Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Crude Oil Teeters On The Brink – Of $100 A Barrel

Commodities / Crude Oil Oct 22, 2013 - 03:55 PM GMT

By: Andrew_McKillop

Commodities

MEMORIES OF THE 1986 PRICE CRASH
Like the US debt ceiling saga – with the only possible result being more debt - the ultra-magic triple-digit dollar price of US WTI, and of course more for European Brent, needs extraordinary measures to stay that overblown. In the case of the US debt mountain the Fed does the extraordinary (over)blowing, but for oil WTI counts on heavy lifting by leading members of Wall Street's oil market manipulator clique – sometimes called “investors” - who not so long ago forecast WTI as easily able to attain $125 per barrel by December 31st.


So the shading of New York oil prices below $99.99 on 21 October was something of an historic event.
Even by mid-morning, New York time, on 21 October the plunge protection team was clearly at work trying to repair the damage - because falling oil prices are a challenge to New Normal.

The nightmare for new normal oil and its unreal pricing – totally unrelated to natural gas and coal prices due to oil being so “noble” - would be a repeat and remake of the 1986 price crash. This featured plenty of the parameters, and the same Mid Eastern and other actors, we have today.

The official story for what happened in 1986, which resulted in a cool 67% or two-thirds reduction of the oil price through 6 months, followed by 13 years of low prices, can be given but doesn't have to be believed. The story says Saudi Arabia “abandoned its swing producer role”, cutting back its production from a little over 10 million barrels a day (Mbd), close to today's claimed 11 Mbd, to just 2.3 Mbd by August 1985, because of increasing price weakness signals in the market, or at least clear signs of reduced Saudi revenues. The story continues that Saudi Arabia had been tinkering with pricing options and alternatives, from compensation-offset trade deals, to increased refining action to reduce crude as a percentage of exports, to netback-pricing concepts tying the crude price to the value of refined petroleum products in certain markets, in a global refining system like today's but more extreme – beset by high costs, overcapacity, outdated technology, and so on.

In fact the most basic problem was soft global demand for crude, which had not recovered from the 1979-83 recession. The Saudi action of hiking its production above 10 Mbd had spurred other OPEC members to increase crude production and offer their own barter-offset and netback-pricing deals for buyers. World supply and stocks of crude and products rose through late 1985 and continued into 1986. The average per-barrel FOB (free on board) price for OPEC crude oil dropped from around $23.45 in December 1985 to $9.85 in July 1986 and for some crudes, and some buyer markets, it dropped further than that. Prices for crude oil from nonOPEC countries of course followed the same track. A 13-year price decline ensued.

ENERGY ECONOMICS VERSUS GEOPOLITICS
Rather similar to today, the US-Saudi prime concern of the day was the Iranian menace, even if Syria's al-Assad of the day, called Hafez was less of a problem than his son Bashr. In 1985 the Iraq war effort against Iran in their war which started in 1980 was weakening by the day. The war was partly financed by Saudi Arabia and mostly armed by the US, including the supply of chemical weapons to Iraq, but by late 1985 was failing and tapering down. Iran had not been beaten. There was stalemate.

Through the period to late 1985 and into 1986 the Middle East “war risk premium” on oil was often estimated at around $10 a barrel, or more. Today's estimate is about the same. By late 1985 however the taper-down of the Iran-Iraq war was becoming hard to ignore, eroding the risk premium, but Saddam Hussein's demands for financing, loans and weapons, and even fighting men to throw at Iran were higher than ever. A collapse in oil prices was about the worst thing possible for keeping the war popping – but the war popped its clogs and fizzled out, in major part due to insufficient funding, made worse by falling oil prices!

The impact of the oil price collapse on the US oil sector was dramatic. Crude prices 60% lower reversed the upward trend in US oil production that had operated for the previous 5 years. High-cost wells, made economic by the doubling of oil prices in 1978-1980, became unprofitable and were shut in. US oil imports soared, from 3.2 Mbd in 1985 to over 8 Mbd by the late 1980s, and peaked at 9.1 Mbd in year 2000 except for imports from the Gulf Arab states, which peaked in 2003, according to US EIA data.

Through 1986-99 the collapse of world oil prices had most and first affected OPEC crude. OPEC oil exports to the US grew and overall oil consumption of the US rose from in those 13 years by nearly 4 Mbd, from  15.7 Mbd to 19.5 Mbd.

The energy economics of the crash were drastically simple. When oil prices decline, Saudi Arabia pumps less and the US imports more. When oil prices rise Saudi Arabia pumps more and the US imports less but as the 1986-99 period showed, OPEC producers apart from Saudi Arabia taper down less, or not at all, to try conserving oil revenue totals. Non-OPEC producers can also react this way, even in high cost oil provinces like the North Sea where oil output went on rising as prices crashed and stayed high throughout the 1986-99 period. The USSR's production through the 1980s was rarely below 11.6 Mbd, and only seriously declined from 1990.

Oil geopolitics in no way has to converge and comply with the energy economics. Mainly for internal domestic political reasons, Saudi Arabia soon threw in the towel on its production-cutting effort or “price discipline” role, defending prices by producing less. From 1989 to 1991 it hiked average daily output by 3.1 Mbd, to 8.1 Mbd, and throughout the 1990s with prices often down to $10 - $15 per barrel it held its average output at around 8.1 – 8.4 Mbd. The claimed “target price” agreed by OPEC and promoted by Saudi Arabia, was $18 per barrel, but this was rarely attained for a period lasting 13 years from 1986.

WILL IT HAPPEN AGAIN?
Theoretically it would be totally impossible to have a comparable more-than-60% fall of oil prices, today, with prices cut to around $40 per barrel, and held at that low level for over a decade. The crash of oil prices in 2008-2009 was a radically rapid decline-and-rebound event.

Today, both Saudi Arabia and Russia work on short national financial and economic fuzes, and the US economic fuze is so short that any massive cut in oil prices – creating a wave of panic in the US domestic oil industry – would likely not bolster economic growth or lead to a big uptick in US oil consumption. In 1986 world oil production and refinery overcapacity was huge, but the overhang is not so large today. The price crash of 2013-14 would therefore be more restrained, and could not feature a cut of oil prices by more than about 33% from present prices.

Nevertheless, today, both Saudi and Russian oil output are at record highs – and US output also. The smaller OPEC producers, and a host of small non-OPEC producers are often at or near record output. The potential for oil stocks growing radically outside the US, and potentially also in the US, certainly exists and reporting disclosure of radically rising crude and refined products stocks will always add further downward pressures on prices if and when they are already falling.

The Middle East war risk premium, assuming it is around $10 per barrel can be heavily cut given the basic US-Russian entente or deal to not bomb Syria and remove its chemical weapons, whatever Saudi Arabia might think of that. This would take oil prices to about $89 per barrel for WTI. About another $10 below that price level we start approaching actual US shale oil producer prices, making further declines less easy, but still possible.

The likely sustainable floor price – meaning a long term depressed price level – could be as high as $70 - $75 per barrel, after trading swings and plays have turned down.

HELPED OR HINDERED BY THE DOLLAR?
Conventional oil analysts and trader lore says that if the USD declines, oil prices in dollars normally rise “mutatis mutandis” but even if we forgot our Latin, the outlook for the USD plunging - against what? - presents a lot of intellectual problems. Against oil is what the oil bulls hope.

Quoted on Pravda.ru, October 16, scholar Mikhail Khazin said: "Those who are professionally engaged in economic matters, in one voice say that there are not years, but months or even weeks left before the collapse." To be sure he meant a collapse of the USD and its role in world trade – especially oil trade. Conversely, Khazin said nothing at all about the Russian ruble becoming the world's new petrodollar, nor the CNY-RMB, nor gold – and we can tell him that oil-gold trades will be hampered by persistent weakness inside the bullion market, upstream corporate debt for miners hitting extremes, but revenues declining, and soft gold mining stock prices being sure and certain for some while forward.

Forecasts that the USD is going to tank – against what? - face so many hurdles in the real world we can bet with the contrarians that the world value of the dollar will rise a little, if not a lot, in coming days and even weeks. Dragging down the oil price.

In a normal world, nothing like New Normal, as pointed out by Alistair Macleod in a long interview with Chris Martenson on 'Peak Prosperity', October 19, the role of QE worldwide and whether this concerns the US Fed, the ECB, the BOE or the BOJ, has reached a saturation effect in artificial wealth creation. It is now only a wealth transfer operation. Only those players close to the money spigot will now get the spinoff or “trickle down” from printed money.

This is a deflation crisis, likely or certainly followed by hyperinflation, but presently a deflation crisis. Outside the trickle down, everywhere else in the economy, local and global, we get deflation. Oil prices will therefore deflate – not inflate.

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.

© 2013 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 advisor.

Andrew McKillop Archive

© 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

6 Critical Money Making Rules