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"Oil May Drop To $25 On Chinese Demand Plunge, Supply Glut, Ageing Boomers"
By Paul Hodges of International eChem via Russell Napier's ERIC
We have forecast since mid-August that Brent oil prices would fall to “$70/bbl and probably lower”, and the US$ would see a strong rise. As Chart 1 shows, Brent has now reached our target, falling 40%, whilst the US$ has risen 10%. We believe this represents the first stage of the Great Unwinding of policymaker stimulus that has dominated markets since 2009. This Note now takes our oil price forecast forward into H1 2015.
Astonishingly, most commentators remain in a state of denial about the enormity of the price fall underway. Some, failing to understand the powerful forces now unleashed, even believe prices may quickly recover. Our view is that oil prices are likely to continue falling to $50/bbl and probably lower in H1 2015, in the absence of OPEC cutbacks or other supply disruption. Critically, China’s slowdown under President Xi’s New Normal economic policy means its demand growth will be a fraction of that seen in the past.
This will create a demand shock equivalent to the supply shock seen in 1973 during the Arab oil boycott. Then the strength of BabyBoomer demand, at a time of weak supply growth, led to a dramatic increase in inflation. By contrast, today's ageing Boomers mean that demand is weakening at a time when the world faces an energy supply glut. This will effectively reverse the 1973 position and lead to the arrival of a deflationary mindset.
CONTENTS Page:
1. Oil prices continue bouncing down the stairs to lower levels. Page 2
2. Financial players have destroyed price discovery in oil markets. Page 4
3. OPEC’s high prices have accelerated move away from oil to gas. Page 5
4. Gulf countries risk losing US defence shield if oil prices stay high. Page 7
1. Oil prices continue bouncing down the stairs to lower levels

Chart 2: Brent prices are now in a steep downtrend
Brent oil prices have reached the “$70/bbl and probably lower” level that we forecast in August. So we now need to think about where they go next. Luckily, Chart 2 above can still guide us, as it has done since September 2010. We first forecast the collapse on 18 August, and then followed this on 27 August with a detailed analysis and specific price forecast:
“How low will prices go? We can have no idea, as prices have never been this high for so long. Nor can we rule out a further massive stimulus effort by the central banks at some point. But "technical trading" logic would suggest they will fall to at least the 200-day exponential moving average, currently around $70/bbl, and probably lower (red line)”.
Unfortunately, conventional wisdom completely missed this move, believing that prices would always stay at $100/bbl. Many companies and investors have lost large amounts of money as a result of wearing these rose-tinted glasses.
WHAT HAPPENS NEXT?
There are 2 parts to the question of ’What Happens Next?’:
- Why is this happening?
- will tell us when the price move is ending?
The “Why” question is easy to answer:
- China’s stimulus policy has ended. Instead, President Xi is moving to his New Normal concept. He intends to improve income levels for ordinary people, not to create wealth effects for a minority via a property bubble
- The US Federal Reserve’s Quantitative Easing (QE) policy has paused. Many investors are preparing to ‘dash for the exits’ just before interest rates rise, as they know prices for financial assets are well out of line with fundamentals
This means that the stimulus policies that pumped air into China’ s demand bubble and the US financial asset bubble have stopped pumping. And a child knows what happens to bubbles when you stop pumping more air – they deflate very quickly. The initial catalyst for this was the unwinding of China’s ‘collateral trade’. As we warned in June, this is now opening the fault lines in the debt-fuelled ‘ring of fire’ created by central bank stimulus.
The “What” question relies on the chart for an answer. We are still in the Great Unwinding phase of these stimulus policies, so we cannot yet rely on supply/demand fundamentals to guide us. Instead, as the chart shows:
- The ‘triangle shape’ extended for 5 years before prices finally fell (red, green lines)
- Prices then collapsed rapidly through support at $90/bbl and $70/bbl (purple)
- $70/bbl was also the 200-day exponential moving average price (red)
- Our August forecast has thus been realised, and prices have indeed carried on falling
We are now in a classic falling formation, bounded by the blue line. We think of this as a rubber ball bouncing down stairs. The ball falls off one stair, bounces to the next, and never quite manages to bounce back to the higher stair. Then it bounces down to the next stair, before eventually reaching the bottom.
Market traders instead call this a “Lower highs, Lower lows” pattern, where sellers continue to dominate. Buyers appear at the lows, but then give up as more sellers appear and sell into the rally. So we will only know when the selling is finished when the price finally makes a ”Higher high” again, and bounces back onto the stair above.
In terms of supply/demand fundamentals, however, little has so far changed. There have been no major production cutbacks or demand increases. As expected, Saudi Oil Minister Ali al-Naimi, wants the market to decide, saying Wednesday, ”Why should we cut production? Why?”. Equally, many developing countries have been busy removing subsidies that supported demand.
It is therefore hard to see what will stop prices continuing to fall towards $50/bbl in H1.
CHINA WILL AGAIN BE KEY TO THE NEXT MOVE
What happens then will be the key question. Geopolitical disruption cannot be ruled out. Russia, for example, might cut gas supplies to try and boost energy prices. But otherwise, the key to the future will continue to be China.
Asian producers and traders now have large inventories of almost every oil-related product. Buyers have simply stopped buying in recent weeks as prices have collapsed. So the question is whether China’s demand will now increase in January, before markets close for Lunar New Year in mid-February. A lot of money is now riding on this issue.
If these hopes prove false, and the West enjoys a mild winter, there would seem little to stop prices heading back towards historical levels of $30/bbl – $40/bbl. This would be good news long-term, as $30/bbl is an ‘affordable’ price for the global economy, at 2.5% of GDP. But it would be very bad news for investments based on the two myths that (a) oil will remain at $100/bbl forever and (b) China’s demand will increase exponentially as it becomes middle-class. Equally important is that a sustained price fall will mean deflation becomes inevitable in the Eurozone and Japan, irrespective of any further QE initiatives.
Financial markets will also be impacted as a new ‘Minsky moment’ develops, and investors suddenly realise, as in 2008, that they have overpaid for their assets and rush for the exits.
The International Energy Agency’s December Report suggests OECD stocks “may bump against storage capacity limits” in H1, and confirms our own fears that we risk “social instability or financial difficulties” in H1. This highlights why we have long feared the Great Unwinding will be a very bumpy road, as we described back in June.
2. Financial players have destroyed price discovery in oil market
Chart 3: Volumes in financial futures markets is now many times physical production.
Oil prices should be set by the balance of supply and demand. But as Chart 3 shows, oil markets have instead become dominated by financial players, as pension and hedge funds decided to buy oil as a “store of value“.
Before 2000, financial market volume (red line) had equalled annual oil production (green). This worked well, providing physical players with sufficient liquidity to enable price hedging to take place. But in 2000, after the dot-com crash, central banks stopped focusing on the need to defend the value of the currency – previously their main role. Instead, they refocused on trying to maintain economic growth. And they began to use their new weapon created in the dot-com revolution, the power to print ‘electronic money’.
OIL MARKETS LOST THE POWER OF PRICE DISCOVERY
Chart 3 shows how this has played out. Unfortunately for all of us, central banks couldn’t resist the temptation to play with their new toy. They came to believe it had near-magical powers, and could control the economic cycle. After the Crisis began in 2008, they even gave it a new name “Quantitative Easing” (QE). And central banks around the world began to use it to print trillions of dollars. Unsurprisingly, of course, this had side-effects.
One was that US pension and hedge funds quickly realised that QE would also devalue the US$. They therefore rushed to invest in oil markets as a supposed ’store of value‘.
What they didn’t realise was that this created a massive imbalance of financial versus physical market demand. Producers couldn’t suddenly double their production at the touch of an electronic button. Financial sector demand simply overwhelmed physical supply:
- Hurricane Katrina in 2005 had already shown the potential for this type of speculation to occur.
- By the time US refineries were operating again after it, financial trading was 4x physical production.
- By 2011, with the support from QE, financial players were trading the equivalent of 6x physical production.
Thus financial market demand came to dominate physical demand, and prices leapt skywards (blue line). The physical market’s key role, that of price discovery, was destroyed [ZH: same as the gold market, incidentally]
Many analysts failed to make the linkages, and instead claimed these high prices were justified by reduced supply or increasing demand. But as we know today, there has never been any physical shortage of oil since the Crisis began. Instead, what is now becoming obvious is that the collapse of the price discovery process led producers to over-invest and create an energy glut.
There are two key issues that will now determine future prices:
- One is that gas has been increasing its market share at oil’s expense.
- The second is Saudi Arabia’s need to ensure the 1945 US/Saudi ‘oil-for-defence agreement’ continues.
We are in for a very bumpy ride, as oil prices return to being based on their own supply/demand fundamentals.
3. OPEC’s high prices have accelerated move away from oil to gas
Does OPEC have a future? Or has it already disappeared as an effective force in oil markets? We are not alone in asking this question. Saudi Oil Minister Ali al-Naimi asked the same question in the summer, suggesting OPEC Ministers should instead meet once a year, and have occasional videoconferences, adding:
“We don’t need a meeting. People come and make nice when at the end of the day, Saudi Arabia carries the burden of balancing the oil market.”
Recent events have shown Naimi meant what he said. He understands that major oil producers need to monetise their product quickly, as it is likely much of today’s vast reserves will end up being left in the ground. This has already happened with coal, after all.
Nobody today worries about the potential for coal shortages set out in the Club of Rome’s famous 1972 Report, ‘The Limits of Growth’ . And the chart above, based on BP data, suggests oil will likely share coal’s fate:
- Consumption of oil (red line) and gas (blue) grew at similar rates from 1965-75
- Both gained market share versus coal in relation to total energy demand (green)
- But OPEC’s high oil prices from 1973-1985 gave a sustained boost to gas demand
- Record oil prices since 2005 have further boosted gas and reduced oil consumption
- They have also reduced OPEC’s oil market share to 42% today versus 51% in 1974
Chart 5: Energy markets are now transitioning from oil to gas.
Chart 5 from ExxonMobil’s 2013 ‘Outlook for Energy to 2040? places these trends in a longer-term context.
- Wood (brown) was the major fuel 200 years ago, but was replaced by coal (orange)
- Oil (green) has since replaced coal, but it is now being replaced by gas (red)
- In 50 years, gas may be replaced by renewables, hydro-electric or nuclear as a fuel
So OPEC faces a future where its product, oil, is now inevitably losing market share to gas. It made a terrible mistake by allowing prices to rise to unaffordable levels in 1974-1985. And since 2005, it has repeated the same mistake.
Energy users have choices, after all. Many have chosen to abandon oil for gas or other fuels. Those tied to oil have reduced consumption by improving energy efficiency.
Even the US has finally moved to adopt European fuel efficiency standards for its auto fleet. Since 1980, US passenger car fuel economy has risen 27%, from 26 mpg to 33 mpg. And this trend is accelerating as today’s more efficient cars replace older models. The standard for new vehicles will be 35.5 mpg (15.09 km/l) in 2016.
Equally important is that most OPEC countries have undermined the oil quota system:
- They have built large numbers of oil-based refineries, as well as oil/gas-based petrochemical complexes
- Those using oil effectively increase the country’s oil exports beyond its official quota
- Those using gas increase its total energy exports, effectively cannibalising oil’s share of the energy market
Naimi has another reason for abandoning OPEC today, namely the growing geopolitical threat to Saudi and the other Gulf Co-Operation Council (GCC) countries. The GCC are surrounded by potential enemies, all of whom would like a share of its current oil wealth.
In these circumstances, they cannot possibly continue to allow high prices to destroy the rationale for the US defence shield on which they have depended since 1945.
4. Gulf countries risk losing US defence shield if oil prices stay high
Chart 6: Canada now exports more to the US than OPEC
A version of Chart 6 must have been keeping ministers awake at nights in Riyadh and other Gulf Co-Operation Countries (GCC) in recent months. “How did we allow Canada to supply more oil than OPEC to the US?” they worry. ”What did we think we were doing?”
This might not be quite so critical if the GCC was able to defend itself militarily against its enemies. But Saudi Arabia, the main GCC country, has a population of just 27 million. The total population of the other GCC countries is just 23m. And they all remember very well what happened in 1990, when OPEC-member Iraq decided to invade GCC-member, Kuwait.
It wasn’t Nigeria, or Venezuela or Libya or another OPEC member that came to their rescue then. It was the USA, under the long-standing 1945 oil-for-defence deal agreed by President Roosevelt and King Saud. Roosevelt had needed Saudi oil to rebuild the US after World War II, and Saud needed someone to fight off his enemies.
Now, fast forward to today. Can one imagine President Obama and Congress putting US armies into a modern-day Operation Desert Shield/Desert Storm? Or UK Prime Minister Cameron rushing to persuade the President to do this? Of course not. But Margaret Thatcher did in August 1990, telling President Bush “This is no time to go wobbly”. And Congress agreed, as we all knew we needed friendly regimes in Riyadh and the GCC.

Chart 7: GCC exports to the US are falling as Canada’s increase
The second chart highlights the key message. Of course, it wasn’t OPEC’s fault that oil prices went back to record levels over the past decade, as discussed in section 2. But they allowed it to continue, instead of increasing supply post-2008, and collapsing the whole charade. Sadly, they preferred to believe the story that the world could now live with $100/bbl oil - though it had never done so before, and they forgot that high prices encourage new supply:
- GCC oil exports to the US had historically been on a rising trend (purple line)
- But their volume peaked at 2.5mbd after 2004, and now risks falling below 1.5mbd
- Canadian imports have instead been rising from 1mbd in 1993 to 3.5mbd today (red)
- And Canadian volumes are continuing to rise, whilst GCC volumes fall
So what would happen today if the Caliphate or someone else decided to attack? After all, the GCC countries are immensely wealthy after a decade of high prices. Would the US, UK and other countries come to their rescue again?
The GCC countries have clearly woken up to this critical issue, that their position is extremely vulnerable without US support. This have suddenly begun to plan their own oil price strategy, independently of OPEC. Instead of agreeing to production cuts, Saudi Oil Minister Naimi has said that in future, “the market sets the price”.
* * *
Prices have so far fallen $40/bbl from $105/bbl since we first argued in mid-August that a Great Unwinding was now underway. And there have been no production cutbacks around the world in response, or sudden jumps in demand. So prices may well need to fall the same amount again, before GCC leaders can once again sleep easily in their beds at night.
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NOt really off topic...
Does anyone ever read this site: http://philosophyofmetrics.com ?
excerpt: "...Most analysts and commenters promote the story that the BRICS countries are going to overthrow the Western banks and implement their own gold backed system.
This simply is not true or factual as the BRICS countries themselves are demanding reform to the International Monetary Fund, as agreed in 2010 "
Any thought?
Dammit....I need to put some gas in the truck.....but I just don't want to right now.
I know I'll hate myself next week.
If they really want to boost demand for oil
GET RID OF THE FUCKING ETHANOL SHIT IN GASOLINE!
that will never happen... the US isn't going to go back to using MTBE, ethanol is the oxygenate of choice from here on
GET RID OF THE FUCKING ETHANOL SHIT IN GASOLINE!
Maybe food would go down if they stopped making ethanol out of it.
You can't eat that fucking GMO shit, you might as well make whiskey out of it.
I am not familiar with Russel Napier ... how is is call/prediction history in the macro sense?
Regards,
Cooter
*shruggs*
But he doesn't understand that natty gas and oil aren't always fungible.
Unless a few billion people die, I don't see how oil demand suddenly plummets and stays that way.
I found that extremely specious as well. In India, inspite of high high prices, demand is allways climbing, booming even. Construction alone consumes massive quantities of oil based products across th eboard and construction continues to boom (big bubble, but that is a whole other story).
And baby boomers? Are you kidding me? At low low prices, you will see them all on the road in their 3 MPG RV's sailing into the sunset...
Strange article overall...
This was a rather well placed kick of the can.
Gold Bitchez....I pick up pennies
The writer presents a very good case; however, my feeling is that this 'bump' in the road is just that: a bump. Finite supply dictates the price will bounce back again, next time to possibly $200/brl.
"By contrast, today's ageing Boomers mean that demand is weakening at a time when the world faces an energy supply glut. This will effectively reverse the 1973 position and lead to the arrival of a deflationary mindset."
But, but, but, but ...... Peak OilTM!!!!!!!!!!!!
LOL.
Oil demand is pretty kinked. If you pull out the economic textbook oil demand is a better Giffen good than gold. The chinese buying at lower prices with a growing demand at any price is proof of this. You start to see these capitulation and dogpile trades near a bottom. 25/bbl in real dollars? sure. In nominal dollars, 25 is like 4/bbl in 83 real terms. So its on par with the spx 300 call. OP is basically calling for a default on the US gov at that point given how the highway funds and refinery VAT taxes backstop most of muni and civic budgets. Since his entire argument is based on 1 XOM chart and a candestick breakdown pattern, without any extrapolation (see CSFB, DB or RBC) for where the pain train resonate cascades, it's a bit dangerous to just channel your way to a price target. But whatever, its not like that guy manages anything worth a yard or 7.
Also while he pulls the charts from recognized sources, the threads he spins around them are wrong. Stopped reading when he tried to pull Ontario crude product demand as a bear signal.
The one thing he is correct on, and TD reposted below is that Crude, and all comods always were an emotional trade. Hell, ZH has been posting on the CFTC speculation position builds and bear routes since 2010 in crude & ngas. So its not all that shocking to say as leverage & cost of carry increases due to petrodollar asset rotation, investor interest and therefore crude momentum deflates.
Wish it were more sinister than this, but its not.
On another note, does Limerick King get royalties when a Fed gov. or former Fed gov. does a limmerick on air ? He should. Better yet, before the next market crash that guy should publish a coffee table book of the entire 2007-2015 run of all market commentaries. Call it, a bull cycle in iambic exuberance or some shit.
Colorado, Texas and Oklahoma are going to see another rough patch. Colorado has been totally torn up by oil/gas wells; you can’t walk two steps without bumping into a drilling operation or oil worker there. Perhaps their legalized dope sales will fill in the O&G void in Co. Oklahoma has no other industry as far as I know; Texas has a booming health care industry and banking so they may weather another recessionary period ok, but not great (according to some guy on NPR).
"you can’t walk two steps without bumping into a drilling operation or oil worker there."
BS
It depends on what part of CO you are in. I had to head up there a few months ago, and there were rigs and oil workers everywhere. This was going through Aztec, NM up into CO. They were on both sides of the CO-NM border.
I saw none between Chavez and Pagosa Springs.
Slow downs in Eagle Ford area of Texas already showing up. It's the speculative infrastructure around fracking that's already sucking wind. A small town called Cotulla has new hotels which used to be booked solid at $100 night are almost empty, same with beefed up roads, schools housing and so on. It is the leveraged speculators who are crashing first.
Texas economy will be fine as it is diverse but the fracking money has been very very good until now!
Cotulla - modern day ghost town - boom & bust.
Yeah, maybe on the western slope...
"US passenger car fuel economy has risen 27%"
US POPULATION HAS RISEN 39% since 1980
Need to take all facts into consideration before totaling up an outcome
GMO Sour Mash
What a good name!
It's all in the aging cask
Take away #1: ~"Oil May Drop To $25"~
You say that like it's a bad thing.
Take away #2: ~"GET RID OF THE FUCKING ETHANOL SHIT IN GASOLINE!"~
Seems to me this should just about kill the ethanol racket. eh?
Take away #3: ~"Dammit....I need to put some gas in the truck."~
When living in "curious times", ( a Confucian curse), always keep your vehicle as fueled up as possible, (or maybe that's just my California earthquake preparedness talking).
Take away #4: ~"GMO Sour Mash"~
It's sterilized by the alcohol content, right? Sure then, pour me a honker!
Man, I wish this would kill ethanol, but that shit is corporate welfare straight from Uncle Sugar.
Luckily there's a non-ethanol pump a half-mile from my office.
Age it in oil drums.
Ethanol is a scam. It's not green at all. I would only vote for pols who vote against ethonal.
lol good luck with that
So is most of the US economy... everyone has their cut.
Gasohol is another Al Gore scam. He thought it would get him the farm vote, and win the 2000 election. Oops. He admitted recently that he knew it was a bad idea but pushed it for political ends. How many billions has it cost the public so far?
"We believe this represents the first stage of the Great Unwinding of policymaker stimulus that has dominated markets since 2009."
In other words, there have been no markets since 2009. We artificially increased the price of oil and food so the big banks could recapitalize. Phase 2 of the recapitalization will consist of slaying speculator/muppets in the commodities sector as prices drop while the banks are short. Phase 3 will be the banks buying up said commodities and the producers of said commodities and anyone who gets slain in phase 2 for pennies on the $$.
Grab your socks.
I'm sure the financial types have lots of reasons to get upset about this; but its fine with me. If I never sit in another gas line again only to arrive at a pump that says $5.00 on it; it'll be too soon.
JC Collins makes some very good points.
He also misses a lot.Over intelectualizes .
No plan survives first contact with the enemy. Their plan is already in shambles.
"JC Collins makes some very good points.
He also misses a lot.Over intelectualizes .
No plan"
I agree, I guess what I really do not understand is how all the CBs are connected, are they "one big family?"
Just look up BIS, Switzerland...
All will be clear as crystal. They are one big unhappy family...
yep look up BIS and determine who are the real Presidents / Prime Ministers of each nation... what we vote for is basically a tax collector with "charisma" for the masses.
From OceanX:
He is wrong (or lying), because there was a deadline (February or March this year if I correctly recall) for implementing the reforms. And guess what, the US elites doesn't implemented them and started a nasty war in Ukraine.
So they can make a nasty move they this or in 1st quarter next year.
Allegedly, the IMF has switched to "plan b" - due to failure of the U.S. to pass the reforms, Volitility, is part of plan b, Hegelian dialect... ??
They won't survive the kind of volatility that we are in store for. We get it, plan b or no plan b. The so-called elites are going to lose control.
Site pushing TROLL
Rubbish. Oil demand from China and India will skyrocket at lower prices.
Take a good, hard look at this chart for what really drives oil prices.
if I could give this post +1000 I would... I've said all along it's price manipulation that's finally unwinding... if this isn't proof I don't know what is
What's totally important to me is, what does Kevin Costner think about all of this?
I have lunch with Jessica Alba today. I will ask her if she has spoken to him about it lately.
pods
Take a dump in one of her over glorified diapers.
One of the most educational charts I've seen on this subject. Thanks!
BTW, Prius owners have been awfully quiet recently.
California Teacher's Retirement Fund (CTRF) responsible for the run up in many commodities including oil and copper to name two.
You don't think Kim Kardasian's viewpoint is vital ?
Yes, please ask her what will be the fashion statement she will make when her whale years arrive (about age 37 - 38)
price manipulation that's finally unwinding
Whatcha talkin bout Willis?
https://www.youtube.com/watch?v=Qw9oX-kZ_9k
If Obama had a son.....he'd probably look a lot like that guy.
Not unwinding, just taking the short side for awhile. Short fracking debt, short oil, make a pile of money and screw the Ruskies. I can't see it going substantially below 40 and will take calls there or perhaps mid 40s with a promising bounce
Yah, duhhh. Same as Spoos. Idiot muppets sucking down HY Bonds pitched by Goldman and Da Boys based on a shale miracle and an artificially inflated crude price 80% dependent on money printing. . . . . . . yeah sounds like a great idea!!!
It's not the absolute or raw price per se it's the existence of the game. Da Boys create these pipe dreams like the "Shale Boom" and their only objective is to create and sell bullshit connected to said dream.
Oil prices are manipulated in BOTH directions. How much do you want to bet there isn't some insiders like the Rothschilds that are betting on the collapse in oil prices?
It's possible to make more money faster on the fall in asset prices than on the rise. And when the bottom is in (that the insider knows is REALLY THE BOTTOM), then buy those assets for a song. It's a classic Rothschild investment strategy. The Napoleonic Wars and their insider trading in French and British bonds were VERY profitable.
"......possible to make more money faster on the fall in asset prices than on the rise......"
Exactly......
Got 'Soros' written all over it, no?
Soros is one of the public faces for the Rothschild family. They also own the "other side" in the classic Hegelian manner.
wait, so it actually WAS the evil speculators that caused oil to rise over the last decade?? But ZH said it wasn't. And now it is? I'm confuzed.
Precisely. And who are the entities creating that volume?
Tyler and the author of this article say that the financial bubble created by the Fed's easy money strategy has filled the marketplace with speculators who drove up the price of oil. I'm assuming that at some point, market forces finally reasserted themselves and oil has dropped on some redscovered mechanism of price discovery combined with an oversupply.
But no-one is explaining how this happenned. Why did speculators decide, now, to get out of the market? if the reasons were purley economic, it would sm tht dmand has not slumped enough to send this sort of plunge signal. There was no unwind in bond yields PRIOR to the price drop. The only signal I remember was Kerry's visit to SA... but that would point to a political reason, which would hint that the whole mess has been manipulated- first up... and then down.
THIS HAS NEVER HAPPENNED BEFORE!!!!! (S)
I could be totally off base here, but think like this.
NOTE: Futures do have a legitimate roll for consumption and production planning. This article is stating this purpose was hijacked by free money.
Futures on peaches sell for $1 and peaches sell for $!. But, there is a lot of free money going around, so futures go to $2 and drag the price with it. Then $3. Then $5. Farmers plant tons more peach trees (lets assume the produce fruit in a few years).
But this can not go on forever.
At some impossible to predict point, actual supply is going to overwhelm actual demand and farmers can't sell all their peaches. Then the bottom falls out of price as farmers are pushing more peaches on the market than the market can absorb. Speculation in futures has pushed the costs up, up, up, but demand is not going up in kind. Farmers now refuse to NOT sell their peaches to bring balance back to the market. Once the speculators start selling out, it is self-reinforcing price correction.
This is why the "price signal" is broken, as the farmers are about to have a hell of a time as peaches go back to $1 and they have entire farms (and families) built around $5 peaches.
And this happens a lot, particularly in the historical sense (but maybe not to this extreme degree). And oil is very necessary for economic activity, so it isn't as optional as peaches. Consumers had to buy as prices went up.
Regards,
Cooter
Very well said. Not as much fun as conspiracy... (sigh) But your explanation is better.
+1 Great post CC.
Tulips.
Tulipmania is not the same, technological innovation removed the scarcity of rare coloured tulips. There is no technological innovation providing abundant energy at a much lower price than oil.
I think speculation is only partially to blame for the rapid drop of oil prices, there are geopolitical goals to be achieved. It makes no sense for OPEC not to create a price floor by cutting production of their extremely nonrenewable resources. And also notice nary a peep from DC regarding the pain being inflicted on its shale industry.
I was going to make a long post but couldn't explain nearly as well as this article: Oil Price Crashes, Who Really Wins?
another case of a fat, muscular dinosaur financial tail shaking the small real economy dog to which it is attached. +1
around 1995 "the thing" started to grow in excess of any real need, and 1999... bye bye, Glass-Steagall
.... also, google Commodity Futures Modernization Act 2000 < note chart's price acceleration immediately thereafter >
Yup and exactly to the article's point of the financial demand overwhelming physical demand. This time correlation does imply causation.
How long is oil useable in the barrel, I wonder? I guess it does not expire per se, but I know for instance gasoline will go bad after 2 years and to get that you need to use a stabilizer. I ask this because if there is a glut, the use by date would become relevant.
Oil in the ground is usable for a very long time. Why would it be different in a barrel? Exposure to air can make a difference.
Oil is made up of MANY different molecules, each with its on evaporation temperature (at different pressures), viscosity, etc. So, a broad generalization here about UNREFINED oil, not refined products.
The notion "barrel" is from back in the good old days when they reused whiskey barrels and moved the stuff on a train. Now there is entire pipeline, tanker, and storage farms for the stuff.
The only practical way to store it, based on my knowledge, is renting a tanker and parking it at sea. This has a daily operational cost. The other alternative is similar to the Strategic Petroleum Reserve, where the oil is pumped back into the ground in a formation where oil was found to begin with.
That said, the tanker storage is a short term arbitrage type deal, not a long term gamble. Nation states have the deep pockets required to take an exhausted oil field, do the proper engineering work, and use it for a big ass storage tank (e.g. the SPR or military needs). I don't think it would be practical for a private company to do that, unless it was purely circumstancial (i.e. they had 90% of the assets they needed in place and could store with minimum investment/operating costs).
As far as refined fuels, like gasoline or diesel, those have a shelf life and don't keep forever.
Regards,
Cooter
CC, thanks for some great posts of late. Much appreciated. Here's a scenario of what happens after oil is refined... As all of us are aware there are thousands of miles of pipelines running throughout the US that carry gasoline, as an example. Historically, there were 3 different types of gasolines pumped through those lines.
The way it works is that an oil company puts a given quantity of product into the line and gets to pull that same given quantity of product out at the terminal end of where it needs the product. This is obviuos, but what isn't obvious is that the pipelines are shared by many oil companies. The arraingement is the companies can pull out the quantities they put in, so basically, all the gasoline in those lines is simply a fungible commodity and owned by all the oil companies per the quantities they put in. They put the additives in they market, such as 'Techroline' in Cheveron's case once they extract the product from the line.
But here's the rub. Actually two of them. The first is the method of transfer through the pipelines. Let's say they pump X amout of gallons of type 'A' gasoline through the pipeline followed by X amount of 'B' type gasoline. These two differnet fuels are separated by a 'pig' which is essentially a plug that glides through the lines separating the two fuels as they flow through the line.
But some mixing occurs and as much as 20% of the gasoline needs to be rerefined at the terminal point because of mixing while in the pipeline due to inefficiency of the pig. This adds cost.
The second rub is that due to California regulations, and to some degree ethanol, as well, the types of gasoline pumped through the lines went from 3 different types up to as many as 64 different types being pumped. Not only pumped, but rerefined at the terminal end to get the gasolines back in spec. Needless to say the inefficiencies of such a system add a considerable cost to the end product. We pay those costs at the pump. It's a shame they couldn't get back to simply pumping 3 types of gasoline and keep it simple, imho.
Crude oil generally comes out of the ground as a complex mix of compounds, everything from hydrogen and H2S to methane-ethane (natural gas) to gasoline-kerosene to gas oils and lube oils to asphalt. Before it is shipped it is frequently "stabilized" by removing the lighter components (to keep them from evaporating in tankage and creating a fire hazard at the shipping terminal); the lighter compounds can be flared, burned for electrical production, condensed for product, etc. Crude oil itself does not typically degrade easily, even in the ocean oil spills can be a problem for years; as long as the valuable compounds can be fractionated, coked, cracked, etc. crude oil still has a value.
That said, demand (to this point) has typically been such that little or no crude gets "old"; it gets refined into products fairly quickly, or simply left in the ground until the demand regains. The products can have a shelf life, like gasoline; or be near-eternal, like ingots of asphalt for roofing. But crude oil, once stabilized for shipment, is fairly inert.
Tyler, if the graph is true then oil price must shoot up without the futures. The futures drive oil price down not up.
"Tyler, if the graph is true then oil price must shoot up without the futures. The futures drive oil price down not up."
I must admit my gut instinct was to downvote (silly me) this, as it immediately smacks of kind of a trollesque sticking up for futures. The statement isn't saying this, it is saying that the false creation of digital versions of a product drives the price of the actual product down. Quite likely lots more will downvote, but then go on to say elsewhere that it is the PM futures that cripple physical prices, cake and eat it?
Just goes to show you should engage the grey matter for a minute before judging anything!
@TD
Take a good, hard look at this chart for what really drives oil/GOLD prices.
Fixed it for you
PS oil@$25= Gold $375
You're sold on the idea that gold is denominated in US dollars.. It's the other way around. Oil, (and USD for that matter), value fluctuates based on supply and demand. Gold does not. That will all become apparent soon enough.
@TGoodfellow
oil has an average ratio to gold ...........15
Says it all.
That was a pimp slap.
Let's examine the fundamental value of oil and then examine whether $25 prices are realistic:
This has been argued and debated often on TOD, mainly in response to some of my own quotes in media about 1 barrel equating to 25,000 hours of human labour (12.5 years at 40 hours per week). Ultimately the answer to this question depends highly on assumptions - but we can arrive at a good approximation. 1 barrel equates to 6.1 Gigajoules (5.8 million BTUs). Depending on the 'job', humans use roughly 100-700 Kilocalories per hour (Computer work requires an estimated 119.3 Kcals/hr). 1 kilocalorie (Kcal) = 4,184 joules. So 1 barrel of oil has 6.1 billion/4,184 = 1,454,459 kcals. Using a range of 100-700 kcals per human hour of work then results in a range 2078 and 14544 hours per barrel of oil. At 2000 hours per year (40*50), this is would then be 1.0-7.25 years per barrel
So should oil be going for $25 a barrel if it represents 1 to 7.25 years worth of human labor? If oil hits $25, it will be due to pure manipulation and for a very short time.
http://www.theoildrum.com/node/4315
The comparison gets tricky, because at first the numbers seem to be straight across, but then things get weird.
For example, the effciency ranges of an internal combustion engine and a human (or animal, like a horse), are equivalent. An engine is about 20% effcient, and so is a human, in thermodynamic terms. (ie most energy is wasted as heat).
But... an engine burns a lot more calories a lot faster. Take this example: A human and a horse can plow an acre of ground in a day, (8hrs) burning approximately 15,000 kCal in the process. A small 35 horsepower tractor can plow the same acre in an hour, burning about 100,000 kcal (4 gallons/hour of gasoline). So, when we factor the energy expenditures per TASK, we discover a huge discrepancy in relative efficiency.
In other words, the human with a tractor gains a huge increase in time effciency, whereas the human with a horse gains a huge advantage in energy efficiency. Which efficiency gain is more advantageous? Just go ask a farmer. 30 years ago, the tractor would have won hands-down. But there is a small but growing cadre of small farmers who use draft power, and they are making money. What that tells me is that the gap between the economics of realtive effciencies is closing.
To sum up, the calculation is not how much human energy is in a barrel of oil, but HOW MUCH MONEY CAN A HUMAN MAKE WITH A BARREL OF OIL. What is the average profit-equivalent represented by a barrel of oil? That's your index. Don't ask me how to come up with that, I'm just a farmer. It's a mission for those who choose to accept it.
When you fire your tractor up for the first time on a given day, you're supposed to let it warm up a bit, especially if it is cold. All of that fuel burned when warming up is wasted. If you're tilling or plowing or whatever, every bit of energy burned when you aren't going forward with the plow/ripper/tiller in the ground is wasted. 20% efficiency or 30% efficiency is only to the tires or flywheel and not necessarily to the plow.
Your forgeting about a key consideration in price discovery- scarcity. We can't live without air nor water, but only water carries a premium and that is relative to the supply (deserts vs places with large available aquifers or rivers, lakes, etc). The amount of labor to produce a carrot greatly exceeds its' commercial value, etc.
Funny how hollyweird seems to always give us a glimpse into the future.
Just stumbled onto this with a H/T to ZH in the listing.
https://www.youtube.com/watch?v=qq0ykF2mHgQ
Well done, good find. Could that writer have been our own cougarw? (You're missed, cat.)
But, but... PEAK OIL!
Clearly you don't understand peak oil. Here read this:
http://www.dummies.com/how-to/content/peak-oil-theory-and-its-effect-on-...
Peak Oil is a reality, and its mechanisms represent an outworking of a fractal equation. Have you ever watched a washing machine on spin cycle expel the water out of the machine? First there is a steady stream of water, but as the amount of water in the spinning clothes diminishes, you get a spurting effect. The water gushes out of the hose, and then the flow diminishes rapidly, then there is another fat gush, then very little water. The gushes are closely spaced at first, and then, as the spinning clothes inside the machine release less and less water, the gushes become more infrequent, until... there aren't any gushes at all.
The first dry spell of Peak Oil was 73, and the first gush of Peak Oil was in 98, (roughly). This is the second gush. It will be followed by a long "dry" period, in which oil prices are crazy-high, and the world economy will falter. There will then be another gush, shorter and not as powerful, followed by a yet longer dry period. This is how Peak Oil works. So, in the gush, Peak Oil deniers will claim there is no Peak Oil problem. Time to rise above the worm's eye view in general.
The only problem I have with that link is the following...
"technological advances (such as horizontal drilling) are enabling previously unextractable oil to now be extracted."
These, "advances," and the know-how have been around for decades. The only thing enabling this new production is a very high price for oil.
The end of that high price will be the end of the advanced production.
Yeah I know, but there is no easy way to get people to understand what peak oil really means.
So how exactly do these low prices suggest that oil production will not peak globally?
These low prices are part of the process. Oil prices have to be far upwards of $100 per barrel to increase global production in any significant way.
With low oil prices production will soon be declining.
So what do you call the phenomenon where oil production increases, peaks and then begins to decline?
Oh yes... Peak oil...
Seems we're at peak now. The only way to avoid it is more QE from the Federal Reserve to re-inflate the oil bubble that is currently popping.
Without high prices in the future we're guaranteed to be at peak right now.
Plan ahead. Plant a garden.
So what you peak oil cats are saying is that I should beg for $5.00 per gallon gas now because if I don't, they will cut production so much that I will pay $5.00 per gallon in the future. Pretty twisted fucking logic that only makes sense to someone who profits from expensive oil. Put away your slide rule nerd!
I'm not perscribing any action other than to learn to live with less.
Collapse now and avoid the rush.
Peak anything is a Malthusian wet dream which continues to prey on the minds of the ignorant. The Elites have been crying chicken littles for two hundred years and yet, the sky has failed to fall. They have found many delicious profits in corporate welfare and the restrictions on markets.
"Peak Oil" clowns been beating the drum for 40 years now. They don't know any better. Their last words will be "Is the oil gone, yet"
SPOILER ALERT: THE ANSWER IS NO.
+10,000
And just think, a week or two ago, I had some poster tryint to tell me that oil was not financialized.
Oil goes to $25? I won't be shocked.
Oil goes to $200? I won't be shocked.
Oil does both? I won't be shocked.
Yeah look...
UK oil production peaked in 1999.
Global conventional peaked in 2005.
Physics kicks the shit out of economics any day.
Someone out there HAS to have figured out the elasticity of the denial envelope as a mathematical index. Extend and pretend has its limits, but what are they? Why haven't we reached them yet?
That's because physicists who don't make the world match the model, rather than economists who believe that they can make the world match the model, get ostracized. Physics, while it does not give a complete description of everything, at least has this going for it. Work = force x distance. Energy = the ability to do work. Energy gets shit done. Moving all of the raw materials and goods and whatnot is getting shit done.
Thanks for the emphasis Tyler. Much appreciated.
3 questions:
1. What happened in 2005?
2. What happened in 2011? (Baby-boomers start retiring - pension funds unwinding ... ?)
3. Yes, futures are unwinding but why? Why now? Who decided that they didn't want to scam the system after all, even if it did make them richer?
Sorry for still not quite 'getting' it.
"Speculators" indeed......
What drives ALL prices in ALL Markets is this Simple Principle.....
EVERY "Instrument", and Oil is just that in Markets, No More No Less, reaches a Point where everyone who is going to Buy has........
This is based on a Story Line that is developed over Time in Markets......These are "Long" Stories and "Short" Stories....
Mostly "Long" because those are the Easiest to Play and Maintain.......
That may last awhile, as it did here.....
Then there is only One Direction to Go........
A Friend who Manages $ 100's Millions, was on that Oil Trade for a number of years now......As I told him then, Oil would See $ 50 BEFORE $ 150.......
But like the rest, they ALL "Buy the Meme".......
Now he is bulk in BRK.A.........
As the True Master Says:
"Nowhere does History Repeat More than on Wall Street....."
LOL. Okay, I looked at it. Putting in a side column of 100 million barrels of production per day of oil production and going to 700 on a side graph when we haven't even reached 100 million bpd tells me that what is driving oil prices is chicken little bullshit. We are at about 90 million bpd production now and I think back in 1996, we were around 80 mbpd.
One thing I can't get is how Malthusian economics still rule. You would think by now after 250 years of losing that the Cornucopian view, more people = more food and that more people = more energy production would be accepted as fact by now. These peak oil nuts keep screaming that we are running out of oil yet year after year, world production goes higher.
So yeah, I was worried about oil going higher in 2004 when I bought a Mercedes diesel that gets 35 MPG but I am not today. Today is the day you buy a tricked out SUV that gets 10 MPG bc gasoline prices are going to $1 to $1.50 per gallon and going to stay there for the next 20 years.
Oil has always been a boom-bust return, and right now, anyone in oil is going to get busted.
Yeah, China demand dropping is the only real new idea in the data, and I'm not sure I buy that. Something to think about though...
Oil may drop to $25?
Promises, promises.
Knowing my luck, if oil prices drop that low then my wages will drop even further (or I'll work less weeks per year)...
If only I could afford a V8. I'd sort out any oil glut real quick.
Here ya go man. http://www.v8juice.com/coupons.aspx
You fucking heartless bastard!!!!
;)
THIS IS WHAT YOU WANT!
http://classiccarinformation.blogspot.com/2011/11/1968-camaro-specifications-and.html
Naaaah, this is more to my liking:
http://www.madmaxmovies.com/mad-max-interceptor/
(But with a real super-charger, of course).
I prefer straight sixes.
I once had a straight six. Gotta admit, they sound nice too. Sound nice? They don't make any noise! Smoooooooooooooooth as a greasy bowling ball. Depends what mood I'm in, I guess. But I do like the rumble of an 8, so it would be nice to have one next time around.
china pegged $US ... strong dollar hurting them ... mfg PMI just CONTRACTED ... look elsewhere for your "skyrocket" ... maybe if china devalues/depegs ... which likely put a huge short squeeze on yen
got popcorn?
http://www.markiteconomics.com/Survey/PressRelease.mvc/69a0d2d7ecd640b6b...
Agreed and I am inpressed with how Zerohedge readers call BS when they see it. I could see a spike down, but I don't see oil below 60 for very long. The US/Canada/Mexico/North Sea can not economically produce at those prices and Russia, OPEC and Iran can not politically produce at those levels. So there goes your supply, and as you stated demand will skyrocket as prices are cut 75%. THink about that thats sub dollar gas. I know I'll be less careful about driving and anything else that consumes fuel. Think about someone living in New England using heating oil. The past several years they have been suffering with thermostats at 62 because it costs 1500 bucks to fill their tank. Sure now that its 800 bucks they may pocket a few hundred, but they will also turn that thermostate up a bit. I know we have, and if it stays down my wife will keep it at a balmy 72.
Thats not to mention the monetary policy reaction. Low oil prices, particularly 25 dollars, will cause contagion due to the high yeild energy market bond market as has been covered extensivly on ZH. What do you think the fed will do in response.
Not all zerohedge Authors are created equal, this guy is a hack.
72! With all respect, I think you should get her some sweaters for Christmas.
Amerika and its friends have declared an economic war against Russia. They are smashing the price of oil. They are doing so using the same tools and methods. Print up fake money and slam the futures markets. They don't give a shit as to the consequences as long as they punish anyone that challenges their control or authority.
Oil bears are popping out of the woodwork. It my be about time to take the other side of the trade.
normally, i would agree
but oncoming (imo) US recession sez it is going lower
It's hard to argue against that point, and there are a lot of margin calls going out, but I can't help to think that there is a good trade here. A lot of consolidation will be forthcoming.
I still reckon we're gonna get the opposite of this chart:
http://www.forecast-chart.com/chart-crude-oil.html
i.e. crash, spike then revert to "normal", but the truth is that I have no credentials and should be classified as "totally clueless" in this matter.
Powers behind the scenes don't like to let prices get too low for too long. Something to do with debt, collateral, valuations, asset values, solvency - all that kind of stuff. If oil prices do manage to go down then something will happen to wages (eg no-one will have any, or suddenly interest rates spike and soak up all disposeable cash) so that oil will still be too expensive, even if at $25 pbl.
I repeat: I am totally clueless in this matter. Other people are smarter. Feel free to tell me why I'm wrong (or right) either now or in a year's time. I got no ego staked in this argument and I do like to learn. Yes, I read the article. Over supply, decreasing demand. BUT, there's 64 million empty houses in China that say that is not a problem, along with millions of empty homes in the rest of the world plus people getting paid to demolish empty houses (Ireland if I remember rightly, but that's only the ones we hear about). The sucker never gets a break from being stomped on. When the boot wears out, they use the other boot while buying new ones.
Napier forecast $70 oil in August when it was over $100.
If he was right in August, there should be more than 50% probability he is wrong now - forecasting is like throwing a coin.
Napier forecast $70 oil in August when it was over $100.
He's still no Jon Nadler.....just sayin.
Good to know.
Indeed....
And I Concur in his General Views on where SPX is heading....
Let Me Add this:
BRK.A More than Cut in Half by 2018........
I am intrigued by the amount of bearishness that is lining up re. oil prices. I remember well in 2008 when an analyst at Goldman predicted upwards of $200 per barrel for oil... right before oil imploded... and then bears piled on during the implosion... right before oil began to rebound. When I see this much bearishness, I am intrigued.
Oil rebounded because of Fed debt monetization. The QE drug was already starting to wear off. Now we'll see a little unwind before the Fed starts the next rounds of debt monetization. Then you'll see young and old running for the US dollar exits. At least that's how I think it plays out....
We'd be adjusting to a very differnent way of life without QE right now. It would have been better to have started it back then than now.
Can oil drop to Zero?
I think you're thinking about gold.
Does the Pope shit in the woods?
He's one of those global warming eco-terrorist types so probably.
St. Peter did, when he was first promoted to being the first Pope. While traveling on the road. But that was then.
Is Vlad Catholic?
Probably anything in a futures market can assume any price the controlling entities desire.
edit : Peter Warburton's essay from 2001 is still worth reading:
http://www.gold-eagle.com/article/debasement-world-currency-it-inflation...
Sure it can. If it costs $2000 bucks per litre and takes ten litres to drive to your minimum wage job.
When everyone loses their job then there is no way to earn money to buy oil.
Not only that, Economists will be saying, "There is no point in digging up oil because no-one wants any." They tend to forget the colloquial idea of "demand" and only concentrate on the Economic jargon definition of the word.
Theroetically it could go negitive where they would be paying someone to take it. Really though at some point it gets so cheap that enough buyers say, "wow thats a great deal" and the price goes back up. For a short duration it will go below that pricing point of "its a great buy". This all depends on people not interferring with the market and we all know how that goes.
After Russia, all eyes and ears on Greece
A short summary of what's at stake in the global financial and geopolitical arena
http://failedevolution.blogspot.gr/2014/12/after-russia-all-eyes-and-ear...
What about a negative oil price? You know, just to screw Russia. Nothing's too insane in this world.
Negative oil price is 50% of the US population making purchases via EBT not income.
How sudden this realization has been.
People are just dumb
Nope the rockerfellas sold $50b in oil assets this year before this crash.
You mean... Harry Dent is RIGHT!!!!
Nyet.
Harry Dent is been pretty good in his use of demographics for forcasting.
Duck and cover the fucking dip.
Is that Bandar bin Sultan "Bush" sobbing in that picture?...
I thought I saw the barrel of a Simonov at the edge of the picture pointed downward at this head!
$25 oil?
there won't be enough body bags for debt collateralized by oil
Body bag = Plastic = Oil
That should level out some.