Best of the Week
Most Popular
1. Ray Dalio: This Debt Cycle Will End Soon - John_Mauldin
2.Stock Market Dow Plunge Following Fake US - China Trade War Truce - Nadeem_Walayat
3.UK House Prices 2019 No Deal BrExit 30% Crash Warning! - Nadeem_Walayat
4.What the Oil Short-sellers and OPEC Don’t Know about Peak Shale - Andrew_Butter
5.Stock Market Crashed While the Yield Curve Inverted - Troy_Bombardia
6.More Late-cycle Signs for the Stock Market and What’s Next - Troy_Bombardia
7.US Economy Will Deteriorate Over Next Half Year. What this Means for Stocks - Troy_Bombardia
8.TICK TOCK, Counting Down to the Next Recession - James_Quinn
9.How Theresa May Put Britain on the Path Towards BrExit Civil War - Nadeem_Walayat
10.This Is the End of Trump’s Economic Sugar High - Patrick_Watson
Last 7 days
Macro Could Weaken After US Government Shutdown. What This Means for Stocks - 17th Jan 19
US Stock Market Indexes Reaches Fibonacci Target Zone – Where to Next? - 17th Jan 19
How 2018 Was For The UK Casino Industry - 17th Jan 19
Gold Price – US$700 Or US$7000? - 16th Jan 19
Commodities Are the Right Story for 2019 - 16th Jan 19
Bitcoin Price Wavers - 15th Jan 19
History Shows That “Disruptor Stocks” Will Make You the Most Money in a Bear Market - 15th Jan 19
What Will the Stock Market Do Around Earnings Season - 15th Jan 19
2018-2019 Pop Goes The Debt Bubble - 15th Jan 19
Are Global Stock Markets About To Rally 10 Percent? - 15th Jan 19
Here's something to make you money in 2019 - 15th Jan 19
Theresa May to Lose by Over 200 Votes as Remain MP's Plot Subverting Brexit - 15th Jan 19
Europe is Burning - 14th Jan 19
S&P 500 Bounces Off 2,600, Downward Reversal? - 14th Jan 19
Gold A Rally or a Bull Market? - 14th Jan 19
Gold Stocks, Dollar and Oil Cycle Moves to Profit from in 2019 - 14th Jan 19
How To Profit From The Death Of Las Vegas - 14th Jan 19
Real Reason for Land Rover Crisis is Poor Quality of Build - 14th Jan 19
Stock Market Looking Toppy! - 13th Jan 19
Liquidity, Money Supply, and Insolvency - 13th Jan 19
Top Ten Trends Lead to Gold Price - 13th Jan 19
Silver: A Long Term Perspective - 13th Jan 19
Trump's Impeachment? Watch the Stock Market - 12th Jan 19
Big Silver Move Foreshadowed as Industrial Panic Looms - 12th Jan 19
Gold GDXJ Upside Bests GDX - 12th Jan 19
Devastating Investment Losses Are Coming: What Is Your Advisor Doing About It? - 12th Jan 19
Things to do Before Choosing the Right Credit Card - 12th Jan 19
Japanese Yen Outlook In 2019 - 11th Jan 19
Yield curve suggests that US Recession is near: Trading Setups - 11th Jan 19
How Unrealistic Return Assumptions Are Ruining Your Stocks Portfolio - 10th Jan 19
What’s Next for the US Dollar, Gold, Stocks & Bonds? - 10th Jan 19
America's New Africa Strategy - 10th Jan 19
Gold Mine Production by Country - 10th Jan 19
Gold, Stocks and the Flattening Yield Curve - 10th Jan 19
Silver Price Trend Forecast Target for 2019 - 10th Jan 19
Silver Price Trend Forecast 2019 - 9th Jan 19
Did Strong December Payrolls Push Gold Prices Up? - 8th Jan 19
How to Spot A Tradable Stock Market Top? - 8th Jan 19
Why 90% of Traders Lose - 8th Jan 19
Breadth is Very Strong While Stocks are Surging. What’s Next for Stocks - 8th Jan 19
Half of Investment-Grade Bonds Are Just One Step from Junk Status - 7th Jan 19
Stocks Rallied Again, Still Just an Upward Correction? - 7th Jan 19
Gold Golden Long-Term Opportunity - 7th Jan 19

Market Oracle FREE Newsletter

Bitcoin Analysis and Trend Forecast 2019

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