Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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.


© 2005-2022 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