Why The Price Of Oil Is More Likely To Fall To 20 Rather Than Rise To 80

Tyler Durden's picture

Submitted by Michael Snyder via The Economic Collapse blog,

This is just the beginning of the oil crisis.  Over the past couple of weeks, the price of U.S. oil has rallied back above 50 dollars a barrel.  In fact, as I write this, it is sitting at $52.93.  But this rally will not last.  In fact, analysts at the big banks are warning that we could soon see U.S. oil hit the $20 mark.  The reason for this is that the production of oil globally is still way above the current level of demand.  Things have gotten so bad that millions of barrels of oil are being stored at sea as companies wait for the price of oil to go back up.

But the price is not going to go back up any time soon.  Even though rigs are being shut down in the United States at the fastest pace since the last financial crisis, oil production continues to go up.  In fact, last week more oil was produced in the U.S. than at any time since the 1970s.  This is really bad news for the economy, because the price of oil is already at a catastrophically low level for the global financial system.  If the price of oil stays at this level for the rest of the year, we are going to see a whole bunch of energy companies fail, billions of dollars of debt issued by energy companies could go bad, and trillions of dollars of derivatives related to the energy industry could implode.  In other words, this is a recipe for a financial meltdown, and the longer the price of oil stays at this level (or lower), the more damage it is going to do.

The way things stand, there is simply just way too much oil sitting out there.  And anyone that has taken Economics 101 knows that when supply far exceeds demand, prices go down

Oil prices have gotten crushed for the last six months. The extent to which that was caused by an excess of supply or by a slowdown in demand has big implications for where prices will head next. People wishing for a big rebound may not want to read farther.

 

Goldman Sachs released an intriguing analysis on Wednesday that shows what many already suspected: The big culprit in the oil crash has been an abundance of oil flooding the market. A massive supply shock in the second half of last year accounted for most of the decline. In December and January, slowing demand contributed to the continued sell-off.

At this point so much oil has already been stored up that companies are running out of places to put in all.  Just consider the words of Goldman Sachs executive Gary Cohn

“I think the oil market is trying to figure out an equilibrium price. The danger here, as we try and find an equilibrium price, at some point we may end up in a situation where storage capacity gets very, very limited. We may have too much physical oil for the available storage in certain locations. And it may be a locational issue.”

 

“And you may just see lots of oil in certain locations around the world where oil will have to price to such a cheap discount vis-a-vis the forward price that you make second tier, and third tier and fourth tier storage available.”

 

[…] “You could see the price fall relatively quickly to make that storage work in the market.”

The market for oil has fundamentally changed, and that means that the price of oil is not going to go back to where it used to be.  In fact, Goldman Sachs economist Sven Jari Stehn says that we are probably heading for permanently lower prices

The big take-away: “[T]he decline in oil has been driven by an oversupplied global oil market,” wrote Goldman economist Sven Jari Stehn. As a result, “the new equilibrium price of oil will likely be much lower than over the past decade.”

So how low could prices ultimately go?

As I mentioned above, some analysts are throwing around $20 as a target number

The recent surge in oil prices is just a “head-fake,” and oil as cheap as $20 a barrel may soon be on the way, Citigroup said in a report on Monday as it lowered its forecast for crude.

 

Despite global declines in spending that have driven up oil prices in recent weeks, oil production in the U.S. is still rising, wrote Edward Morse, Citigroup’s global head of commodity research. Brazil and Russia are pumping oil at record levels, and Saudi Arabia, Iraq and Iran have been fighting to maintain their market share by cutting prices to Asia. The market is oversupplied, and storage tanks are topping out.

 

A pullback in production isn’t likely until the third quarter, Morse said. In the meantime, West Texas Intermediate Crude, which currently trades at around $52 a barrel, could fall to the $20 range “for a while,” according to the report.

Keep in mind that the price of oil is already low enough to be a total nightmare for the global financial system if it stays here for the rest of 2015.

If we go down to $20 and stay there, a global financial meltdown is virtually guaranteed.

Meanwhile, the “fracking boom” in the United States that generated so many jobs, so much investment and so much economic activity is now turning into a “fracking bust”

The fracking-for-oil boom started in 2005, collapsed by 60% during the Financial Crisis when money ran out, but got going in earnest after the Fed had begun spreading its newly created money around the land. From the trough in May 2009 to its peak in October 2014, rigs drilling for oil soared from 180 to 1,609: multiplied by a factor of 9 in five years! And oil production soared, to reach 9.2 million barrels a day in January.

It was a great run, but now it is over.

In the months ahead, the trickle of good paying oil industry jobs that are being lost right now is going to turn into a flood.

And this boom was funded with lots and lots of really cheap money from Wall Street.  I like how Wolf Richter described this in a recent article

That’s what real booms look like. They’re fed by limitless low-cost money – exuberant investors that buy the riskiest IPOs, junk bonds, leveraged loans, and CLOs usually indirectly without knowing it via their bond funds, stock funds, leveraged-loan funds, by being part of a public pension system that invests in private equity firms that invest in the boom…. You get the idea.

As all of this bad paper unwinds, a lot of people are going to lose an extraordinary amount of money.

Don’t get caught with your pants down.  You will want your money to be well away from the energy industry long before this thing collapses.

And of course in so many ways what we are facing right now if very reminiscent of 2008.  So many of the same patterns that have played out just prior to previous financial crashes are happening once again.  Right now, oil rigs are shutting down at a pace that is almost unprecedented.  The only time in recent memory that we have seen anything like this was just before the financial crisis in the fall of 2008.  Here is more from Wolf Richter

In the latest reporting week, drillers idled another 84 rigs, the second biggest weekly cut ever, after idling 83 and 94 rigs in the two prior weeks. Only 1056 rigs are still drilling for oil, down 443 for the seven reporting weeks so far this year and down 553 – or 34%! – from the peak in October.

 

Never before has the rig count plunged this fast this far:

 

Fracking Bust

 

What if the fracking bust, on a percentage basis, does what it did during the Financial Crisis when the oil rig count collapsed by 60% from peak to trough? It would take the rig count down to 642!

But even though rigs are shutting down like crazy, U.S. production of oil has continued to rise

Rig counts have long been used to help predict future oil and gas production. In the past week drillers idled 98 rigs, marking the 10th consecutive decline. The total U.S. rig count is down 30 percent since October, an unprecedented retreat. The theory goes that when oil rigs decline, fewer wells are drilled, less new oil is discovered, and oil production slows.

 

But production isn’t slowing yet. In fact, last week the U.S. pumped more crude than at any time since the 1970s. “The headline U.S. oil rig count offers little insight into the outlook for U.S. oil production growth,” Goldman Sachs analyst Damien Courvalin wrote in a Feb. 10 report.

Look, it should be obvious to anyone with even a basic knowledge of economics that the stage is being set for a massive financial meltdown.

This is just the kind of thing that can plunge us into a deflationary depression.  And when you combine this with the ongoing problems in Europe and in Asia, it is easy to see that a “perfect storm” is brewing on the horizon.

Sadly, a lot of people out there will choose not to believe until the day the crisis arrives.

By then, it will be too late to do anything about it.

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czarangelus's picture

What's funny is last time I checked, Hephaestus wasn't making any more oil for us. Right when we need it most, to build long-term sustainable infrastructure that will take into account the realities of declining energy availability, we've financialized the whole thing and we're shooting our load to try to push the string of the status quo right off a cliff.

Pinto Currency's picture

 

 

$20 oil requires: Paper currency looking strong and the oil producing regions looking geopolitically very stable.

Am seeing the exact opposite of that.

In addition, Goldman, Barclays and Citi are calling for much lower oil prices.  So oil should head higher.

Looney's picture

If interest rates can be negative, why the price of oil cannot be negative as well?  ;-)

Looney

new game's picture

king of merica calling king of s.a. . we got a problem in houston, copy, house of saud; fuck you...

Bilderberg Member's picture

Wow, Alaska calling 1-800-got-junk? to move all that worthless crude.  

kaiserhoff's picture

Futures are dropping, even as spot prices rise, so this looks right.

Mar 16,  WTI  ~  62.50 ,  Down from 70.00 a month ago.

NoDebt's picture

Dennis Gartman said oil was going to drop to $20 a week ago.  Which means it won't.

 

ZerOhead's picture

So WTI is currently trading at $52 and the Mar15's are $62.

Anybody got $50M and a spare 1M barrel tanker handy?

sun tzu's picture

Only if you're a friend of the fed

Anyway it's $52.78 for March 15 WTI contracts. Spot is $52.99. March 16 is $62.44

 

An oil tankers costs $20-40K/month depending on size. 

disabledvet's picture

Next war is never like the last one.  Think a lot of traders agree with you though.

disabledvet's picture

So if I only wait until March that will only cost me...no wait.

 

Taint just oil neither.  Iron ore, copper, coal.  As Pete Puma say "whole lotta lumps."

 

Inflation fail, bubble blowback dead ahead.

Simplifiedfrisbee's picture

A short squeeze is certainly the reason for the current price upward for oil. You people forget that hundreds of billions of free and cheap money is being sloshed around the stock market. Get with the program you good 'ol Mericans! Reserves are not currency and inflationary if they are being pimped around the players circle. Your corporate over lords seek gains by risk-fuck fundamentals. Moving along, supply levels have risen around 8% in a tad over six weeks. Over 30 million barrrels. Reality will yank this orgy into reality. The price of crude can not reach marginal costs because the stock pile is a fat pig waiting to be gutted. I am with the bitch ass squids on this one. Expect a move up followed by a sharp down turn. The question that does beg to be asked is which type of Rigs are closing down?

sun tzu's picture

TV is a bitch with options and futures

BKbroiler's picture

"Not just oil, Keynes-oil"

ZerOhead's picture

< $80

< $20

The most likely price we will first see in the future is...

HowdyDoody's picture

The correct answer is 'What price do you want it to be?' (a variant on the old accountant gag what is 2+2)

With the current fixed and fraudulent markets, those with control of the USD printing press can make the price be whatever they want it to be. The only solution for a real functional market with price discovery to get the USD out of the equation.

Carpenter1's picture

First bounce and magically everybody is now bullish on oil. I used to think ZH'ers were smarter traders than most, but now I realize there's just as much dumb money here as anywhere else.

Sudden Debt's picture

So you’ve got skin on the short side. Don’t blame others for it.

If you read ZH for a while, youshould know by now that when GS says anything, 90% of the time it means the other thing.

And as they’re publishing arround the clock now why oil should go down, it just means their ass is cooking and we’re looking at a shortsqueeze.

ZerOhead's picture

If Russia moves that nuclear submarine currently trapped in Swedish waters down to the Saudi oil terminals... well it's entirely possible that Putin's partner in crime (ISIS) may attack...

TungstenBars's picture

Israel is with ISIS. Israel has been supplying aid and hospitalizing their wounded from Syria. 

http://www.haaretz.com/news/diplomacy-defense/.premium-1.630359

 

"Reports by UN observers in the Golan submitted to 15 members of Security Council detail regular contact between IDF officers and armed Syrian opposition figures at the border."

TungstenBars's picture

hmm..

Do you support Zionism?

sun tzu's picture

ISIS = CIA

 

It used to be al Qaeda, but 0bama told us they were defeated, so the CIA had to create, train, and arm a new boogyman to scare the sheeple.

Carpenter1's picture

I don't make decisions for or against anything simply because of what GS says. Guess you do though, aren't you calling for $200 oil?

Talk about skin in the game...

Sudden Debt's picture

Nop, I called for 50 dollar oil and made a killing. 

Than I sold and friday I got back in on the drop.

no option through, only the stock. And another 5% rise is more than enough for me to get back out. And a buck higher in oil prises will bring me there.

But hey, it’s only money and everything in life is a lesson. Good or bad. Just stop following the crowd, it rarely pays off.

Sudden Debt's picture

And anyone that has taken Economics 101 knows that when supply far exceeds demand, prices go down… Economics 101 but it only should apply to oil.

economics 101... comming from banksters...

HAHAHAHAHAHAHA

Gold silver anybody?!?!?

LawsofPhysics's picture

7+ billion people (and growing) all competing for a higher standard of living in a world that still runs on oil and you think that there is "no demand"?  Good luck with that.

sun tzu's picture

Peak demand has passed in the developed world. Europe is aging and dying. Same with Japan.

 

The US is also using less oil.

http://ourfiniteworld.com/2013/01/31/why-is-us-oil-consumption-lower-bet...

 

What's left but China? The rest of the world will stay in the stone age. Just look at their birth rates. 

 

Fukushima Fricassee's picture
Fukushima Fricassee (not verified) ZerOhead Feb 16, 2015 7:14 PM

$80 but that will be only $1.00 in todays gold price.

Abbie Normal's picture

The first choice includes the second choice already, or do you mean greater than $80?

zeropain's picture

in world deflation, you would have strong currency and political chaos..

LawsofPhysics's picture

...yes, now if only we had some real deflation.  I don't see any big decrease in the total cost of living at a decent standard, especially once you consider the average wage.

 

zeropain's picture

reversion to the mean....

http://truesinews.com/wp-content/uploads/2015/02/15-01-31-IMF-ALL-2.jpg

also look at Dr copper.  it is very sick.  also effects of printing peaked when gold hit $1900

swmnguy's picture

I don't see any real deflation, either.  I see electronic doo-dads getting cheaper.  Gasoline fluctuates, but I only buy what I need, regardless of price, and don't need enough for that to make a difference to my monthly expenditures.  My taxes aren't going down.  Food only gets more expensive everytime I go to the grocery, and we only buy actual food ingredients, not value0added food-derivative products.  Health insurance doesn't get cheaper.  My kids are teenagers and college isn't looking cheaper.

The only deflation I see is in the wages people I know have to take when they lose one job and have to get another at lower pay.  I'm self-employed, myself, and as I provide specialized services to corporations, I charge as much as I can get them to pay, and that hasn't been deflating much either.

Maybe there's deflation in the Finance sector.  That's more over-supply though, than actual deflation.

zeropain's picture

i pay $2.30 a gal for gas last week in LA area.  it was arround $3.50 a year ago, the highest was $4.50 which peaked 2007 and 2012.

swmnguy's picture

In percentage terms that's a huge series of fluctuations.  In terms of your overall expenses, probably not so much.

zeropain's picture

but what percentage of the world population is in our income bracket.  what kinds of corruptions did it take for US to consume 20% of the earths resources.  can it continue, will it continue.  How many people in the US feel the pain when the packages of food get smaller.  you probably did not notice that beef hots dogs come with less hot dogs or the ice cream is not half gallon any more.  you live in an ivory tower and dont even know it.

JuliaS's picture

GS said $30. Citi said $20. Means oil will hit $80.

When they say $80, it'll go $20.

zeropain's picture

volitility kills markets.....

Carpenter1's picture

That's your investing strategy huh? Listen to GS, do opposite in some arbitrary measure. I'm no GS fan, but I'm guessing they're not wrong every time, and I'd bet they're right more than wrong, so your strat has gigantic holes

zeropain's picture

be patient... wait until the world wake up to reality, then you may have a clearier vision of whats to come...

Lets Buy The Dip's picture

yes dont you just hate it, these big brokerage firms BUY when everyone is SELLING and VICE VERSA!. Bastardo's

I think 3 things are the case here.

1) Crude / energy is nearing a bottom here => http://bit.ly/1fMcakI

2) There is much BS, and manipulation about teh GREECE Crisis,

3) They will make the GREECE crisis seem bad, and send the market down a BIT so that Smart money who missed this nice rally in FEBRUARY can get back in and Make Big money in the coming months.

Time will tell.

daveO's picture

Right. Qe can't be far behind. Rah, Rah, more debt slavery! Or, this;

This is just the kind of thing that can plunge us into a deflationary depression.  

 

dimwitted economist's picture

gas prices are ALREADY rising here in Michigan....

cart00ner's picture

Whale oil beef hooked.

Pinto Currency's picture

 

 

Paper currency is looking strong and the oil producing regions are looking geopolitically very stable.

ghostzapper's picture

The most important question is still the following:  which PDs got buried with the sizzling USD rally and huge plunge in crude?  

At 50/1 and even 100/1 no chance in hell at least one isn't more of a zombie than it already was.  

CapnJackDaniel's picture

Extreme price sensitivity is a sure sign of significant supply issues. This simply shouldn't be a factor in something as embedded as oil. But here it is, staring us all in the face. So what are the supply issues? Supply chain & logisitics? Extraction rates?  Refining chokepoints? Consumption? All four? None of the above? Welcome your thoughts . . . 

Escrava Isaura's picture

 

 

CapnJackDaniel

Extreme price sensitivity is a sure sign of significant supply issues.

Because global oil consumption (at $100) started falling faster than oil production decline.