Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold/SPX Ratio and the Gold Stock Case - 18th Jan 21
More Stock Market Speculative Signs, Energy Rebound, Commodities Breakout - 18th Jan 21
Higher Yields Hit Gold Price, But for How Long? - 18th Jan 21
Some Basic Facts About Forex Trading - 18th Jan 21
Custom Build PC 2021 - Ryzen 5950x, RTX 3080, 64gb DDR4 Specs - Scan Computers 3SX Order Day 11 - 17th Jan 21
UK Car MOT Covid-19 Lockdown Extension 2021 - 17th Jan 21
Why Nvidia Is My “Slam Dunk” Stock Investment for the Decade - 16th Jan 21
Three Financial Markets Price Drivers in a Globalized World - 16th Jan 21
Sheffield Turns Coronavirus Tide, Covid-19 Infections Half Rest of England, implies Fast Pandemic Recovery - 16th Jan 21
Covid and Democrat Blue Wave Beats Gold - 15th Jan 21
On Regime Change, Reputations, the Markets, and Gold and Silver - 15th Jan 21
US Coronavirus Pandemic Final Catastrophe 2021 - 15th Jan 21
The World’s Next Great Onshore Oil Discovery Could Be Here - 15th Jan 21
UK Coronavirus Final Pandemic Catastrophe 2021 - 14th Jan 21
Here's Why Blind Contrarianism Investing Failed in 2020 - 14th Jan 21
US Yield Curve Relentlessly Steepens, Whilst Gold Price Builds a Handle - 14th Jan 21
NEW UK MOT Extensions or has my Car Plate Been Cloned? - 14th Jan 21
How to Save Money While Decorating Your First House - 14th Jan 21
Car Number Plate Cloned Detective Work - PY16 JXV - 14th Jan 21
Big Oil Missed This, Now It Could Be Worth Billions - 14th Jan 21
Are you a Forex trader who needs a bank account? We have the solution! - 14th Jan 21
Finetero Review – Accurate and Efficient Stock Trading Services? - 14th Jan 21
Gold Price Big Picture Trend Forecast 2021 - 13th Jan 21
Are Covid Lockdowns Bullish or Bearish for Stocks? FTSE 100 in Focus - 13th Jan 21
CONgress "Insurrection" Is Just the Latest False Flag Event from the Globalists - 13th Jan 21
Reflation Trade Heating Up - 13th Jan 21
The Most Important Oil Find Of The Next Decade Could Be Here - 13th Jan 21
Work From Home £10,000 Office Tour – Workspace + Desk Setup 2021 Top Tips - 12th Jan 21
Collect a Bitcoin Dividend Without Owning the King of Cryptos - 12th Jan 21
The BAN Hotlist trade setups show incredible success at the start of 2021, learn how you can too! - 12th Jan 21
Stocks, Bitcoin, Gold – How Much Are They Worth? - 12th Jan 21
SPX Short-term Top Imminent - 12th Jan 21
Is This The Most Exciting Oil Play Of 2021? - 12th Jan 21
Why 2021 Will Be the Year Self-Driving Cars Go Mainstream - 11th Jan 21
Gold Began 2021 With a Bang, Only to Plunge - 11th Jan 21
How to Test Your GPU Temperatures - Running Too Hot - GTX 1650 - Overclockers UK - 11th Jan 21
Life Lesson - The Early Bird Catches the Worm - 11th Jan 21
Precious Metals rally early in 2021 - 11th Jan 21
The Most Exciting Oil Stock For 2021 - 11th Jan 21
Financial Market Forecasts 2021: Navigation in Uncharted Waters - 10th Jan 21
An Urgent Message to All Conservatives, Right-Wingers and Patriots - 10th Jan 21
Despite Signs to the Contrary, Gold Price at or Near Top - 10th Jan 21 -
Ultimate Guide On The 6 Basic Types Of Index Funds - 10th Jan 21
Getting Vaccinated at TESCO - Covid-19 Vaccinations at UK Supermarket Pharmacies and Chemists - 10th Jan 21
Cheers for the 2021 Stock Market and These "Great Expectations" - 9th Jan 21
How to Plan Your Child With Better Education - 9th Jan 21
How To Find The Best Casino - 9th Jan 21
Gold Is Still a Bargain Buy - 8th Jan 20
Gold Price Set to Soar as Hyperinflation Looms - 8th Jan 21
Have Big Dreams? Here's How to Pay for Them - 8th Jan 21
Will the Fed Support Gold Prices in 2021? - 8th Jan 21
Stocks trading strategies for beginners - 8th Jan 21
Who is Buying and Selling Stocks in 2021 - 8th Jan 21
Clap for NHS Heroes 2021 as Incompetent Government Loses Control of Virus Again! - 8th Jan 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Who’s Ready For $30 Crude Oil Price?

Commodities / Crude Oil Nov 23, 2014 - 02:38 PM GMT

By: Raul_I_Meijer

Commodities

How low can and will oil prices go, and what will the effects of those prices be? I bet you’ll have a hard time finding even just two people who have the same opinion on that. Not that it’s merely a matter of opinion, mind you, there are a great number of real life factors that come into play. It’s not an easy game.

OPEC gets together next week, and it’s a cartel divided. Many if not most of its members are suffering some kind of losses at present prices, and the obvious choice seems to be to cut output in order to raise prices again. But that’s not easy either, because at lower prices they need more output, not less, to minimize the damage. Besides, is non-OPEC producers don’t cut their output, OPWC cuts may do very little to lift prices.


After the recent plunge in prices, WTI is in the $75 per barrel range, and Brent around $80, the playing field has already been altered significantly. Some producers are fine with oil at $60, others need $120. Many Middle East governments need high prices to keep domestic unrest at bay, even if they can produce relatively cheaply. Some, like Venezuela, are already very close to what looks like a collapse.

There doesn’t seem to be much doubt that Saudi Arabia’s decision to cut its prices has played a major role in bringing down prices. The reason why it’s done that, however, is not so clear. Weakening the economic and political power of Russia, Venezuela and ISIS is a very obvious underlying reason. That the House of Fahd would engage in some sort of battle with US shale seems less likely; the Saudi rulers don’t fight the US that has protected them militarily for decades in the volatile region they’re in.

These geopolitical reasons behind the price drop are interesting, but perhaps the purely economic background plays a far greater role than we tend to think. We know that most large economies are not doing well at all, and we also know that their leaders and central bankers do whatever they can to make us think that pig was born with lipstick on. But perhaps we lose something in the translation, perhaps things are worse than we realize.

An article at MarketWatch by ‘investment specialist’ Ivan Martchev suggests that the impact on the price of oil of the economic slowdown in China could be far greater, in the recent past as well as going forward, than most wish to acknowledge. Since a lot of demand growth comes from China, as Europeans and Americans drive less miles per capita, a significant slowing of that growth demand could be a major factor in where oil prices go in 2015. Martchev:

Cheap Oil May Be A Sign Of Bigger Problems

How low can the oil price go? [..] we know that the cash cost of shale oil is about $60 per barrel, varying among different producers, and that historically, commodity producers have been known to produce their respective commodities at a loss to keep personnel and equipment going, as well a service debts that have financed their recent expansion.

In that regard, it would be interesting to note that energy junk bonds comprise 16% of the junk-bond market, and their issuance is up 148% to $211 billion according to Fitch. So, yes, I think the oil price can decline below $60.

As to how low the oil prices can go, that depends on how much China will slow down as the number-one consumer of oil. China’s financial system is operating on record leverage at the moment. Record leverage in the financial system and a sharply weakening real-estate market suggest that their economic slowdown has the potential to carry far below Beijing’s GDP growth target of 7%.

Yes, China has had three real-estate downturns in the past seven years, but the latest one is coming at a time of debt-driven boom, which means the consequences this time can be quite different. I used to think that China was a classic savings-and-investment economic-growth model, and it was, but that was 10 years ago.

I no longer think that, since GDP growth in the past five years has come from ever-increasing leverage ratios in the banking system. No debt-driven boom is permanent by definition, so the decline in the Chinese real-estate market has the potential to create a domino effect there in 2015. If China does decelerate well below 7% in 2015, an oil price target in the $30 to $40 range is completely realistic.

I have to agree wit that conclusion. And I think China is doing far worse than it lets on. Even if official Beijing numbers fail to reflect this, the amount of oil imported should reflect it. recently, China, has stockpiled large quantities, but it has no limitless storage facilities. One would presume its demand on global oil markets may diminish quite a bit soon.

It’s interesting to see Martchev note that both the China economy and the US shale industry are extremely leveraged, i.e. both are in dangerously deep debt positions. The kind that a slowdown can hurt badly, if not murder outright.

Back in July, Wolf Richter pointed to the Ponzi that US shale has turned into:

[..] the Energy Department’s EIA has checked into it and after crunching some numbers found:

Based on data compiled from quarterly reports, for the year ending March 31, 2014, cash from operations for 127 major oil and natural gas companies totaled $568 billion, and major uses of cash totaled $677 billion, a difference of almost $110 billion.

To fill this $110 billion hole that they’d dug in just one year, these 127 oil and gas companies went out and increased their net debt by $106 billion. But that wasn’t enough. To raise more cash, they also sold $73 billion in assets. It left them with more cash (borrowed cash, that is) on the balance sheet than before, which pleased analysts, and it left them with a pile of additional debt and fewer assets to generate revenues with in order to service this debt.

It has been going on for years. During each of the last three years, the gap was over $100 billion.

If oil prices sink further on the lack of Chinese demand, perhaps even to $30-$40, what will be left of US shale? And I’m not even talking about the 75% or so output decline rates per well, which makes shale a questionable undertaking in the first place. I’ve said repeatedly that US shale is about money, not energy, that it’s a land speculation wager and not much else.

And even at $75 per barrel, that industry is already in big trouble. Not long ago, we saw indications that shale companies would keep drilling and producing full blast with their profit margins being strangled, out of fear that investors would walk away if they showed any sign of weakness. Now, that is no longer their biggest worry:

Drilling Slowdown on Sub-$80 Oil Creeps Into Biggest US Fields

The slowdown in the U.S. oil-drilling boom spread to two of the nation’s largest fields this week. The Permian Basin of Texas and New Mexico, the country’s biggest oil play, lost four rigs targeting crude, dropping to 558, Baker Hughes aid on its website today. Those in North Dakota’s Williston Basin, the third-largest and home to the Bakken shale formation, slid to the lowest level since August, according to the Houston-based field services company’s website.

It was the first time in four weeks that oil rigs dropped in the Williston. “We’ll start to see really big drops early next year if oil prices stay the same,” James Williams, president of WTRG Economics in London, Arkansas, said. Nineteen shale regions in the U.S. are no longer profitable with oil at $75 a barrel, data compiled by Bloomberg show.

Those areas, including parts of the Eaglebine and Eagle Ford in Texas, pumped about 413,000 barrels a day, according to the latest data available from Drillinginfo and company presentations. Domestic oil output slipped 59,000 barrels a day in the week ended Nov. 14 [..] Hess said in a conference call Nov. 10 that it’ll cut its rig count to 14 next year in response to the lower oil prices. Apache, with headquarters in Houston, will reduce spending in North America by 25% next year, a company statement issued yesterday shows.

And that’s just a Bloomberg account. You need salt with that. What is clear is that even at $75, angst is setting in, if not yet panic. If China demand falls substantially in 2015, and prices move south of $70, $60 etc., that panic will be there. In US shale, in Venezuela, in Russia, and all across producing nations. Even if OPEC on November 27 decides on an output cut, there’s no guarantee members will stick to it. Let alone non-members.

And sure, yes, eventually production will sink so much that prices stop falling. But with all major economies in the doldrums, it may not hit a bottom until $40 or even lower. Oil was last- and briefly – at $40 exactly 6 years ago, but today is a very different situation.

All the stimulus, all $50 trillion or so globally, has been thrown into the fire, and look at where we are. There’s nothing left, and there won’t be another $50 trillion. Sure, stock markets set records. But who cares with oil at $40?

Calling for more QE, from Japan and/or Europe or even grandma Yellen, is either entirely useless or will work only to prop up stock markets for a very short time. Diminishing returns.

The one word that comes to mind here is bloodbath. Well, unless China miraculously recovers. But who believes in that?

By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2014 Copyright Raul I Meijer - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
Raul Ilargi Meijer Archive

© 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