Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Gold Surges on Stock Selloff - 18th Jan 19
Crude Oil Price Will Find Strong Resistance Between $52~55 - 18th Jan 19
Stock Market’s Medium Term is No Longer Bullish. It is Now Mixed - 18th Jan 19
SPX and Gold; Pivotal Points at Hand - 18th Jan 19
Fable Media Launches New GoWin Online Casino Affiliate Site in UK - 18th Jan 19
The End of Apple! - 18th Jan 19
Debt, Division, Dysfunction, and the March to National Bankruptcy - 18th Jan 19
Creating the Best Office Space - 18th Jan 19
S&P 500 at Resistance Level, Downward Correction Ahead? - 17th Jan 19
Mauldin: My 2019 Economic Outlook - 17th Jan 19
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

Market Oracle FREE Newsletter

Bitcoin Analysis and Trend Forecast 2019

The Other Side of the “Oil Glut”

Commodities / Crude Oil Jan 10, 2015 - 03:53 PM GMT

By: Money_Morning

Commodities

Dr. Kent Moors writes: The pundits continue to hawk the same reasons for the fall in oil prices.

These are always “spearheaded” by comments about surging global supply led by the onslaught of unconventional (tight and shale) oil production in the U.S.

Invariably, what’s missed by these “TV sages” are the pricing dynamics kicking in that virtually guarantee an increase in oil prices as we move into 2015.


They’re based on the actual condition of the oil market, not some knee-jerk emotional commentary delivered by the talking heads on TV (some of whom are actually short the market).

The good news is more of the guys who really understand what’s going on have begun to mirror what I have been saying for some time – including some well-known economists.

One of them is Steve Kopits, the high-profile managing director of Princeton Energy Advisors, who recently came out with a particularly bullish projection…

According to Kopits, “In permitting low oil prices, the Saudis seek to bring the market back into equilibrium. At present, our calculation of break-even system-wide is in the $85-$100 a barrel range on a Brent basis.”

But Kopits isn’t the only one who’s optimistic about oil. The legendary Mark Mobius, the emerging market guru, chimed in this week that he expects Brent to rebound to $90.

Oil Prices: A Significant Squeeze Ahead

This move higher in oil prices won’t happen overnight. Instead, it will happen gradually.

Absent any move by OPEC to cut production – an unlikely short-term prospect given the current Saudi position – it will be driven by traditional supply and demand factors. In fact, the current low price environment is actually setting the scene for a major uplift in prices.

A read earlier this week by Dan Steffens is illuminating on this point.

Dan Steffens is one of the best (and most readable) analysts you can find. He and I have had a like mind for some time on what the real impact is going to be from the current “oil glut.”

According to Dan, the current low crude oil price could be overkill and result in the next “Energy Crisis” by early 2016.

As Dan notes:
“The upstream U.S. oil companies we follow closely are all announcing 20% to 50% cuts in capital spending for 2015. We will start seeing the impact on supply at the same time the annual increase in demand kicks in. Our model portfolio companies are all expected to report year-over-year increases in production, but at a much slower pace than the last few years.”

“A study released by Credit Suisse two weeks ago shows that U.S. independents expect capital-expenditure (Capex) cuts of one-third against production gains of 10 per cent next year. This would imply production growth of 600,000 bpd of shale liquids, and perhaps another 200,000 bpd from Gulf of Mexico deepwater projects. At the same time, U.S. conventional onshore production continues to fall. I have seen estimates of 500,000 to 700,000 bpd declines within twelve months. If these forecasts are accurate, U.S. oil production growth would be barely positive next year and headed for a material downturn in 2016.”

 ”North American unconventionals (oil sands, shale and other tight formations) have been almost all of net global supply growth since 2005. If unconventional growth grinds to zero and conventional growth is falling outright, the supply side heading into 2016 looks highly compromised. At today’s oil price, only the “Sweet Spots” in the North American Shale Plays and the Canadian Oil Sands generate decent financial returns to justify the massive capital requirements needed to continue development. Global deepwater exploration is rapidly coming to a halt.”

“Were demand growth muted, this might not matter. Demand for liquid fuels goes up year-after-year. It even increased in 2008 during the “Great Recession” and ramped up sharply during 2009 and 2010 despite a sluggish global economy. Low fuel prices are increasing demand today and my guess is that, with U.S. GDP growth now forecast at 5% in 2015, we could see demand for fuels increase by close to 1.5 million barrels per day this year. The current IEA forecast is for oil demand to increase by 900,000 bpd in 2015.”

And here’s the kicker…

“Low fuel prices are increasing in demand today and with U.S. Gross Domestic Product (GDP) likely to come in higher (about 5% is the current consensus) in 2015, demand would increase by almost 1.5 million bpd this year. The current International Energy agency (IEA) forecast is for oil demand to increase by 900,000 bpd in 2015.”

As a result, more analysts are beginning to conclude that the oil markets will be heading into a significant squeeze.

The Coming “Oil Shock”

Dan and others also put emphasis on the real supply side quandary.

The last extended period of low oil prices was from 1985 to 1990. In 1985, when oil prices collapsed in a similar fashion to what is occurring today, the world had 13 million bpd of spare capacity, with 7 million of that in Saudi Arabia. OPEC was well-positioned to comfortably meet any increase in demand.

Today, just about all of the world’s discretionary spare capacity resides in Saudi Arabia and amounts to no more than 2 million bpd. Oil expert Lou Powers says that Saudi Arabia will have difficulty maintaining production at over 10 million bpd for an extended period. If we do swing to a supply shortage, the Saudis may find themselves needing to open all production for a prolonged period of time. Lou says at that point the world will be headed right back into an oil shock and we will see much higher oil prices than $100 per barrel.

Recall that only North America and deep water projects are the only places with meaningful production upside. If crude oil prices remain below $60 a barrel for any length of time it could prove catastrophic to non-OPEC supply. At some point, OPEC action may become necessary.

But some are pointing elsewhere. Steve Kopits says that the cut may not initially come from either Saudi Arabia or OPEC. “OPEC could cut production to prop up prices and increase revenues,” Steve says. “But for now, a better strategy for Saudi Arabia would be to hang back, deflect criticism, and let events play out. If the Russians are thinking clearly, Moscow will cut first.”

As a result, I have started to set up my Energy Advantage and Energy Inner Circle subscribers for the moves I’ll be introducing shortly.

Because there is one truism in all of this…

Before the spike in crude oil prices occurs, a range of highly profitable energy sector prospects will fall into our laps.

Seriously oversold markets have a way of doing that.

Source : http://oilandenergyinvestor.com/2015/01/side-oil-glut/

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning 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