate Change…… deal with it…..
Speculawyer on Mon, 8th Dec 2014 11:36 am
Lots of stories like this lead me to conclude we are near the bottom.
Northwest Resident on Mon, 8th Dec 2014 12:04 pm
“And, of course its equally obvious that we are in an oil glut right now.”
First came the demand destruction, then came the “oil glut”. The one and only reason for the “oil glut” is due to demand destruction — shrinking demand while the oil keeps pumping. It is NOT because producers are producing more oil than is needed by a vibrant expanding economy. Not even close.
Who was it that said that “cheap” oil prices are good for the economy? Whoever said it is flat out wrong.
Oil Crash Comes Home To Roost: ConocoPhillips To Slash 2015 CapEx By 20%
“With every single hollow chatterbox repeating that crashing oil prices are “unambiguously good” it is clearly the case that the opposite is true. And sure enough, the first indications that the crude price crash is about to lead to some serious pain in the US came first yesterday from BP, which announced over the weekend that it would “slash 100s of mid-level supervisor jobs” around the globe, and moments ago, from ConocoPhillips, which added that as a result of plunging oil prices, it would slash its 2015 spending budget by a whopping 20%, cutting off some $3 billion in capital spending mostly involving “less developed project: spending which for those who remember their GDP reduction calculation, means a proportional in the US Gross National Product.”
But hey, I saved a few bucks at the gas pump last week, so no big deal — right? Wrong!
http://www.zerohedge.com/news/2014-12-08/oil-crash-comes-home-roost-conocophillips-slash-2015-capex-20
marmico on Mon, 8th Dec 2014 3:58 pm
But hey, I saved a few bucks at the gas pump last week, so no big deal — right? Wrong!
A few bucks. Try $130 billion fewer bucks.
The calc: $1/gallon less at the gas pump times 263,257,000 barrels (last data point being September 2014) times 42 gallons per barrel times 12 months equals $132 billion annualized compared to COP’s decline in capex of $3 billion, not all of which is domestic.
And there are millions more barrels of petroleum product consumed monthly that are not gasoline.
I tally benefits. You tally costs. So far, you are a rounding error.
Northwest Resident on Mon, 8th Dec 2014 4:11 pm
marmico — So, everything is just fine? Nothing to worry about? BAU forever, plenty of oil to keep 7 billion-plus going strong as far into the future as we can see? Global economy remains strong and resilient even with massive amounts of junk bonds and CDOs unwinding?
P.S. I don’t tally anything. I just stay on top of numerous news sources and read comments by people who claim to be and probably are experts, and my opinion is formed based on the general consensus. The consensus is that this rapid and substantial and still ongoing oil price plunge is anything but good. See article linked above as an example.
GregT on Mon, 8th Dec 2014 4:17 pm
130 billion / 330 million = 393 dollars per person per year
393 / 365 = $1.07 per day
Enough to buy 1 Starbucks double latte per week per person. Benefits for all.
Thanks for pointing that out Marmico, and to think that some believed this to be trivial.
Northwest Resident on Mon, 8th Dec 2014 4:26 pm
GregT — Thanks for doing the math.
Another point worth considering on this subject is that with the freefalling oil prices, a lot of oil workers are going to be out of jobs. Savings on gas isn’t going to mean a lot to them. All the service industries that serve the oil industry especially in those areas where drilling permits are plunging along with oil prices are going to earning a lot less money — small consolation reduced gas price will provide to them. Investors losing big on their high yield/high risk investments are not going to be compensated for their losses by savings on gas. Actually, the list of serious system risks that plunging oil prices introduce to the already brittle global economy is a very long list. Gail addresses this issue in her newest post, “Ten Reasons Why a Severe Drop in Oil Prices is a Problem”.
Issue 1. If the price of oil is too low, it will simply be left in the ground.
Issue 2. The drop in oil prices is already having an impact on shale extraction and offshore drilling.
3. Shale operations have a huge impact on US employment.
Issue 4. Low oil prices tend to cause debt defaults that have wide ranging consequences. If defaults become widespread, they could affect bank deposits and international trade.
Issue 5. Low oil prices can lead to collapses of oil exporters, and loss of virtually all of the oil they export.
And five more, at:
http://ourfiniteworld.com/2014/12/07/ten-reasons-why-a-severe-drop-in-oil-prices-is-a-problem/
GregT on Mon, 8th Dec 2014 4:32 pm
NWR,
My daily driver is a company vehicle, so this latest pullback means little to me. My wife and I sat down last night and figured that she will save around $450 CAD per year in fuel costs. I’m afraid to look, but between the two of us we’ve probably lost 100 times that already in our investments and retirement funds.
Richard Ralph Roehl on Mon, 8th Dec 2014 4:54 pm
Old Coyote Knose… the Earth’s biosphere will NOT permit the continued use of fossil fuel consumption… let alone an INCREASE in fossil fuel consumption.
Humanity is dead meat. Rather literally. Mars tells the tale… and ET will not mourn the loss of foolish baboonies too stupid to NOT shit in their beds.
WHERE THERE IS NO INSIGHT, THE PEOPLE PERISH!