Best of the Week
Most Popular
1. Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - Nadeem_Walayat
2.Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - James Burgess
3.Gold Price Trend Analysis - - Nadeem_Walayatt
4.The Beginning of the End of the Dollar - Richard_Mills
5.Stock Market Trend Forecast Update - - Nadeem_Walayat
6.Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - Troy_Bombardia
7.Precious Metals Sector: It’s 2013 All Over Again - P_Radomski_CFA
8.Central Banks Have Gone Rogue, Putting Us All at Risk - Ellen_Brown
9.Gold Stocks Forced Capitulation - Zeal_LLC
10.The Post Bubble Market Contraction Thesis Receives Validation - Plunger
Last 7 days
The Incredibly Bullish Set-Up for Gold - 20th Oct 18
Here Comes the Stock Market Retest - 20th Oct 18
Waterproof Camera - Olympus Tough TG-5 Setup and First Use - 20th Oct 18
Israel’s 50-Year Time Bomb, Pushing Palestinians to the Edge - 19th Oct 18
Bitcoin Trend Analysis 2018 - 19th Oct 18
History's Worst Stock Market Crash and the Greatest Investing Lesson! - 19th Oct 18
More Signs of a Stocks Bull Market Top and Start of a Bear Market in 2019 - 19th Oct 18
Stock Market Detailed Map Of Expected Price Movement Before The Breakout - 18th Oct 18
Determining the Outlook for Gold Mining Stock - 18th Oct 18
Investor Alert: Is the Trump Agenda in Peril? - 18th Oct 18
Stock Market is Making a Sharp Rally After a Sharp Drop. What’s Next? - 18th Oct 18
Global Warming (Assuming You Believe In It) Does Not Affect Gold - 18th Oct 18
Best Waterproof Compact Camera Olympus Tough TG-5 Review - Unboxing - 18th Oct 18
Silver's Time Is Coming - 17th Oct 18
Stock Market Volatility Breeds Contempt - 17th Oct 18
Gold 7-Year Bear Market Phase Is Over - 17th Oct 18
Gold - A Golden Escape - 17th Oct 18
Tec Stocks Sector Set For A Rebound? - 16th Oct 18
Real Estate Transactions are Becoming Seamless with Blockchain-Powered Data Sets - 16th Oct 18
Important Elements of a Viral Landing Page - 16th Oct 18
Stephen Leeb Predicts 3-Digit Silver and 5 Digit Gold?! - 16th Oct 18
BREXIT, Italy’s Deficit, The EU Summit And Fomcs Minutes In Focus - 16th Oct 18
Is this the Start of a Bear Market for Stocks? - 16th Oct 18
Chinese Economic Prospects Amid US Trade Wars - 16th Oct 18
2019’s Hottest Commodity Is About To Explode - 15th Oct 18
Keep A Proper Perspective About Stock Market Recent Move - 15th Oct 18
Is the Stocks Bull Dead? - 15th Oct 18
Stock Market Bottoms are a Process - 15th Oct 18

Market Oracle FREE Newsletter

Trading Any Market

Crude Oil Price Decline – To What Price?

Commodities / Crude Oil Aug 18, 2014 - 05:42 PM GMT

By: Andrew_McKillop

Commodities

Triple Digit Prices are Not Forever
In what is only superficially amazing at a time when Islamic insurgency, including Boko Haram in Nigeria and ISIS in Iraq may be threatening the state, civil society and the oil sector in major exporter countries, oil prices are declining quite rapidly. The “magic three digit” price level for oil - $100 a barrel  come rain or shine – has been seriously eroded for US WTI and may soon also be attacked for Brent. The major reason for this decline is sharper than expected and forecast decline in leading economic indicators for many large importer countries, including Japan and the EU28. Monthly oil import demand outturns for China and India are variable, but have suffered major contractions relative to previaling rates before 2010.


Ample supply is also cited as a cause of price erosion, by oil analysts and this is demand-related on the global level, but is not demand-related in the key example of US shale oil output growth. US shale output growth is raising domestic oil supply for a domestic market that is “flat” or only in very slow growth.  US shale oil supply growth is almost totally disconnected from the domestic demand side. The simplest of oil-sector indicators, like oilinventories at Cushing OK tend to show this.

The Fundamentals
Broadly speaking and related to the Peak Oil paradigm, there was “incipient structural shortage” of oil, worldwide, before the 2008 economic crisis and its sequels. This helps explain the fantastic run-up in prices as shown in the chart, below from the US EIA to 2008




Through 2002-2008 there was an almost straight-line run-up of prices, making forward bets on prices all that easier! In fact, the Peak Oil paradigm became a self-fulfilling hypothesis (see my article: http://www.marketoracle.co.uk/Article46846.html) with major ramifications in public policy, including the large support given to energy saving, “low carbon “ energy and oil substitution, but with different timelines for concrete impacts in the real economy.

Unsure and variable, easily qualified and disputed break-even producer cost estimates for WSB-Western Sedimentary Basin Canadian oilsand liquids, for example, place these in the $60-per-barrel ballpark as of today. However, major actors in WSB oilsands in the period 2000-2005 such as Royal Dutch Shell claimed that when and if “carbon credits” were added to the equation, breakeven production prices could be cut to as low as $30 per barrel.

Supply-side fundamentals, when mixed with geopolitics, produce the Genel Energy phenomenon where this oil producer nearly exclusively focused on Kurdistan can source oil supply at very low prices relative to still-current market rates. Although vigorously disputed by General Energy, this may include supply to Genel Energy, for resale, of Kurdish oil at “around $50 per barrel”.

 

The 2008-2009 Price Collapse
This is already today a heavily discussed subject area with a large number of potential interpretations (see eg OIES study http://tinyurl.com/lm9cnxj), but the key role of a rapid decline in global demand for oil, especially imported oil was a certain driver of the price collapse. In other words this was not a supply-driven or supply-led price collapse.  Also we can note, a key result or key driver of the price decline process in 2008-2009 included firstly a peak in the Brent / WTI differential, or Brent premium, followed by a collapse to almost-identical prices for the two “marker crudes”.

As we know, recent trends for the Brent premium show that this mark-up for Eastern hemisphere oil relative to Western hemisphere oil is “not what it used to be”. It can be compared with the still-existing global natural gas market price premium, on gas outside the US versus gas inside the US.

While such market price premiums held, they certainly affect investment decision on oil and gas, and the breakeven price required for project approval. To be sure, we could expect that oil producers, in particular, will be sensitive to market price outlooks and scenarios, but simply the persistence of a large Brent / WTI premium directly led to very high cost, high break-even investment decisions in the Eastern hemisphere, for example the ENI-led Kashagan project, BP's pipeline and other oil projects in west Asia, and the Chinese and Indian national decisions to start SOR-Strategic Oil Reserves.

Overall however, nothing prevents a price collapse to far below break-even prices for oil, as in 2008-2009. Signs of this include the alleged ability of Genel Energy to source oil from Kurdistan at around or about $50 per barrel and the probably willingness of KSA to make up any losses of Iraqi output if or when attacks in Iraq by the Islamic State pose a real threat to oil installations. In this second case this it would be comparable to the post-1986 decision by KSA to deny revenues to the Islamic Republic of Iran, engaged in a long war with the Sunni-ruled Iraq of the day. At the time, oil prices collapsed by about two-thirds or 67% in a short period.

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.

© 2014 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

© 2005-2018 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