Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Crude Oil New $75 Floor Price

Commodities / Crude Oil Oct 01, 2012 - 06:01 AM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleOil analysts, pundits and commentators are getting a hold on the rising threat of what is called "severe correction" hitting oil markets. The 2008-2009 sequence where Nymex prices crashed from a peak around $147 a barrel to about $40 are relatively fresh in the mind. The rebound was also dramatic, pushing prices through 2010 back over the 100-dollar mark into low triple digits by Q1 2011.


The present outlook certainly includes the potential for gung-ho traders working another downside then upside miracle, but fundamentals dictate otherwise. The basics of world oil have changed, even in the 4 years since 2008: neither further price growth beyond $125 a barrel for WTI, nor a crash below about $60 to $75 a barrel for WTI are realistically possible - although traders do not need (or want) to know that! Prices far below $100 a barrel for the two major reference grades, WTI and Brent, are however the new rational "market equilibrium" outlook, meaning several things.

NEW REALITIES FOR NEW ENERGY
Back in 2008 the global economy was at the end of maybe its last classic growth surge, which operated through 2004-2007 and was weakening fast by 2008, when "financial expectations" and market rigging were able to briefly drive Nymex, ICE and other oil market prices near $150 a barrel. The surge was so special there was almost no spread or prime on Brent against WTI and heavily compressedremiums on less-traded "regional reference" crudes such as Urals, Bonny, Dubai, Tapis, ESPO or others.

Also during the 2004-2007 global economy growth surge, it was still possible to have annual growth rates of world oil demand near 2 percent, another rearview mirror item in global energy history. Betting on if, rather than when world oil demand can again rise by even one half of that Belle Epoque rate, that is 1 percent or about 890 000 barrels per day in a 12-month period, is integrated in oil market trading as a background bet, still today.

Despite that, both the IEA and EIA, since 2008, have on multiple occasions been forced to backtrack on their growth forecasts, always trimming their estimates of global oil demand growth going forward. In the case of the IEA, recent and ongoing oil market analysis and forecasts still include claims that "by about 2017" global oil demand could recover Belle Epoque annual increments, that is growth of well above 1.25 million b/d each year. Even with accelerated output of shale oil and natural gas liquids, and gas-based synthetic oil, and biofuels, and oil saving the two energy agencies still say, global oil shortage could or would return with prices forecast or guesstimated by the IEA of "well above $150 per barrel", even $200 a barrel.

It is not presently possible to say when the IEA and EIA will throw in the towel on "high growth-high price" scenario building, but the facts and trends are stacked against them. What we can say is that another oil price surge to near $150 per barrel would, more than ever, trigger oil saving and substitution which is already in high gear - but first we would have to accept it is even possible to attain $150. The current outlook, and increasingly the betting by traders is no.

Conversely and poorly analyzed and identified, the "new floor price" for oil is a lot higher than in 2008-2009. Another price crash to $40 per barrel would have fast and drastic impacts on world oil, world energy and the economy - all of them negative! The drastic cut in oil E&P (exploration and production spending) through 2008-2009, only reversing in 2010, estimated by analysts at around 40%-45%, could easily be topped when or if oil prices fall below $60 per barrel, let alone $75. Any sustained period of oil prices at below $50 per barrel will be disastrous for Big Energy, triggering showdown time for their corporate strategies and identities in the energy world.

WHY THE NEW PRICE FLOOR?
One simple reason is that if oil E&P declines from its current high rates (probably above $350 billion per year), even maintaining current global oil output will be difficult: taking Exxon Mobil, its current E&P budget for oil is around $36 billion per year (for 2012), with the corporate goal of raising Exxon Mobil's total oil production capacity by about 1 million b/d by 2016. When or if Exxon takes its foot off the spending pedal, or shelves the program aimed at covering annual depletion loss of capacity and also expanding total oil output - by 1 million b/d in 4 years - this major oil producer could only produce less oil. The same story applies to almost any other major oil & gas corporation, even including the NOCs of OPEC and non-OPEC states, for a variety of reasons which feature the extreme high costs, and therefore risks of expanding total oil output, for a global oil market that is going south.

Right behind those reasons and especially for the "historic oil majors" (including Exxon, Chevron, BP, Shell, Total, ENI), the rush to develop and produce shale gas and stranded gas - in unexpectedly huge quantities - has added a new dimension to world oil & gas. Basically, gas can and will only become cheaper everywhere outside the US, even if oil gets more expensive. As oil prices grow, energy consumers find ways of not using it, and these ways expand fast when oil prices rise fast. Every "demand domain" of oil is in fact threatened: even the semi-sacred private automobile, which can easily, cheaply, and cleanly run on gas. Oil fired electric power production is an almost extinct species in OECD countries - but developing countries still consume around 2 billion barrels a year for power generation, according to IEA data. The alternatives to oil-fired power are simply massive, and always getting cheaper, and now include the new renewables, wind and solar. Oil-fired marine transport (using about another 2 bn barrels a year) was another "reserved domain" for oil, but ships can run on coal, gas and wind, as well as oil. Also, both bulk cargo and container shipping are in decline as the global economy downsizes, re-localizes and constantly raises its energy efficiency.

The above and other energy-economic fundamentals are likely not so important for explaining why the coming slide in oil prices may have to stop at around $60 to $75 per barrel: the knock-on to a basically deflating real economy (well sheltered from or starved by the rain of QE bank bailouts) of a major cut in oil prices will be deflationary - and bad. For Big Energy companies and corporations the impacts may be disastrous, really disastrous, including bail outs being needed for what were imagined to be Win Only cash machines generating shareholder benefits, supplying energy and oil products supporting a huge web of state tax revenues. Cheap energy is a danger for economic growth, the exact opposite of any political party pitch on the subject - and the US experience with cheap shale gas is a real time, real world example of what cheap gas energy has done for the economy: almost nothing for growth, and major damage across the energy patch.

We can however be rather sure oil traders will not be interested in this type of analysis - when the right signals come, barrel prices can fall far and fast, in $10-a-week increments, to be sure with highly predictable dead cat bounces when "market sentiment says the downside was exaggerated". Finding the right price level for oil is however easy: in the US, natural gas is now priced around $20 per barrel equivalent; the cheapest coal in the US is priced at $1.60 per barrel equivalent; wind power and solar power plants operate on "fuel" that is 100% and perfectly free: beat that with 100-dollar oil!

From the danger price level of $75 per barrel on the downside, however, the action by oil producers will go into high gear. Saudi Arabian claims, from its oil minister al Naimi that "he likes $75 oil" will disappear off the newsfeeds coming out of Saudi Arabia, and Russian reaction to $75 oil is easy to predict. Further price erosion to $60 per barrel will produce a rout, with a major downward impact on oil production and supply, enabling oil traders to excel themselves with an hysterical surge in prices, but that is business as usual!

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in