This page has been archived and commenting is disabled.
Bank of Montreal Asks If "Oil Prices Could Collapse To $20"; Answers: "Yes"
When looking at the price of oil in 2015, Canada's Bank of Montreal admits it was wrong. Very, very wrong.
In our "2015 Year Ahead" report we laid out three plausible scenarios: (1) our base case, which forecast Brent crude oil prices of $50-60/bbl over the first half of 2015 and $60-80/bbl over the second half of the year; (2) a bull case, which forecast a Brent trading range of $85-95; and a bear case, which suggested a Brent trading range of $50-60/bbl. The actual trading range in 2015 proved to be even more ‘bearish’ than our bear case, with Brent generally trading between $36 and $60/bbl. So what did we get wrong?
The answer: pretty much everything but mostly the fact that in the race to the production bottom ("we'll make up for plunging prices with soaring volumes") only dramatic outcomes, which shock the status quo, have any impact, to wit:
"we assumed that Iraq production would average 2.9 million bpd; actual production was roughly 1 million bpd higher. We also assumed that Saudi Arabia would be content to hold production at 9.2 million bpd whereas actual production was roughly 800,000 bpd higher. In our view, this incremental 1.8 million bpd of production was the principal reason that global oil inventories swelled by more than 340 million barrels to a record high of approximately 3.1 billion barrels and why crude oil prices have collapsed."
Well, that, and the fact that the financial BTFD community finally threw in the towel on the most financialized commodity, and following two failed attempts at dead cat bounces, may have thrown in the towel. That said, just looking at speculative positions, oil may have a long way to drop still.
Which may also explain why, as noted last week, someone has made material directional (and/or hedge) bets via puts that oil will slide to $25, $20, even as low as $15.
However, now that the financial overhang from the price of oil has been stripped away, the supply/demand fundamentals once again matter. Which brings us back to BMO, and its latest oil price forecast for the coming year. According to the far more downbeat (compared to last year) Canadian bank, "the current supply-demand balance is not sustainable; something has to give." More:
If OPEC production increases with the return of Iran and non-OPEC production declines only modestly, global inventories could test capacity in 2016. Since this can’t happen either OPEC and/or non-OPEC has to voluntarily (or involuntarily in the case of a disruption) reduce supply. We believe that crude oil prices will need to remain low enough for long enough to force non-OPEC producers to reduce production. We believe that Brent oil prices in the range of $35-45/bbl are required to force a further reduction in the U.S. rig count and/or shut-in oil production from higher cost sources such as stripper wells, conventional heavy oil and mature offshore platforms. Our base case assumes that Brent crude trades in the $35-40/bbl range over the first half of 2016. We believe that this could lead to a reduction in non-OPEC supply in the second half of 2016 that balances supply and demand and supports modestly higher prices in $45-55/bbl range over the second half of the year. The reduced activity should also allow inventories to begin being drawn down in 2017, which should support prices in the $50-60/bbl range in 2017.
More on the near record supply/demand imbalance:
We believe that the weakness in crude oil prices reflects a combination of fundamental factors and financial flows. Fundamentally there is simply too much oil. The main culprit is Iraq, which increased production by roughly 1 million bpd over the last 12 months, along with Saudi Arabia which added an additional 800,000 bpd over the same period. In our view, this incremental 1.8 million bpd of production was the principal reason that global oil inventories swelled by more than 340 million barrels to a record high of approximately 3.1 billion barrels and why crude oil prices have collapsed.
* * *
In other words, in order to avoid embarrassment for the second year in a row, BMO is merely parroting the Goldman base-case of a reduction in the net supply imbalance in the second half of 2016, which should push prices of oil higher. On paper, sure. In reality, who knows.
Which is also why BMO, prudently, hedges by laying out the biggest downside risk to any forecast: a full-on price implosion.
Could oil prices collapse to $20?
The short answer is ‘yes.’ We believe that crude oil prices could fall further unless global oil production is reduced. As shown in Table 2, we estimate that the global oil market could be oversupplied by roughly 920,000 bpd in 2016. The key assumptions are year-over-year growth in global demand of 1.2 million bpd, Saudi Arabia, Iraq and Libya hold production at current levels, Iran ramps up production at moderate pace over the course of the year and the U.S. rig count remains at current levels.
This would translate to a build in global crude oil inventories of roughly 231 million barrels over the course of the year and potentially result in OECD crude oil inventories reaching capacity by the end of the year, as shown in Chart 14. Another risk is that Libya increases production. The countries two warring factions recently signed a UN-brokered agreement to form a national government. This could lead to higher levels of production, potentially adding another 1 million bpd to the already over-supplied market. Under this scenario, we believe that crude oil prices could plunge to $20/bbl to ensure that enough crude oil is taken off the market to prevent inventories from breaching capacity.
Good luck with that "voluntary" reduction thesis. If anything, the worse the fiscal outlook of any given oil-exporter gets, the more it will export to offset declining prices, as Chinese steel producers have been kind enough to demonstrate.
Which is why, for anyone focusing on the fundamentals instead of the financials (and the biggest upside price risk has nothing to do with geopolitical events but more with a central bank -coughnorwaycough - announcing it would launch a commodity-focused QE) a $20 case should be the base-case around which to hedge, especially since last week Dennis Gartman turned "Very, Very Quietly Bullish Of Crude."
In a follow-up article we will show what $20/oil means for the key industry participants in the context of everyone's specific oil price floor, and what happens if and when it is breached.
- 82 reads
- Printer-friendly version
- Send to friend
- advertisements -







I stopped reading at Bank of Montreal.
Who knows what will happen. I doubt that the Bank of Montreal knows any more than most of us do.
$20 oil would likely dignify a terrible economy. It might grow back (cheap fuel would give some incentive, but that would take time).
Later, oil might make another run to over $100. It's a crazy market!
This oil dilemma just shows how true markets work when the laws of supply and demand go unhindered. Just wait until the artificial (paper) suppression of PM prices cracks. No one really knows what their true fiat dollar values are. With the soaring demand and very limited supply, the whiplash will be tremendous.
Bizarro world...food still expensive. The entire idea of QE was inflate prices and make debts payable, now what? If food and other prices keep dropping with energy how will the debts be payable?
Its pretty interesting, the first leg down was caused by over-investment caused by low interest rates…Debt. The second leg down is being caused by companies overproducing to service that debt. Now that's how you screw up a market, way to go Fed. Explained further here.
All printing does is push production forward and hyper printing pushes production forward for many, many years
Man, are those digital fiat trading credits ever valuable!
Soon as it does im buying
The backlash from this will not be pretty.
Beautiful sight- the effluent of the Hoover Dam trying to pass through a soda straw with thirsting for water downstream. What would the price of water be? About like gold when the fiat fucks out and the demand for gold goes crazy for a small pile available.
It's really unpredictable. One thing for sure, the tracks are evident for the unraveling of fiat with interest rates at 0 for several years running. The NIRP unintended consequences will be astronomical, all bad for the middle classes. Agrarian societies will suffer but not nearly so badly as the service money shuffling economies.
Its funny to hear oil and gas professionals talk about Supply and Demand of the oil and gas market like its free.... When oil is production is controlled by opec it not longer has any free market forces and is reduced to the last guy who didnt get any oil begging to pay more next month cause he didnt have enough fuel to use or sell. "Oh it will just go right back it happened in 2008 it will happen again"!!! Since I live in Calgary I bombarded by these ignorant oil and gas people who think its going to be a month or two and its going back to 100$..... Why did oil go to over 100$ in first place? G. Bush blessed us with QE, the war on terror and the american army was burning petrolium just as fast as the chinese were burning it to build those ghost cities.... Now the Dollar goes back up, USA stop consuming at the army base in german all that petro, the war has stopped, and USA continues FRACKING!!!!! We are not in a situation we have seen in 30 or 40 years.....
IRAN....
EOG has capped well's just waiting for a higher price along with all the other majors...
USD could hit as high as 160 on just like the end of the Reagan days...
BMW, MERCS are pointing towards all electric 2025...
If Oil is going to be useless its a race to sell as much as you can as quick as you can before its worthless!!!!!!!!!
Chinese will makes really cheap fucking electric cars quick....
Fracking, Tar Sands and techonology....
When you look at a 50 year chart of crude with DXY at 100 oil should be 20-30$....
2016 I don't think soo 2020 maybe before you see crude break 70-100 $
My two cents
http://www.forbes.com/sites/nathanvardi/2015/11/10/saudi-arabia-preparin...
Bank of Montreal Asks If "Facebook Could Collapse To $20"; Answer by Wall Street: "Do you think we’re running a Ponzi scheme"
15 months ago they called for $120/bbl oil
Says it all really. Remember when Goldman were talking $200 oil.
I dunno why ZH bothers with these analyst reports from the goobers at various banks as if they're worth something.
Just remind us of their past predictions everytime they release one and conclude with "where is XXXX going? Going by past history these guys have NFI."
I remember when they were calling for $5 oil. That was when it was a $10 and ready to rocket to the moon
Just start bombing Saudi Arabia for the evil they have done, and it will be back up real fast.
Just watch Saudi be torn apart by internal fighting.
Isreal should do us all a favour and nuke Saudi!!!
why would Israel ever consider that? It is like saying, "The US should do us all a favour and nuke Great Britain". Israel and SA are best of friends.
I could live with $20bbl price. I don't have a problem with that. Bring it on!
And imagine that this was done to fuck Putin ....
hehe.
What makes you think you've got the outlook right this time?
I'm guesstimating here but $5 bbl shipping price and $5 bbl production price from the Middle East is what the bottom will be.
My six month look ahead:
http://cdn.c.photoshelter.com/img-get/I0000Q04sWCVwoEo/s/750/750/KUW-014...
It only cost $5 to dig it out of the ground, no wait..
So long Canada we hardly knew ye.
Don't worry Canada has housing bubble to hedge against oil. Oh Canadaaaaa you are going to be sooooo fucked. Ehhh.
Actually it's a capital flight bubble.Out of China. They could buy something else but they like housing. Housing is just the symptom.
They forgot to Australia ...
That great territory with little space ...
Does not produce a decent screw.
Burning like California, fills with water as Florida and is there a large island almost sinking in debt too.
hehe.
Im not a fan of Lindsey Williams, but he did predict that oil would go to $20 years ago, claims he has insider info, and God.
https://www.youtube.com/watch?v=CZFO1tq5OeI
People should try to remember why the dollar is also called the PETRODOLLAR.
If oil slides that much more, a lot of liquidity will be drained out of that system and end up in the economy creating other bubbles. And if history rimes... food and other basics will skyrocket. And not for the farmers but for the traders.
And the economy in the west largely depends on the oil dollars. So when people pay that dollar less for oil, they can rest assured that they'll lose a lot more as industries will now crumble even more. And those industries have suppliers and that circle goes through our entire economy.
Our governements will have a lot less income and the people now at the bottom, on wellfare will soon feel the most severe cuts and slowley it will work it's way up.
Anybody who thinks cheaper gass is good doesn't know how our economy works.
The price of gas is propped up because otherwise a lot of important people would be shown to be bankrupt morally degenerate fools (BMDF). The unemployment rate is reported at 5% because otherwise obvious BMDF have made bad decisions. House prices must be kept high because BMDF would be exposed. So which group of BMDF is exposed first? Saudi Arabia said not them. Russia said not them. China said not them. USA, Canada, EU, most of South America, all of Africa are still in play. Vietnam and Philippines still in play. Don't forget the sub-groups. Wall Street, K Street, academia and banks led by the Federal Reserve. Anyone want to argue that the Federal Reserve isn't a group of BMDF?
so you are saying that at $20, the demand for new dollars will decline? Or that the same amount of new dollars will be created but only $20 will go to oil and the rest will remain to drive down interest rates and blow asset bubbles?
the keynsians kind of like more money in the form of debt being created....they really want more debt all the time--its the only way to pay interest on the existing debt.
the short answer to helps the status quo is for prices to climb. supply disruption in the ME would allow frackers here to survive longer and continue to roll over debt. if they cant roll over debt and the debt dies, a lot of 'asset' entries get taken down too.
if you are thinking the same amount of money will continue to be created...what areas will this occur? EM dollar debt? corp debt? consumer debt? addl profligate govt spending? govt spending could do it, an auto loand and auto manufacturing bail out...throw in another 300B for 'strategic natural resource supply maintenance' for the frackers, and we might get a $1T in new debt....
I predict the next ones to get bailed out will be the Big Oil companies. They'll socialize the entire energy industry next. We're a communist system in every way but name.
I think they are being too pessimistic, but with 1 million bpd coming online from Iran in 2016, oil prices aren't going up anytime soon. The first half of 2016 is going to be ugly for oil producers. The only way prices can get over $45 is if supply disruptions occur in the Middle East.
My guess is that oil prices will remain stuck in a trading range between $35 and $45 for the next 6 months. We might get a spike into the 20s, but it won't last very long.
Enjoy low gasoline prices while you can, because these low prices will likely go bye-bye in 2017. It may appear that the world is awash in oil, but if you look at global oil exports, they peaked in 2005. Oil exporting countries are using more oil internally and have less to export. Also, decline rates are eating into exports. At some point soon (3-5 years), there won't be enough oil exports to meet demand at todays prices.
Don't be fooled by the global oil production numbers (which have been rising), the only thing that matters is the global oil export numbers. That is what determines the oil price. Once that number starts shrinking, then we have a problem. Currently it's around 44 mbp, the same number as 2005. Once we drop below 42, we will have $100 oil again.
The only two countries that can increase their exports to any degree is Iraq and Iran. It's possible these two countries could add 2-4 mbd. However, by the time they ramp up production, other countries will be losing exports to the decline rate and internal use.
The wildcard is tight oil. It's possible these deposits could be exploited for much more oil production. Also, Venezuela has a tremendous amount of unconventional heavy oil that could be exploited.
The second wildcard is Saudi Arabia, which is dependent on very old fields that at some point will lose their free-flowing ability. When that day arrives (sooner than we think), their exports will drop significantly. It will be a game changer.
I believe that Iran never missed a lick on oil sales during the post Marc Rich era, now called the Turkey Connection.
2016 is going to be a watershed year as energy companies will lose the protection of forward hedges and face full on impact of the global oil price. High coat production countries like Canada, Venezuela, and Brazil. The tax revenue from the Oil & Gas industry and the huge service Industries is going to come to a HALT in Canada. Loans from ALL the major banks to the highly levered Industry will go into default, this just from the forward hedge's coming off at higher prices and selling into mid 30 oil. If mid 20 happens look out below, Canadian dollar will see a massive drop as in massive. The Gov't will need to borrow massively and unemployment will soar, NIRP will be rushed in, and inflation on food will get very ugly.
That is exactly what I suspect to happen. If you think about it, Canadian dollar drop under 50, means real estate drop 50%. Can't wait to see Vancouver housing bubble to burst.
Vancouver house prices will be stable. If the Loonie drops China will buy more. In Vancouver the dropping of the Iranian sanctions has brought pent up demand from Iranian buyers back. And once Iran starts shipping oil again there will be more $ coming. China and Iran will be bedfellows in the ME just as they are in Vancouver. Vancouver and BC are already considered a vassal state of China and the locals like it that way. Less Muzzies. It will be interesting to see China's reaction when the Muzzies want prayer rooms in schools and streets closed for prayer like in London. The smart money is on Vancouver 's Chinese and Iranians (not many Russians here). There is no damned way the Chinese will let the Muzzies screw up billions of dollars in real estate investment around Vancouver since the 1987 return of Hong Kong to China. Proof of this Chinese control can be confirmed looking at the fall 2014 BC teachers strike. As the schools approached the one month mark of being closed and working parents became apoplectic there were some prominent downtown demonstrations, a rarity for Vancouver unless we just lost a big hockey game. There were fights between Chinese parents and teachers in front of the Vancouver Art Gallery ( the old city hall). Then the Chinese government made a little comment about the length of the strike. BC'S Premier ( Christy Clark, who has been called a MILF on live radio) had been avoiding meeting the teachers union, BCTF. But then a meeting was convened and boom the strike was over in a week. So the next time someone tries to forecast what is going to happen to Vancouver real estate when oil drops focus on the money. Vancouver has never attracted that much oil money. The Albertans liked Vancouver Island just as much. Westjet even started daily flights from Calgary to small cities on the Island. Proof of the lack of oil money in Vancouver comes from public oil companies. Most TSX and TSX-V oil companies are domiciled in Calgary or Edmonton or maybe Toronto. Retired bored oil men can't easily play on the Board or as shareholders of such companies when they are thousands of kilometers away from the Board meetings. Vancouver has no military bases. BC has no nuke reactors. Our biggest worry aside from Fuku rads is the Muzzies but the Chinese have that sorted. Muzzies dint even factor when new condo towers are put up for sale. 80%+ Chinese buyers. Muzzies. ..not so much. On a side note, there are many likeable Muzzies here but it's Justin Bieber I mean Justin Trudeau and the Syrian refugees that the Vancouver it's worry about.
Most people in Vancouver spend more then 50% of there income on real estate. If prices rise, many people will be in trouble trying to pay for there real estate. That's one, second is China story. Which is complicated and that's why every one thinks that the bubble will keep inflating. I think hot Chinese money is only hot for certain period of time. Same shit was said about Miami hot South America money. Look what happen to that. It's hot till it's not.
"Most"??According to independent research 90% of the homes selling over $2m are cash buyers from China. $1m-2m are still lots of cash buyers, China, Korea, Iran. If you calculate an average including those cash buyers on the high end the average income divided by average sales price looks scary.For the real picture net out the cash buyers and foreign buyers. They are unlikely to work and don't need a mortgage.TThe new picture isn't nearly as scary.
House prices up there are already in a downward spiral 4-6%/month and sales are 36% below last year same time period. If this downward momentum increases, which usually occurs as the "sell" psycholgy kicks in, we'll see a RE bloodbath up there.
A condo I looked at in 1999 for $280k in Vancouver is "valued" now at $1.8 million!
NFW!
This RE Bubble is deflating.
"This RE Bubble is deflating."
Where do you get your news??
The national average sale price rose 10.2% on a year-over-year basis in November; excluding Greater Vancouver and Greater Toronto, it increased by 3.4%.
https://ca.finance.yahoo.com/news/canadian-home-sales-climb-further-1400...
What's the deal with Victoria?
I went there earlier in the year and it's a paradise compared to Vancouver - and I only saw white people.
Couldn't figure why it hadn't been overrun yet, especially as I compared house prices and you could get a genuinely nice place for a lot less than a dump in Vancouver.
Wouldn't be surprised to find more Chinamen seeing a decline in the loonie as a bigger sale on Vancouver real estate.
Keep on dreaming and keep on waiting for the earth to stop turning.
Central banks will hyper print to buy all the junk bonds from the mid to small size oil/exploration companies to support the market.
It wont work if you understand the nature of the industry. The cost of production is very high and its fixed for all intents on the downside but not on the upside. The market price for all is what the price is and if its below cost the income staement will bleed red badly. Issueing bons to pay for the ongoing capital needs to produce oil that bleeds red is not viable
It's viable for banks, derivatives, sub-primes, student loans, helicopter drops, ad infinitum, until it collapses. I believe the plan has been to collapse it all along.
Clueless central economic planners printing "free" money is how the shale mess got created in the first place. Its not a coincidence that these oil wells are failing when the Fed stops throwing "free" money at them.
QE/ZIRP were a horrible mistake and Bernanke should be charged with treason. We will all pay dearly for his arrogance, and our unwillingness to tell him to STFU
Canada's safety regulations are a major reason the everything costs so much here...
Costs also include the fact that the Canadian oil industry in made up of thousands of small production wells for non oil sands productions plus the massively expensive oil sands production. There is very little high volume low cost production, its just the geology
I can't wait to see those overpaid oil sector workers go on strike.
Isn;t that also known as Unemployement Insurance?
This is how we, in very similar fashion, bankrupted Russia by outspending them during the cold war. This time it is happening in reverse and now with oil. Lots of bankruptcies coming our way.
So......
It had nothing to do with a shitty failed economic system, it was what the USA spent?
The entire economy is gutted. All new jobs pay 9 bucks an hour. Oil workers making 40 bucks an hour is not sustainable.
Quick dump helicopter money so sheeple can buy from China and make oil go up....
I like how these morons keep using large production numbers coming on stream as being what they call "incremental".They left out one very important item which is the trade embargo on Russia,so Russia was going to go all out and how Saudi was determined to break the U.S. shale oil producers even though they need hundreds of billions to sponsor two proxi wars and world terrorism.This was all at the same time that a trained monkey could see the Baltic Dry Index Chart falling to record lows.Dah.Do any of these bankers have people working for them that aren't smoking opium?
Where's "Peak Oil" when we need it? Gas $1.99/gal. in New York today. Maybe the new norm isn't good for producers but it's good for a lot of people including farmers, industries which use petroleum feed stocks, and people who pay for heat and transportation. Some creative destruction will sort out the oil industry including those national government owned producers which provide the bulk of crude oil and the many Ponzi schemes organized around peak oil and alternative energy. In less of course they manage to arrange for a government bailout which I imagine they and their cronies in government are contemplating this very moment.
I'm laughing so hard. Remember 40 years ago when they said we were going to run out of oil? Hahahahahahahahaha
I know maths are difficult once one gets past 10 but: "this incremental 1.8 million bpd of production was the principal reason that global oil inventories swelled by more than 340 million" LOL x's 2 and thanks for the chuckle.
I'm sure it's the "incremental' x that is the problem.
Prove me wrong.
That's right. I thought so.
They are confused about the definition of "marginal product".
This will really fuck Pootin.
People that need money from oil are going to produce even more. Eventually this is going to shit all over itself.
The next big threat are insurance companies (and those that aid and abet them) forcing farms out of business to be sold and then bought for pennies on the dollar to their agricultural portfolios. Cattle futures anyone (Hillary).
Is supply meeting demand? Then it's called "the price".
The idea that oil needs to be at a chosen price level is the fantasy desire of manipulators who are into dirty dealing with paper.
Maybe lay off that glass pipe for awhile, stop stuffing financialization in there and taking those big ol' hits. Kids these days.
Oh shit, Maria Bartiromo wil be back on her "high oil prices are good for the economy" rant again Monday morning. I'm trying to believe, I really am, I just have this huge bullshit meter in my skull, it's called a brain and someone somewhere taught me how to use it. I know I'm few and far between, but i just can't help it.
http://www.investorsfriend.com/canadian-gdp-canadian-imports-and-exports/
From reading the financial news you may have been under the strong impression that Canada’s GDP is dominated by the commodities including particularly oil, gas, and various minerals. You may have also heard that manufacturing is no longer such an important component of Canada’s economy. (And that therefore we should not worry much about any manufacturing job losses that we hear about).
The actual figures show that “Real estate selling managing, renting and leasing” is the largest segment of Canada’s economy at 13%.
Manufacturing, while it may be lower than in years past, is still a very large portion of GDP and is the second largest component at 11%. (We understand that manufacturing includes refining industries).
Mining, quarrying, and oil and gas extraction is third at 8% of GDP.
So $20 OIL IS NOT GOING TO CRASH THE CANADIAN LOONIE.... BUT IT MIGHT GET DOWN TO ITS PREVIOUS LOWS
It hit a record low of 61.98 cents (U.S.) on Jan. 18, 2002.
<-- CabalA$$LickerLiarAddictHomObamma :
'We have to twist arms when countries don't do what we need them to'
-----
Looks like he (with she inside) has armtwisted towelhead saudis to crash oil prices.
'The Great Dictator' playing ball with the world
Typical CNBC vomit. The "tylers" are trolling for clicks
Since these guys (all the bank "analysts") get their forecasts wrong year after year after year -- why the hell would any competent journalist quote them yet again? Its not like BMO (or Citi, or BofA, or ...) has any idea what they are talking about.
Why doesn't the NY Times run a story about the price of oil (or stocks or ...) as forecast by their "official" ouija board?
Cause I am certain the ouija board knows just as much as these "analysts", but it doesn't cost six figures a year in salary (plus bonus).
The $20 per barrel narrative continues. GS was spewing the same shit.
No one knows. Historically, oil has remained between 10 and 30 per barrel.
So 20 is not a shock, unless you are big fat fucking goobermint that will get destroyed when deflation hits.
And deflation arrived years ago.
Keep fucking with the macros Yellen - you're going down regardless.