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Page added on April 1, 2015
Why $30 a Barrel Oil Is Unlikely
ROBERT RAPIER: As the price of West Texas Intermediate went into free fall in the second half of 2014, nobody had a clue where the price might stabilize. After all, in mid-2008 a similar free fall began that took WTI from nearly $150 a barrel into the $30s. As the price dipped below $50 a barrel, many analysts began suggesting oil could fall much lower.
Edward Morse, Citigroup ‘sC +0.03% global head of commodity research, suggested oil prices could fall into the $20s. Goldman Sachs GS +1.32% COO Gary Cohn said we could be headed to $30 a barrel. Analyst Dennis Gartman went so far as to suggest on CNBC that we could see oil fall to $15 a barrel because of insufficient crude oil storage.
I view $30 a barrel or lower as extremely unlikely. My prediction for 2015 was that West Texas Intermediate wouldn’t close below $40 a barrel, because of some important distinctions between today’s market and that of 2008.
Despite an oft-repeated mantra about falling demand, global demand for oil grew by more than 5 million barrels a day between 2008 and 2014. Demand for oil did decline in developed countries over that time, but this decline was more than offset by demand increases in every developing region in the world. The International Energy Agency forecasts that demand will grow by another 900,000 barrels a day in 2015.
Rober Rapier/Data Source: BP Statistical Review of World Energy 2014
How was this growing oil demand met? Primarily through growth in production in North America, which overwhelmingly was driven by U.S. shale oil production. In fact the 2014 BP Statistical Review of World Energy showed that in 2013 U.S. oil production grew by 1.1 million barrels a day over the previous year – from 8.9 million barrels per day in 2012 to 10.0 million barrels per day in 2013. Daily production outside the U.S. declined from 2012 to 2013 by 554,000 barrels per day.
Robert Rapier/Data Source: BP Statistical Review of World Energy 2014
The problem is that most of the shale oil production that is being added has break-even costs above $50 a barrel. This is a number supported by many energy analysts, and also attested to by the drastic drop in drilling rigs and the steep cuts in capital budgets for U.S. shale drillers as oil prices declined below $50 a barrel.
The Energy Information Administration forecasts that U.S. oil production will creep up slightly over the next month, but output has started falling in the Eagle Ford Shale, the Bakken Shale and in Colorado’s Niobrara Shale. The EIA further forecasts that 2015 production growth in the U.S. will be far below the 1 million barrel-a-day gains of the past few years (and that’s with an expectation that WTI prices will be above $50 a barrel).
So why are some calling for such low prices for crude oil? Primarily because crude-oil inventories are rising to record levels, a situation I discussed in “Is the U.S. Running Out of Crude Oil Storage?” While it is true that crude-oil inventories have risen rapidly since last fall, this is also the lowest demand season of the year. U.S. refinery maintenance will peak this month, after which crude-oil demand will begin to pick back up.
The current picture with crude-oil storage is in my opinion the reason crude oil is trading in the $40s, and therefore unlikely to be the catalyst that takes crude down to $20 a barrel. While markets often overcorrect, crude oil has shown some resistance to dropping below the $40-a-barrel mark. Whether the price briefly dips below that level, it is hard to envision a scenario that keeps the price below $40 a barrel for long.
10 Comments on "Why $30 a Barrel Oil Is Unlikely"
Plantagenet on Wed, 1st Apr 2015 1:44 pm
Interesting to see that the claims of “falling demand” and demand peaks don’t fit with the actual data which shows a five million barrel per day INCREASE in oil consumption between 2008 and 2014 when the oil glut began.
Speculawyer on Wed, 1st Apr 2015 1:53 pm
The price could certainly hit a number in the $30s . . . the market is quite volatile. But it certainly won’t stay there for any length of time because that would be far below so much of the production costs.
beammeup on Wed, 1st Apr 2015 2:11 pm
Plant – I have to agree with you on that point. As much lamenting as we hear on this forum about the horrible state of the world economy (some of which certainly has merit), the fact remains that oil consumption is not decreasing on an absolute, global basis, not yet anyway. We have a glut because the world poured $1T into US shale production, which is looking like a very bad investment at the moment. Lots of investors will lose their shirts, but oil consumers around the world will get a brief period when then can consume oil at less than the cost of production.
Plantagenet on Wed, 1st Apr 2015 2:18 pm
beammeup – You are exactly right
—- shale investors are in a world of hurt. Of course for every loser there is a winner. Folks who have any cash left to invest get to buy Schlumberger etc. on the cheap AND enjoy driving on $2 gasoline while it lasts.
Cheers!
Nony on Wed, 1st Apr 2015 4:35 pm
crude oil futures price shows a gradual recovery to 70 or so. Who cares what the talking heads say? They didn’t foresee the drop either.
BobInget on Wed, 1st Apr 2015 7:37 pm
A more likely scenario is $200. inter-day.
John McCain escaped the Senate long enough to call for bombing Iran yet again. Tell Israel to “Go Rogue”
http://www.huffingtonpost.com/jon-rainwater/mccain-joins-bolton-invit_b_6973978.html
http://www.eurasiareview.com/01042015-mccain-to-israel-go-rogue-oped/
If these not so veiled threats were not enough,
Saudi Arabia, with US blessings keeps bombing Yemen, an Iranian Allie.
When Iran or henchmen Hezbollah moves to face down Israel and Saudi Arabia, lots of rice bowls get busted in the process.
NYT
AL MUKALLA, Yemen — Houthi fighters backed by tanks pushed into the center of Aden on Wednesday and were battling for control of the southern port city, despite a weeklong Saudi military offensive against them.
Witnesses reported fierce street battles and high civilian casualties in the Yemeni city on Wednesday night, including in the Khormakser district along the coast. Local journalists said the Houthis were facing stiff resistance from fighters allied with the exiled president, Abdu Rabbu Mansour Hadi.
A Houthi victory in Aden, Yemen’s second largest city, would be a significant setback for the Saudi-led military coalition, which has declared an open-ended operation intended to restore Mr. Hadi to power. Houthi control of the city would most likely expose it to even greater turmoil, as local fighters opposed to the Houthis continued to resist their presence and as coalition forces intensified their efforts to dislodge the Houthis using airstrikes and naval shelling.
Continue reading the main story
RELATED COVERAGE
Open Source: Tired of War, Yemeni Bloggers Say, ‘Enough’MARCH 31, 2015
A police officer surveyed a crater where homes once stood near the airport in Sana, Yemen, as a Saudi-led offensive targeted suspected Houthi militia sites.Aid for Yemen Dwindles as Need Rises Amid ChaosMARCH 31, 2015
Dozens Are Reported Killed as Saudi-Led Strike Hits Camp for Displaced Yemeni CiviliansMARCH 30, 2015
Tires were used to create roadblocks Friday in the southern city of Aden, where Houthi-aligned forces fought in the streets.Houthi Forces Move on Southern Yemen, Raising Specter of Regional Ground WarMARCH 27, 2015
Mona El-Naggar in Sana, the capital of Yemen, in January.A Close-Up of Unfolding Unrest in YemenMARCH 25, 2015
Hundreds of civilians have been killed as Yemen has been consumed by combat over the last few weeks, with clashes stretching from southern provinces around Aden to the border with Saudi Arabia in the north.
Speculawyer on Thu, 2nd Apr 2015 12:55 am
John McCain needs to retire. He’s really lost touch with reality. As if bombing Iran is something the nation is interested in doing. Yeah, Afghanistan and Iraq were not enough. We now want to tangle with Iran which is bigger than both Iraq and Afghanistan combined.
Perk Earl on Thu, 2nd Apr 2015 1:22 am
“John McCain escaped the Senate long enough to call for bombing Iran yet again. Tell Israel to “Go Rogue”
Bobinget and Spec, did you know that he was tortured as a prisoner during the Vietnam war. Hung upside down from the ceiling by his feet at one time all night long. He was known by the guards as being able to withstand every torture they threw at the nutcase, and he was still feisty as all get out. Apparently all that harsh treatment twisted him pro-war in the extreme.
oldfarmermac on Thu, 2nd Apr 2015 2:34 am
I believe that the current low price is due to nothing more than the collective customer not wanting as much oil as the collective producer is bringing to market.
Oil is a commodity that is extremely price inelastic in the short term. The consumer buys as much as he needs and no more – you buy as much milk as you want your kids to have and no more – unless it gets cheap enough to feed it to the cat.
With the industry producing just a tiny bit more than the consumer wants at eighty or ninety or a hundred bucks a barrel the price has to fall WAY DOWN to get the consumer to buy the surplus being marketed day after day.
And the industry itself is like a really big ship. It takes a good long while to get such a ship up to speed – and a good long while to stop it as well.
Consider the situation of a land lord who has bought a building expecting to rent it at let us say five thousand a month. If business turns bad and he can get only three thousand he is going to lose his shirt- but it is better to get the three thousand that NOTHING.
Most oil is owned and sold by nationalized oil companies that simply MUST continue to sell in order to generate cash, no matter the price. The many independent oil companies, except for the ones called ”majors” or ” super majors” are generally in the same spot- compelled to sell to generate cash even if running at a loss.
Pretty soon – certainly within the next twelve months – the folks who have been drilling all the new wells in the tight oil fields are going to be finishing up the wells they have already committed themselves to drilling and Fracking because new wells will not generate a profit at current prices.
The industry is ” stacking rigs” and laying off people at a very fast pace.
Once the number of new tight oil wells coming on line starts declining – which is going to happen within the aforementioned twelve months – then American domestic production will start falling off pretty fast because tight oil wells decline very very fast.
Given that American tight oil production is the only significant recent new production on a large enough scale to influence the world market – total production is going to start falling off fairly soon.
Depletion never sleeps and without new production coming online on a regular basis supply will start drying up within the year.
rockman on Thu, 2nd Apr 2015 6:30 am
Howdy Mac. Been too long hearing such sage words from you.
Great points as usual. And I’ll add the same point as before: the oil producers, neither the Rockman nor the Saudis, set the price of oil…the refiners do. The only control we producers have is how much of our oil we are willing to sell at that price. I suspect some folks don’t realize how intense the refiners analyze their sales market. A refiner isn’t going to sell gasoline for $2.50/gal if it costs him $2.70/gal to produce it. At least not intentionally. And you and the rest of the consumers aren’t going to be forced to pay $3/gal for that gasoline if you decide not to buy it.
And as you point out there are few producers that will give up cash flow by limiting production so other produces can reap higher prices. This is exactly why the OPEC cartel model seldom ever worked. The only time efforts to restrict production in order to stabilize price was when the Texas Rail Road Commission determined on a monthly basis how much of our oil could be produced. Break the allowable rules and get a big ass fine. And maybe lose your right to operate in Texas. And if you’re really bad get some jail time.
Now that’s how you run a cartel. LOL.