Best of the Week
Most Popular
1. Dollargeddon - Gold Price to Soar Above $6,000 - P_Radomski_CFA
2.Is Gold Price On Verge Of A Bottom, See For Yourself - Chris_Vermeulen
3.Dow Stock Market Trend Forecast 2018 - Nadeem_Walayat
4.Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - P_Radomski_CFA
5.Why The Uranium Price Must Go Up - Richard_Mills
6.Dow Stock Market Trend Forecast 2018 - Video - Nadeem_Walayat
7.Jim Rogers on Gold, Silver, Bitcoin and Blockchain’s “Spectacular Future” - GoldCore
8.More Signs That the Stock Market Will Rally Until 2019 - Troy_Bombardia
9.It's Time for A New Economic Strategy in Turkey - Steve_H_Hanke
10.Fiat Currency Inflation, And Collapse Insurance - Raymond_Matison
Last 7 days
Gold Price Trend Forecast 2018 - 24th Sep18
The Stock Market Has Been Exceptionally Strong this September. What’s Next for Q4 2018 - 24th Sep18
Gold / US Dollar Inverse Trend Relationship Video - 23rd Sep 18
US and Global Stocks, Commodities, Precious Metals and the ‘Anti-USD’ Trade - 23rd Sep 18
Gerald Celente Warns Fed May Bring Down the Economy, Crash Markets - 23rd Sep 18
Top 3 Side Jobs for Day Traders - 23rd Sep 18
Gold Exodus to Reverse - 22nd Sep 18
Bitcoin Trader SCAM WARNING - Peter Jones, Dragons Den Fake Facebook Ads - 22nd Sep 18
China Is Building the World’s Largest Innovation Economy - 21st Sep 18
How Can New Companies Succeed in the Overcrowded Online Gambling Market? - 21st Sep 18
Golden Sunsets in the Land of U.S. Dollar Hegemony - 20th Sep 18
5 Things to Keep in Mind When Buying a Luxury Car in Dubai - 20th Sep 18
Gold Price Seasonal Trend Analysis - Video - 20th Sep 18
The Stealth Reason Why the Stock Market Keeps On Rising - 20th Sep 18
Sheffield School Applications Crisis Eased by New Secondary Schools Places - 20th Sep 18
Precious Metals Sector: It’s 2013 All Over Again - 19th Sep 18
US Dollar Head & Shoulders Triggered. What's Next? - 19th Sep 18
Prepare for the Stock Market’s Volatility to Increase - 19th Sep 18
The Beginning of the End of the Dollar - 19th Sep 18
Land Rover Discovery Sport 'Approved Used' Bad Paint Job - Inchcape Chester - 19th Sep 18
Are Technology and FANG Stocks Bottoming? - 18th Sep 18
Predictive Trading Model Suggests Falling Stock Prices During US Elections - 18th Sep 18
Lehman Brothers Financial Collapse - Ten Years Later - 18th Sep 18
Financial Crisis Markets Reality Check Now in Progress - 18th Sep 18
Gold’s Ultimate Confirmation - 18th Sep 18
Omanization: a 20-year Process to Fight Volatile Oil Prices  - 18th Sep 18
Sheffield Best Secondary Schools Rankings and Trend Trajectory for Applications 2018 - 18th Sep 18
Gold / US Dollar Inverse Correlation - 17th Sep 18
The Apple Story - Trump Tariffs Penalize US Multinationals - 17th Sep 18
Wall Street Created Financial Crash Catastrophe Ten Years Later - 17th Sep 18
Trade Wars Are Going To Crash This Stock Market - 17th Sep 18
Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - 17th Sep 18
Financial Markets Macro/Micro View: Waves and Cycles - 17th Sep 18
Stock Market Bulls Prevail – for Now! - 17th Sep 18
GBPUSD Set to Explode Higher - 17th Sep 18
The China Threat - Global Crisis Hot Spots & Pressure Points - 17th Sep 18 - Jim_Willie_CB
Silver's Relationship with Gold Reaching Historical Extremes - 16th Sep 18
Emerging Markets to Follow and Those to Avoid - 16th Sep 18
Investing - Look at the Facts to Find the Truth - 16th Sep 18
Gold Stocks Forced Capitulation - 15th Sep 18
Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - 15th Sep 18
Trading The Global Future - Bad Consequences - 15th Sep 18
Central Banks Have Gone Rogue, Putting Us All at Risk - 15th Sep 18
Gold Price Seasonal Trend Analysis - 14th Sep 18
Growing Number of Small Businesses Opening – and Closing – In the UK - 14th Sep 18
Gold Price Trend Analysis - Video - 14th Sep 18
Esports Is Exploding—Here’s 3 Best Stocks to Profit From - 13th Sep 18
The Four Steel Men Behind Trump’s Trade War - 13th Sep 18
How Trump Tariffs Could Double America’s Trade Losses - 13th Sep 18
Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - 13th Sep 18
Trading Cryptocurrencies: To Win, You Must Know Where You're Wrong - 13th Sep 18
Gold, Silver, and USD Index - Three Important “Nothings” - 13th Sep 18
Precious Metals Sector On a Long-term SELL Signal - 13th Sep 18
Does Gambling Regulation Work - A Case Study - 13th Sep 18
The Ritual Burial of the US Constitution - 12th Sep 18
Stock Market Final Probe Higher ... Then the PANIC! - 12th Sep 18
Gold Nuggets And Silver Bullets - 12th Sep 18
Bitcoin Trading - SEC Strikes Again - 12th Sep 18

Market Oracle FREE Newsletter

Trading Any Market

Why I'm Revising My Crude Oil Price Outlook… Upward

Commodities / Crude Oil Jun 24, 2015 - 03:59 PM GMT

By: ...

Commodities

MoneyMorning.com Kent Moors writes: I just left a closed-door meeting in Paris. Assembled here were some high-powered oil practitioners, the traders selling their productions, and the bankers financing all of it.

As often happens, the pundits and talking heads have been discussing matters quite similar to what was on our agenda. And as usual, their perspectives are very different from those of us "behind the scenes."


As a matter of fact, what I heard at this meeting has led me to believe that I may even have made a misjudgment.

For some time I have been talking in Oil & Energy Investor about a confluence of factors leading to a rise in oil prices. It was heartening to see I was right according to those assembled in my meeting – except for in the case of one interesting factor.

Never mind the noise coming from the cable news crowd. Here's what you need to know about what's really going on in the oil markets…

Have the U.S. and OPEC Destroyed the Supply-Demand Balance?

First, let's discuss what the pundits in the media have been getting wrong.

In the last two days, no fewer than four separate opinion pieces have appeared, all focusing our attention on the same point. About a year ago, each of these missives begins, a crude oil pricing collapse began. By the time it was over, prices had slid almost 60%.

The apparent culprit, according to this view, then and now, is a surplus of crude on the market. Each of these pieces then concludes that the problem is continuing.

Why? Because OPEC production is up, U.S. unconventional oil (read: shale and tight) remains too high, and there is a declining drain-off from refinery runs despite the reported rise in gasoline demand as we move into the primary driving season.

The translation being advanced is simple enough: The expected rebalancing of the crude oil market, in which supply and demand are equivalent and pricing changes are narrow, has not taken place because there remains too much supply on the market. In support of the argument, the pundits then turn to their two primary culprits.

The first is the decision by OPEC to initially keep production levels high and then to raise them even more in an almost frantic attempt to maintain market share. The second is the resilience of the American shale patch to continue extraction levels in the face of subdued prices for the product being lifted.

"It's the supply side, stupid," the commentators seem to be saying in unison.

However, the truly remarkable thing to recognize is that these same writers were touting that the rebalancing was in fact forming. And they had even proclaimed it had actually arrived early that week!

We Don't Need a Full-Blown Shortage for Rebalancing

So what happened?

Initially, they had to contend with the uncertainty of a Greek collapse in Europe and then with the uncertainty of what the Fed would say last Wednesday. Pundits, you see, hate uncertainty.

Then the weekly figures came in from the EIA (the Energy Information Administration, a division of the U.S. Department of Energy). They continued to show a drawdown and an absolute decline of almost 2 million barrels a day in American crude oil inventory. But not as large a decline in gasoline as anticipated.

That combined with a report earlier in the week that OPEC had produced 31.1 million barrels a day in May, a level higher than for any month since October 2012. This puts the cartel's production some 1.1 million barrels a day above its own monthly member quotas and 1.8 million barrels a day over its own estimates of the demand for its own oil.

Suddenly, the opinions were looking back a year – to the beginning of a pricing decline – and proclaiming the same supply problem existed this time around.

Now, what the "short-sightseers" want is an absolute contraction in American production totals, not simply a reduction in forward production rates. That is both unnecessary and a terrible way to calculate the actual base for prices. Nobody is expecting a shortage. We don't need one for the balance in the oil market.

Why My Price Estimates Weren't Optimistic Enough

This leads me back to yesterday's meeting here in Paris.

Behind the closed doors, the consensus was quite different. While nobody considers a constriction of supply likely (there is currently too much short-term available oil from both the conventional OPEC providers and the new U.S. oil fields), the balance is already here.

Hence my misjudgment: It seems I may be too conservative in my price readings of $73 to $78 a barrel for the West Texas Intermediate (WTI) in New York and $82 to $85 a barrel for Dated Brent in London by the end of the year. These came in at the very low end of the figures being proposed.

While the pundits are still in search of their elusive "balance," the combination of OPEC member financial difficulties – all of them, including Saudi Arabia, are drawing heavily on hard currency reserves as credit becomes more expensive – makes the present overproduction unsustainable. With a range of other considerations, this has established a pricing floor.

These other considerations have been the subjects of my briefings here for months. U.S. shale and tight oil production has been buttressed by expanding volume from the most recent wave of wells. That flow will begin to taper off next month (July) as the wells exhibit the production peak at about 18 months from opening common to fracked drilling.

Much of the secondary and enhanced oil recovery normally used to temper the decline will be too expensive for use without cutting into profit margins. Companies will cream frontend production and move to additional wells drilled but not completed. These are primarily replacement wells and will not provide any overall increase in aggregate production rates.

The other major consideration is on the financial side. Credit on both sides of the Atlantic is becoming more expensive. Here in Europe, the concern over a "Grexit," a Greek exit from the Eurozone, and the attendant drain on interbank credit mean there will be a spike in interest requirements on new drilling loans. Much of that is orchestrated from London. I was certainly picking up signals of this while I was there earlier this month.

The Balance Is Already Here

In the U.S., the quality and expense of the high-yield (read: junk) bonds used to finance new drilling have resulted in companies scrambling to pay an increasing debt load and remain the biggest reason for major cuts in future capital expenditures for horizontal, fracked, deeper, and more expensive shale drilling.

That means the prospects for significant new drilling remain problematic. That is another decided cause of lower new production trends moving forward.

There will not be any sudden shortage of oil. But the price will also not be retreating back to the mess of late last year. The European movers and shakers have concluded the balance is here.

And what of all that noise the pundits have been making in all of this? Oil closed above $61 in New York on Monday. It was above $64 in London.

Maybe someday these guys will understand the market they are commenting upon. But I haven't seen any indication of that yet.

Source :http://moneymorning.com/2015/06/24/why-im-revising-my-oil-outlook-upward/

Money Morning/The Money Map Report

©2015 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.


© 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