Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19
Gold Price Gann Angle Update - 10th July 19
Crude Oil Prices and the 2019 Hurricane Season - 10th July 19
Can Gold Recover from Friday’s Strong Payrolls Hit? - 10th July 19
Netflix’s Worst Nightmare Has Come True - 10th July 19
LIMITLESS - Improving Cognitive Function and Fighting Brain Ageing Right Now! - 10th July 19
US Dollar Strength Will Drive Markets Higher - 10th July 19
Government-Pumped Student Loan Bubble Sets Up Next Financial Crisis - 10th July 19
Stock Market SPX 3000 Dream is Pushed Away: Pullback of 5-10% is Coming - 10th July 19
July 2019 GBPUSD Market Update and Outlook - 10th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Why I'm Revising My Crude Oil Price Outlook… Upward

Commodities / Crude Oil Jun 24, 2015 - 03:59 PM GMT

By: ...

Commodities

MoneyMorning.com Kent Moors writes: I just left a closed-door meeting in Paris. Assembled here were some high-powered oil practitioners, the traders selling their productions, and the bankers financing all of it.

As often happens, the pundits and talking heads have been discussing matters quite similar to what was on our agenda. And as usual, their perspectives are very different from those of us "behind the scenes."


As a matter of fact, what I heard at this meeting has led me to believe that I may even have made a misjudgment.

For some time I have been talking in Oil & Energy Investor about a confluence of factors leading to a rise in oil prices. It was heartening to see I was right according to those assembled in my meeting – except for in the case of one interesting factor.

Never mind the noise coming from the cable news crowd. Here's what you need to know about what's really going on in the oil markets…

Have the U.S. and OPEC Destroyed the Supply-Demand Balance?

First, let's discuss what the pundits in the media have been getting wrong.

In the last two days, no fewer than four separate opinion pieces have appeared, all focusing our attention on the same point. About a year ago, each of these missives begins, a crude oil pricing collapse began. By the time it was over, prices had slid almost 60%.

The apparent culprit, according to this view, then and now, is a surplus of crude on the market. Each of these pieces then concludes that the problem is continuing.

Why? Because OPEC production is up, U.S. unconventional oil (read: shale and tight) remains too high, and there is a declining drain-off from refinery runs despite the reported rise in gasoline demand as we move into the primary driving season.

The translation being advanced is simple enough: The expected rebalancing of the crude oil market, in which supply and demand are equivalent and pricing changes are narrow, has not taken place because there remains too much supply on the market. In support of the argument, the pundits then turn to their two primary culprits.

The first is the decision by OPEC to initially keep production levels high and then to raise them even more in an almost frantic attempt to maintain market share. The second is the resilience of the American shale patch to continue extraction levels in the face of subdued prices for the product being lifted.

"It's the supply side, stupid," the commentators seem to be saying in unison.

However, the truly remarkable thing to recognize is that these same writers were touting that the rebalancing was in fact forming. And they had even proclaimed it had actually arrived early that week!

We Don't Need a Full-Blown Shortage for Rebalancing

So what happened?

Initially, they had to contend with the uncertainty of a Greek collapse in Europe and then with the uncertainty of what the Fed would say last Wednesday. Pundits, you see, hate uncertainty.

Then the weekly figures came in from the EIA (the Energy Information Administration, a division of the U.S. Department of Energy). They continued to show a drawdown and an absolute decline of almost 2 million barrels a day in American crude oil inventory. But not as large a decline in gasoline as anticipated.

That combined with a report earlier in the week that OPEC had produced 31.1 million barrels a day in May, a level higher than for any month since October 2012. This puts the cartel's production some 1.1 million barrels a day above its own monthly member quotas and 1.8 million barrels a day over its own estimates of the demand for its own oil.

Suddenly, the opinions were looking back a year – to the beginning of a pricing decline – and proclaiming the same supply problem existed this time around.

Now, what the "short-sightseers" want is an absolute contraction in American production totals, not simply a reduction in forward production rates. That is both unnecessary and a terrible way to calculate the actual base for prices. Nobody is expecting a shortage. We don't need one for the balance in the oil market.

Why My Price Estimates Weren't Optimistic Enough

This leads me back to yesterday's meeting here in Paris.

Behind the closed doors, the consensus was quite different. While nobody considers a constriction of supply likely (there is currently too much short-term available oil from both the conventional OPEC providers and the new U.S. oil fields), the balance is already here.

Hence my misjudgment: It seems I may be too conservative in my price readings of $73 to $78 a barrel for the West Texas Intermediate (WTI) in New York and $82 to $85 a barrel for Dated Brent in London by the end of the year. These came in at the very low end of the figures being proposed.

While the pundits are still in search of their elusive "balance," the combination of OPEC member financial difficulties – all of them, including Saudi Arabia, are drawing heavily on hard currency reserves as credit becomes more expensive – makes the present overproduction unsustainable. With a range of other considerations, this has established a pricing floor.

These other considerations have been the subjects of my briefings here for months. U.S. shale and tight oil production has been buttressed by expanding volume from the most recent wave of wells. That flow will begin to taper off next month (July) as the wells exhibit the production peak at about 18 months from opening common to fracked drilling.

Much of the secondary and enhanced oil recovery normally used to temper the decline will be too expensive for use without cutting into profit margins. Companies will cream frontend production and move to additional wells drilled but not completed. These are primarily replacement wells and will not provide any overall increase in aggregate production rates.

The other major consideration is on the financial side. Credit on both sides of the Atlantic is becoming more expensive. Here in Europe, the concern over a "Grexit," a Greek exit from the Eurozone, and the attendant drain on interbank credit mean there will be a spike in interest requirements on new drilling loans. Much of that is orchestrated from London. I was certainly picking up signals of this while I was there earlier this month.

The Balance Is Already Here

In the U.S., the quality and expense of the high-yield (read: junk) bonds used to finance new drilling have resulted in companies scrambling to pay an increasing debt load and remain the biggest reason for major cuts in future capital expenditures for horizontal, fracked, deeper, and more expensive shale drilling.

That means the prospects for significant new drilling remain problematic. That is another decided cause of lower new production trends moving forward.

There will not be any sudden shortage of oil. But the price will also not be retreating back to the mess of late last year. The European movers and shakers have concluded the balance is here.

And what of all that noise the pundits have been making in all of this? Oil closed above $61 in New York on Monday. It was above $64 in London.

Maybe someday these guys will understand the market they are commenting upon. But I haven't seen any indication of that yet.

Source :http://moneymorning.com/2015/06/24/why-im-revising-my-oil-outlook-upward/

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules