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Guest Post: Is A Freefall In Oil Prices Really Underway?
Submitted by Robert Rapier via OilPrice.com,
Over the past three weeks, there have been numerous headlines insinuating that a freefall in oil prices is underway. Last week I read that the various causes were a slowdown in China’s economy, OPEC’s decision not to cut production, and America’s growing oil production. Based on the headlines, one might suspect that we were right in the middle of a major bear market for oil.
Just how far had the price of West Texas Intermediate (WTI) fallen?
All the way to $92 a barrel - before resurging in the last few days). Keep in mind that WTI opened 2013 at $93.14 a barrel. Since then it has traded between $98/bbl and $87/bbl. (In my Five Energy Predictions for 2013, I predicted that the price of WTI would average less this year than last year, and that the Brent-WTI differential would narrow. To date both predictions have proven to be accurate).
According to the US Energy Information Administration (EIA), the weekly average price of WTI this year traded below $90 only once. The week ending April 19th the average price was $88/bbl. Over the past 12 months, the weekly average has traded in a range of $17/bbl. The low took place during the week ending June 29, 2012 at $80.33 and the high occurred the week of Sept. 24, 2012 at $97.56. The weekly average price of WTI over the past 12 months has been $90.95. So despite the bearish headlines, WTI is still trading above the average over the past 12 months.
Over the past 2½ years, the average weekly price of WTI traded below $80/bbl only once. During the week ending Oct. 7, 2011 the weekly price averaged $79.43, but then climbed back above $100/bbl within two months. To get consecutive closes below $80/bbl, we have to go back nearly three years to the end of September 2010.
Following the oil price crash in 2008, there was some weakness in early 2009 that for a short time saw weekly averages in the $30’s and $40’s, but by October 2009 the price had once again reached $80 despite a severe economic slowdown.
Typically the cycle of oil prices goes like this. High oil prices result in increased spending on new projects by oil companies. But high prices also slow the economy, reducing demand for oil in the process. This combination causes a supply surplus that leads to plunging oil prices and lower investment in new oil projects.
This is a cycle that has been repeated many times, but I believe this cycle will ultimately come to an end because I don’t believe the oil companies will always be able to build out spare capacity to stay in front of growing demand.
Over time the lower prices brought on by the supply surplus act as a stimulus to the economy, and demand — and in turn oil prices — pick back up. Because of the underinvestment by oil companies during the period of low prices, we often see an increase in demand at a time when the oil industry isn’t increasing supply. Thus we return to the oil price spikes that slowed the economy in the first place.
But the 2008-2009 bust was unusually abbreviated. True, prices did plummet, but they didn’t stay down long. Here is why:
Historically global demand was dominated by the US, and while the US and EU both saw decreased demand as a result of the higher prices, demand in every developing region in the world continued to grow. Thus, unlike previous oil spikes, global demand continued to climb and the oil industry was unable to build out the kind of spare capacity that had taken place in the face of previous price spikes.
Between 2000 and 2011, global oil consumption increased by more than 11 million barrels per day, but the development of additional production capacity did not keep pace. This eroded spare capacity in the global oil market, which led to much higher prices and greater volatility.
A number of agencies are predicting much lower oil prices in the coming years. I have been hearing these predictions regularly since 2005. Daniel Yergin, author of the Pulitzer Prize-winning book on the oil industry called “The Prize” and one of the most highly-respected analysts in the industry, consistently underestimated the price of oil during the past decade before recently reversing direction.
But I do agree with the sentiment that supply is likely to expand for several more years. It’s just that demand is going to expand as well, and existing fields will continue to deplete. In an interview conducted last year with former Shell president John Hofmeister, he corroborated my thesis:
“In 2005 China needed about 5 million barrels per day (bpd) of oil; in 2011 China needed 10 million bpd of oil; by 2015 China will probably need 15 million bpd of oil. And that kind of tripling of demand in China, augmented by significant additional increases in daily demand from the rest of the developing world, including India and the fact that OPEC has been largely flat in its production and its inability to create spare capacity for most of the last decade is behind surging prices.”
Oil depletion reduces production in existing fields by 4 million to 5 million bpd each year, which means it takes that much new oil development just to maintain global production rates. Mr. Hofmeister summarized the problem as “We have not been able to keep up with demand growth and the decline rate simultaneously.”
However, over the past few years tremendous investments have been made in finding and developing new sources of oil, and growing demand will not as easily erode spare capacity as in recent years. This is why I have predicted that oil is likely to trade in a range — perhaps as low as $70 up to maybe $120 for the next few years. Some may feel that it is unlikely that oil could fall to $70. After all, it’s been three years since the price of WTI was at that level. But if Iran capitulates on its nuclear program, escaping the related trade sanctions, a lot of oil could hit the market, and certainly the expectations of oil traders could drive prices down in a hurry in that situation.
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Pffft!
Every market is currently being manipulated. Where do you think they learned it from? Oil has, and will continue the manipulation to infinity and beyond...
The article totally misses currency devaluation.
Oil is still priced in dollars... for now... Thanks for playing though
news flash: glut in oil and gas causes prices to soar.
in other news this market is a joke.
The thing is, oil is one of the few commodities that are actually responding correctly to the Fed's criminal dollar depreciation.
Sure, there is a supply glut, but even if demand is flat or even shrinks, the dollar is still being depreciated. Probably take a really big vacuum in demand to 'tank' oil, which may be coming up in the next several months.
Not everywhere. But even though it is mostly priced in dollars, a plunging dollar will still raise nominal prices. To the extent that it drops relative to other currencies, that will still make the dollar, and hence oil cheaper in those countries raising demand for oil in those countries above and beyond what it would have been with a stable currency. Higher demand, of course = higher prices elsewhere.
Price inflation also increases costs to produce and ship the oil. Costs at refineries go up. etc.
If Obama had been encouraging gas infrastructure buildout insted of tilting at windmills there would have been already.
Remind me, the US is *still* a net importer of NG, isn't it?
Remind me, what fraction of current US NG production would correspond to a 10% reduction of oil imports (on a BTU basis of course)...
My fuck, will you ever learn anything?
PM's now trade like an leveraged inverse S&P ETF despite record demand and tight markets...
Oil simply doesn't trade any longer outside a very narrow channel despite slowing demand and a glut of oil.
Seems normal to me.
perfectly normal manipulation.... the middle east has to have a minimum price or Arab spring/summer/fall/winter occurs......
What glut???
And please don;t even try intimate that the land locked stocks at Cushing represent a glut on any global scale...
And for bonus points please explain how their could be a glut when global *net* exports have been in decline since 2005....
Good to see your posts.
Logic is precious commodity these days.
Windmills? Where? Let me get my trusty sword and steed out!
Don Quixote de la Obama to the rescue!
One word, Syria
Get long ES bitchez for a super end of week ramp to 1650!
No amount of supply coming on line is going to suffice for the 7 and soon to be 10 billion people in the world. Anybody prediciting that oil will come down in price for any length of time is a fool. We might get a temporary slam down with a financial crash, but it will be short lived.
MOAR wars!... [itchy fingers ~ trigger happy]...
World population growth is slowing and will stabilize below 8 billion.
We were supposed to run out of oil by 1982 according to the brainiacs writing peak oil scare articles in the mid '70's.
The price cycles are to be expected, and I agree that any crash will be short-lived, as will any peak, like the last one at $147 a barrel. When we hit that level, Bush announced that he would look at opening new offshore drilling areas. The price started dropping the next day and didn't stop until it hit $35.
There are still a lot of areas that can be opened, on and offshore.
If you remove the gas taxes from the equation, and adjust for inflation, the price of filling up today is little different from 35 years ago.
Peak oil does not involve oil running out.
Hit the wiki.
Well said. Everything announced from "official" channels that has the slightest connection to oil has no credibility. Watch instead our international "diplomacy" and military moves. How come terrorists never live in the land of solar panel production and high winds? If that doesn't work, take a simple course in the geologic fundamentals.
This silly talk of "supply glut" continues to ignore EROEI, exponentially growing population, the fact that the rest of the world has only very recently started using the suff on a massive scale, and the fact that 300 million folks, however arrogant or armed, can't control a market of 7 billion players.
Good god, even Forbes is starting to grasp EROEI....
Dangerous Times As Energy Sources Get Costlier To Extract
look at the price action today. It looks like 100 is coming.
Silver just keep crashing, Markets are closed and yet some Bansters
criminal Ring probably JPM keep selling naked paper Silver..
F*ckers pinging 1$ T per year and Gold/Silver should just drop.
F* nonsense.
Fuck WTI - Brent has been hovering between $100-105/bbl for months. Way too stable to be anything other than a manipulated detante' between a rock and a hard place.
Hooray! Gas will be $2.00 a gallon soon! Yippee! Woohoo!
Just paid $4.39 in Chicago. What the f..
It's 4.29$ in many areas of Michigan. WTF
There are a number of mid-western refineries out of action....
monthly and weekly showing huge triangle coming to apex soon - 90ish is center
Using September as the most active arbitrage month; Since the end of February the Brent WTI spread has come in $8.00
So in reality the world price of crude has come down $9.00 and the price of WTI has gone up $1.00.
The market has cracked the nut on the increased production the US by building pipelines to move the US crudes to the Gulf Coast. This spread could come in another $4 before before it is all done. Flat price is meaningless in this equation.
Thanks.
That explains the modest relief on the East Coast, which is largely priced on Brent.
With the aggressive ethanol content, gas mileage is dropping. No one seems to be talking about this, but I have documented the gas mileage in my car for the past five years and gas mileage is down about 10% from 2009. This means than I need ten percent more gas to travel the same distance as before. This means that a gallon of e-gas at current local prices of $3.52/gal. actually requires a total expendature of $3.87 to travel the same distance as four years ago.
Just one more example of the ever growing expenses hobbling middle class paychecks.
same ratios all the way down to anyone who operates commercial scale lawnmowers & snowblowers... People who live in shitty little cookie cutter townhomes or small residential lots don't see this... But if you're cutting 30+ acres a week, you notice it...
#$%¢€°?÷&*# kid won't mow the lawn anymore. Says gas cost to much.
GET.OFF.MY.LAWN. [kid]
FUCK ETHANOL
I live in IA, king of corn. I refuse to burn that shit, pisses me off every damn time I go to the Coop to fill up they just assume I want 89(10% blend). I tell them no, I want 87, get this look like I am a traitor.
I don't burn that subsidized shit in anything I own. It really plays hell with marine engines too.
PS. I also refuse to eat the "corn fed beef" that everyone rants and raves about. Yeah, if you like GMO fed shit then go for it. I will settle for grass fed, more of the good stuff. If you don't murder it on the grill it tastes as good as the other stuff, even better to me.
Corn is a type of grass.
A decline in oil prices means the ChairSatan has failed, and needs to be cooked and served to some low information voters.
A ballistic increase in oil prices means the ChairSatan has succeeded, and needs to be cooked and liquified so he can be burned in a converted diesel FEMA van.
obama busy arming the muslim brotherhood as well
http://www.thedailybeast.com/articles/2013/06/06/kerry-s-secret-gift-to-...
I have the growing feeling that when this fraud of global markets finally implodes, it's going to be turned upside down on its head in a milisecond.
Why do you think the DHS criminals are stockpiling 2+ Billion Rds. of ammo? It's for target practice all right, target practicing on us citizens...
"I have the growing feeling that when this fraud of global markets finally implodes, it's going to be turned upside down on its head in a milisecond."
I'm old. I remember people saying the same thing in the 1960's. So hang in there, the crash is just around the corner!
DEFLATION. I've thought for a long time that key basic material prices were the things to watch. Oil, copper, lumber, etc. The futures markets are relatively easy to rig and manipulate, but the actual cash market is another thing.
Anybody who argues that basic material prices can't fall below production cost needs to explain how natural gas continues to be produced at $4 when the break even point for fracted gas is $6 to $8. The massive overproduction financed by ZIRP and endless QE is just now hitting the market. The Minsky moment is on us...
correct, there is no such thing as deflation. No currencies or societies have ever died because their purchasing power was too strong.
I wonder why Chesapeake cranked the gas well under my property and increased my monthly royalty check by 400% over the last two months. They had the well birtually shit in for over a year.
They must like losing money.
Not.
"they can't print oil" If they can print gold, why not oil?
Prices falling everywhere...if this keeps up well be partying like it's 2007...
/sarc?
LOL, that is all I can say...hmm...pfff...sounds good as well.
Ok, NEXT
If it wasn't for the rest of the world, everything would be fine.
When Gasoline and Diesel are $1 a gallon I'll consider any further decline a "Free Fall".
Will oil prices crash? Let's assume yes. Will production follow? Oh, yes.
And this is why I call the MSM what it truly is -- the PROPAGANDA PRESS!
WTI Oil Daily looks like it is completing wave 2 up.
http://bullandbearmash.com/chart/spot-wti-oil-daily-consolidating-push-h...
Resistance around 97-98. If this scenario holds, oil will fall sharply.
Yergin's a hack.
I'll take one of those invisible pink unicorns you're riding.
It's hard to talk meaningfully about oil prices in dollar terms given the unpredictability of the dollar as a reserve currency.
What crap, priced in what? Oil remains the most fungible source of energy and commodity chemicals, period. With 7+ billion all looking for a better standard of living, there is plenty of demand and it takes (and is taking more) a lot of work/energy to deliver the stuff.
"I'll take one of those invisible pink unicorns you're riding." - Mad Max.
the 3rd world is buying cars like they used to buy flies
And yet gas prices in the Ameratech region are spiking up to $4.50 a gallon ...
That reminds me. I have to put a quart in my car today.
There might be a dip. It won't last. Anyone who thinks oil prices will ever be permanently cheap and abundant again doesn't know what they're talking about.
No problem with paying $5.00/gallon gasoline. Bring it on!
Around the coasts and around some parts of the Midwest gasoline is already $4.40/gal.
The gas stations are packed. People are used to high prices now. Got to go places and party for the weekend.
When thieves fall out; the Arab Opec and the US frack brigade will come to loggerheads if the frack machine starts spouting anything the world cannot pick up; as its all interconnected.
Those oil monarchies are all hocked in debt if the world depression brings down energy consumption; too many balls up in the air, these are roller coaster times.
For the world to continue to consume without petrodollar hegemony, the second world has to get organised without the dollar hegemony and outside their MIC umbrella. Two bigs unknowns.
Decoupling, if and when it occurs, has a big price tag attached. First world will not give up its oil hegemony nor its money line.
Right now the first world Oligarchy has only one aim : stay afloat and inflate the fiat life boat; all the while killing the middle class welfare state pump as consequence.
Basically peak oil (maximum production rate), is happening right now :
http://goo.gl/LzmGp
And regarding peak oil, if there is a myth from which it is highly urgent to get out, it is :
"first oil schock=Yom Kippur war/Arab OPEC embargo= geopolitical event = nothing to do with geological constraints"
Typically that's how it is "indexed" on below graph for instance :
http://iiscn.files.wordpress.com/2013/05/bp-oil-price.jpg
When the reality is much more :
- end 1970 : US production peak, the energy crisis starts from there, with some heating fuel shortages for instance (some articles can be found on NYT archive on that)
- Nixon name James Akins to go check what is going on
- Akins go around all US producers, saying this won't be communicated to the media, but need to be known, national security question
- The results are bad : no additional capacity at all, production will only go down, the results are also presentede to the OECD
- The reserves of Alaska, North Sea, Gulf of Mexico, are known at that time, but to be developed the barrel price needs to be higher
- In parallel this is also the period of "rebalance" between oil majors and countries on each barrel revenus.
- So to be able to start Alaska, GOM, North Sea, and have some "outside OPEC" market share, the barrel price needs to go up (always good for oil majors anyway) and this is also US diplomacy strategy
- For instance Akins, then US ambassador in Saudi Arabia, is the one talking about $4 or $5 a barrel in an OAPEC meeting in Algiers in 1972
- Yom Kippur starts during an OPEC meeting in Vienna, which was about barrel revenus percentages, and barrel price rise.
- The declaration of the embargo pushes the barrel up on the spots markets (that just have been set up)
- But the embargo remains quite limited (not from Iran, not from Iraq, only towards a few countries)
- It remains fictiv from Saudi Arabia towards the US : tankers kept on going from KSA, through Barhain to make it more discrete, towards the US Army in Vietnam in particular.
- Akins is very clear about that in below documentary interviews (which unfortunately only exists in French and German to my knowledge, and interviews are voiced over) :
http://www.youtube.com/watch?feature=player_embedded&v=fQJ-0jAr3LQ
For instance after 24:10, where he says that two senators were starting having rather "strong voices" about "doing something", he asked the permission to tell them what was going on, got it, told them, they shat up and there was never any leak.
(the "embargo story" was in fact very "pratical" both for the US (to "cover up" US peak towards US public opinion or western one in general, but also for major Arab producers to show "the arab street" that they were doing something for the Palestinians).