Art Berman Sees Oil Heading To $16, Will Lead To "Banking Bloodbath"

Tyler Durden's picture

As Nate Hagens noted, "people think that the economy runs on money but it runs on energy," and as Art Berman details in the following interview how the current oil price collapse represents devaluation from over-investment in unconventional oil - and most commodities - because of cheap capital, and is simply a classic bubble. "Continued oil prices of $30 per barrel or less are the only reasonable path to higher growth and a balanced oil market," Berman contends, adding that he expects $16.50/bbl - "I think we're gonna get there." Berman concludes ominously, we're not going 'back' to anything - "Normal is over, and there is no new normal yet."

Full Art Berman interview below (via Macro Voices):

 

Breakdown:

18:25 - OPEC will cut production in 2016

19:05 - OPEC’s objective is to kill shale drillers’ source of funding

19:30 - The idea that Iraq/Iran will cooperate with Saudi Arabia is laughable

22:30 - EIA/IEA numbers are estimates at best, and almost certainly wrong

24:00 - He doesn’t believe recent EIA figures saying consumption has fallen dramatically

24:40 - US production must drop in a more meaningful way before OPEC can affect crude price

27:00 - Baker Hughes Rig Count is only focused on by traders because it’s available data, not because it matters

29:00 - Regardless of rig count, regardless of what people think, the number of producing wells continues to increase!

31:30 - US production not necessarily in direct competition with Iranian production

33:15 - As long as storage numbers are 80% of capacity or more, prices will remain “crushed”

35:45 - Forget about the nonsense that you read in the WSJ about “the true breakeven price” for shale operators - the true breakeven price for the best operators in the 3 main US shale plays is $60-70/bbl

38:40 - These shale operators “have no money”

39:00 - If investors abandon shale company stock, their total assets decline and their debt is in trouble

40:45 - Pretty obvious to anyone who knows that this situation is going to crash in a big way, it’s just a question of when

40:55 - Similar situation to “The Big Short”

44:40 - Very few options beyond increasing Cushing storage capacity, which takes time

46:30 - Whiting Petroleum clearly out of money, made a terrible acquisition, and is stopping further drilling because they have no other option. They could care less about the shareholders and are acting out of desperation.

48:05 - Midwestern gasoline refineries cutting back on crude purchases as they don’t see sufficient demand

50:00 - $16.50/bbl - “I think we’re gonna get there”

52:35 - Capital providers clearly pulling back from investing in US tight oil projects

53:00 - Future investments in the Oil Sands are dead

54:05 - In the first half of 2016 there will be a wave of shale operator bankruptcies and defaults on bond payments, a collapse in the high yield bond market which could spill over into other markets, as well as further distress in the banking industry - “will be a bloodbath”

55:00 - 2016 shale operator bankruptcies could reach 50%

57:00 - Iran will not get back to 1970’s levels as they would like to suggest. Production levels will be far less.

58:45 - Libya is the wild card. If they ever get their civil unrest under control, they could bring 1.5MMbbl/day to market and “that would be a disaster(for oil prices)”

1:04:15 - We’re not going back to anything - “Normal is over, and there is no new normal yet”

Source: MacroVoices.com

*  *  *

And finally Art Berman's Presentation:

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OutaTime43's picture

$16... huh huh huh... Beavis, he said $16 .. huh huh

https://www.youtube.com/watch?v=BxuCeHUxoBY

 

 

 

tempo's picture

This is like subprime Ca housing .  Companies rushed to buy leases w debt or be left out.  prices hedged in 2015 so no real problems.  Now debt is being downgraded and lender want more collateral.   Service companies and pipeline companies are in danger since producers are stretching out payables or paying pennies on the amount owed.    Their debt is being downgraded.

The banks are watching most of their loans go into defauilt so their debt is being downgraded.

There wes too much money being thrown into this high cost business.   Losses may run into the trillions.

the sharks are looking for weak players and will force even good companies to their knees.   Its going to be very ugly as the powerful will take no hostages and will bankrupt as many companies as possible.  No money will go into fracing for a decade or more.  Saudi will take home the prize.

 

 

 

BorisTheBlade's picture

What might happen is not just mass bankrupcy, but a consolidation and creation of some large entity, aka US analogue of Saudi Aramco. Then the price might be allowed to recover again.

TeamDepends's picture

How could any rational human, after all we've been through, think of a "banking bloodbath" as a bad thing?

julian_n's picture

Maybe someone with a few dollars (pounds/euros) who gets "bailed in"?

buzzsaw99's picture

nice colorful charts

TradingIsLifeBrah's picture

As long as storage numbers are 80% of capacity or more, prices will remain “crushed”

Fixed!

Oilprice.com:

"The U.S. still has 100 million barrels of available storage. Moreover, there will be an additional 230 million barrels of storage capacity added by the end of 2016. At least half of that will come from China, which is building out its strategic oil reserve. The Middle East is also slated to add capacity in the coming years. The UAE is expected to add 10 million barrels. Other countries with forthcoming storage facilities include South Africa, Mozambique, Brazil, and the Dominican Republic. Texas is also expected to build 32 million barrels of new capacity.

In short, there should not be a shortage of storage space for oil. If that is the case, there will two effects on prices. On the one hand, available storage should help avoid the catastrophic crash in oil prices to somewhere in the teens or as low as $10 per barrel, which one investment bank recently forecasted. If there is a place for oil to go, then the world will not “drown.”"

http://oilprice.com/Energy/Energy-General/The-World-Is-Not-Running-Out-O...

Ness.'s picture

So (your) the solution to excess supply and falling demand is to just build more places to store it?

That's funny.  

TradingIsLifeBrah's picture

Not my solution but that is the going solution.  Seems like all the countries are building up their "strategic reserves" at the low prices.  Part of the push of the collapse in oil prices that keeps getting predicted is that there will be no place to store it so it will just go into the open markets and crush the price.  I saw this article a few days ago when I was trying to figure out what was the actual storage numbers that people keep referring to.  

My thought is that having storage actually makes it worst for oil prices in the long term.  If there was no storage, oil prices go to $15 for a few months, companies go out of business and oil shoots back up to $50, $60, who knows where but supply is crushed and oil prices rebound.  Having a ton of storage means that in the future we will consistently have supply that outstrips demand by just enough that prices can't go up but not enough that prices get collapsed.  In that scenario we might be in 2018 and still looking at a $30-$40 oil price.  I think that situation is a lot more dire for the industry than the $15 case (although the $15 oil price case gets more "shock value" for an article for sure)

aVileRat's picture

It takes 2 to 3 years to build even the best VLC newbuilds. 2 years for most tank farms, if you can get around the NIMBY. In the end look at the base metal industry and how 'warehousing' led to an extra 7 years of supply glut, of which only gold is starting to pull out of; and thats' based on market volatilty protection, not industrial demand.

Great effort, stellar eloquence, but the idea fails both in reality and logistically.

Budnacho's picture

I've got this great Venture-capital Idea...We store the oil....in the ground.

 

Ok, ready to have your mind blown...

 

When we need it....we pump it out!

 

Contact me with your bids fella....we can't lose!!!

BarkingCat's picture

You must be a clown or at least a comedian.

With silly ideas like that it is obvious that you do not have a MBA from Harvard or Yale.

 

/sarc

Which way to the beach's picture

Hope they do a better job at storing oil than they did with NG in California. That didn't go so "well".

Bubbles

The fact is's picture

This implies that spending billions for construction and storing all that oil is a no-brainer investment. But it's not the case. Having all that excess itslef will prevent prices from rising. Counties like South Africa, Mozambique, Brazil you mentioned are in dire straits and simply don't have money for that gamble

resaci's picture

ye ha! long UWTI It's in the interest of TPTB to prevent oil from living at $25 or less, you gona fight that? Ohh and there will be no war in the next 2 weeks, uhh err 2 years Sarc.

TuPhat's picture

I'm not an oil expert but a lot of his points seem to contradict each other.  Lower oil prices are all good so far.  Banks failing, even better.

TradingIsLifeBrah's picture

39:00 - If investors abandon shale company stock, their total assets decline and their debt is in trouble

Video is too long to watch but from the quotes it would seem like he doesn't understand balance sheets.  Whether investors abandon shales stock or not their assets will decline as the price of oil declines.  Equity will take a writedown as the value of the reserves are written down to the average prices for oil and gas.  This might just be a misquote, I don't know.  Essentially investors could ignore the write-down and still hold the stock waiting for oil prices to increase and the reserves to be written back up but debt covenants could still be impacted regardless of what equity investors do if the debt has covenants against the Debt to Total Capital or Debt to Equity ratios.

lemosbrasil's picture

The recente rally of Dow Jones-SP500 is the same rally of 2008 before crash.....what rally ? There,,,in 2008, Dow Jones-SP500 touched SMA50 at Weekly chart before Crash.....Today, This SMA is at 17.300 and falling to Dow Jones...and 2.033 to SP500....See here: http://pracompraroupravender.blogspot.com.br/2016/03/vamos-tentar-entend...

sun tzu's picture

I don't see the same market stress yet. There is no Bear Stearns, Lehman, Countrywide etc

Banks and lenders were dropping like flies back then. We need bigger bankruptcies first. 

CHoward's picture

I can go with banks failing.  How soon can we get to $16.00 a barrel??

The Duke of New York A No.1's picture

In a free market yes ..... but we are in a PPT managed market .... the PPT has recently drawn the line in the sand at $30 oil ..... you wont see oil under $30 near-term unless the PPT goes on vacation.

Volkodav's picture

Aubrey McClendon indicted...

Four chan's picture

that guy has slimed his way out of many things.

GeorgeHayduke's picture

Looks like I need to drive less to keep the glut high and the price low to help kill these scumbag banks. Unfortunately there will be a lot of collateral damage in the process, but there's no way to take down the Kraken without some pain involved.

kenny500c's picture

Not just "drivers" will benefit, any company not involved with production or financing same will see lower costs and higher profits.

falga's picture

In addition to Cushing, there is 30 million barrels floating off the Gulf in tanker storage and no one talks about the rail storage...  Waiting time in China for crude discharge is more than 15 days...

 

Wahooo's picture

Steel is cheap, they'll build more holding tanks.

MSimon's picture

Well yes.  Overinvestment started the fracking boom. But like chip makers - frackers have been improving their product. The costs for fracked oil are now in the $20 to $50 range. Some familiar with the industry think the improvements will continue. The cost of fracked oil could get into the $5 to $20 a bbl range.

 

What the folks peddling "free money did it" are not looking at is the changing technology.

 

I have seen a design for a walking beam well pump that replaces the walking beam with compressed air. Instead of flaring the natural gas - it is used to run the pump. The engine is multi fuel.

Duc888's picture

 

 

The "takedown" of the Petrodollar.  It can't happen soon enough.

Dassey4FedChair's picture

If it does look for the mushroom cloud outside your window first 

Holy Roller Empire's picture

Maybe, but not yet. To the moon first.

onmail1's picture

'Banking Bloodbath'
Banks must die
& Banksters should go to jail

jcdenton's picture

The thing missing here ..

 

 

Is Putin. Why oil is not going to $16 ..

It is going to $10 ..

The West will not abide by the cease-fire in Syria ..

The West will betray the East, and the head of the BRICS will pull out his final ace ..

And this, on advice from 2 Americans ..

http://www.veteranstoday.com/2015/01/07/putins-opportunity-to-bust-the-u...

 

If according to Berman we can get to $16 without Putin, then what do you think we can get to with Putin?

puckles's picture

According to the St. Louis Fed, in a remarkably understated article, oil is likely going to zero.  Yes, you read that right, ZERO.

https://www.stlouisfed.org/on-the-economy/2016/february/future-oil-price-consistent-inflation-expectations

These may be some of the reasons why:

 

http://phys.org/news/2016-02-proven-one-step-co2-liquid-hydrocarbon.html#jCp http://brilliantlightpower.com/whatsnew/
pitz's picture

Doesn't oil demand fall over the summer as people take summer holidays (less commutting), energy efficiency increases because of the temperature, and there's fewer homes to heat? 

RadioactiveRant's picture

Probably complicated: in summer heating oil demand will drop, gasoline (and possibly aviation fuel) will increase as people holiday/vacation more.

puckles's picture

In very un-temperate areas (think Maine), this is true, more or less, although many up north heat with virtually emissionless wood pellets, or, for the unreformed, plain split wood..  But people do like to travel in the summer, and also need to air condition their homes, in areas esssentially from New Haven down.  In most of the Mid-Atlantic, demand for energy, regardless of the origin, remains equivalent.  In the South, it increases, dramatically. In the Mid-Atlantic region, many state laws have essentially forbidden further, or even continued, oil dependency for both residential and commercial heating, although natural gas is still allowed, for now.

lemontree2's picture

Don't worry guys. Somehow this is bullish. Why? Central Banksters will stimulate moar. Why? Stawks must soar. Why? Because it's awsome. EVERTHING is awsome. It's just the way it is.

truthalwayswinsout's picture

You must come to our special offices. It has been determined that you are an enemy of the state and a terrorist.....Why?  Because you did not admonish everyeone to buy buy buy...

Which way to the beach's picture

CIA will fix that low price oily thing. NOT.

A war in the middle east should fix that low oil price problem. Oh wait, we have done that. Actually more than once. It still isn't going back up. Lets keep banging that hornets next and prodding the bear. Well, we have destroyed Libya and Syria, lets do Lebanon. These fuckers just wont stop. Are we (CIA and the rest of the agents of chaos) having fun yet? The folks in Syria and Lybia sure aren't.

Syria: A Turkish-Saudi Countermove In Lebanon Threatens Latakia (Updated)

http://www.moonofalabama.org/

And we can at least dream that if it comes to this Syria's allies are prepared. But one can never tell what will happen if this shit starts heading south fast.

"Everyone has a plan 'till they get punched in the mouth." - Mike Tyson

http://syrianperspective.com/2016/02/syrper-revelation-the-end-of-saudi-...

Bubbles

 

Thoresen's picture

Most of the comments and queries above are covered properly in the Audio (it's not a video!)
Putin also comes up several times.

mosfet's picture

So say US oil drillers start dropping like flies and put the hurt on banks.  What stops the gov from placing tariffs on foreign oil imports?  Then wouldn't the local problem be solved as US oil companies' profits and WTI price soars thanks to a gov backed monopoly?  Uncle S(c)am collects huge tax revenues via tariff, oil companies back in the black, banks get their loans repaid, we resume getting screwed at the pump...Seems par for the course for the American Way.  Am I missing something?

RockySpears's picture

Straightforward protectionism, that leads to higher prices for all within the protected area.

  It is infact EXACTLY the same as the steel industry here in the UK (Europe).  We can only produce steel, at a profit, when there is overwhelming demmand and prices rise.  Now demmand is off, we cannot product at a profitable price.  The UK (Europe) want to stick tariffs on Chinese steel to protect our companies.

  What is not realised is that this just makes steel expensive for UK builders/engineers, the number of whom, far outstrip the steel workers.

 But, its for the children (of the steel workers).

fiboman's picture

16?? cmon people...feels like when Oil was at around 140$ and it was ready to go to 250$ (remember peak oil?)

Our view on crude:Possible bottom at around 25$ or at-most 21$

 http://goldenopportunitytrading.blogspot.co.uk/2016/03/crude-on-hold-aka...

Dr Freckles's picture

Hubbert predicted it, the "Rocky Plateau" - so sorry it is so confusing to so many.

The Real Tony's picture

Oil will probably overshoot to the downside below 20 dollars a barrel before holding the 20 dollars a barrel level. Longer term the U.S. dollar will probably weaken as the recession in America takes a firm hold. A short term bounce upwards in oil.

dag's picture

A total reset: War in Saudi Arabia with total destruction of their oil fields

(with serious  collateral damage in Turkey).  US and Russia join  reorganized OPEC.