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$120 Oil As Soon As 2018?

$120 Oil As Soon As 2018?

Today, I’m going to try and tackle the reasoning for my ‘wild’ predictions for oil reaching triple digits by the end of 2017. While I am nearly alone in these forecasts, they are not just pulled out of space, but with deep regard for the fundamental supply/demand picture that everyone mostly agrees upon, combined with what I think is a deeper insight into the likely trajectory of oil company leverage, financing and the role of financial oil derivatives.

Despite the technical nature of this discussion, I think I can make a strong case for $120 oil in 2018 using only two charts of my own making – one charting global demand, which is more universally agreed upon, and then an overlay of global production, which is more open to prediction.

First, demand: Almost all analysts including the EIA and IEA agree that demand continues to grow at a steady pace throughout the rest of the decade, and even a minor economic downturn will only slow the pace of growth (green line), but not upend the upward trend line of demand. Sorry to those environmentalists who pray for an end to carbon use growth in the next decade – virtually no one currently believes it will happen.

(Click to enlarge) 

Now, let’s overlay the rudimentary global production line(s) on top, put some likely dates on this chart and describe some of the possible scenarios: Related: Advantage U.S. In The Global Petroleum Showdown?


(Click to enlarge)

First, we notice that the blue line of production going back before the oil crash is steeper than the demand line – hence the current gluts we are experiencing and low barrel prices. Low prices have made production growth begin to slacken, which I’ve indicated by easing the slope of the light blue line. It’s clear that if nothing else happened from here, we’d still see future production outstrip demand – hence some analysts’ fear of never seeing triple digit oil prices, or at least a much lower for much longer scenario. Related: Saudi Arabia Tries to Slow Iran Oil Exports, Without Much Success

But most analysts agree that the sharp drop in Capex budgets, not just among shale producers, will have its effect on sharply lowering production this year and putting growth in reverse, efficiencies and well cost reductions notwithstanding. What’s critical to note is how the media, and surprisingly most analysts, see global oil merely through the prism of U.S. independent shale players. To me, this is the critical grave mistake they make. Recent lease outcomes in the Gulf of Mexico, problems in Brazil and the likely end of spending for all new Russian oil projects are just a few of the other gargantuan gaps in global production we’re likely to see after 2016.

I’ve drawn two lines in black on production; one that most of the analysts including the EIA are making in how they see this production curve playing out, and mine – how I see it likely playing out.

While the EIA and most other analysts agree that sharp capex drops will begin to have their halting effects on oil production, they tend to argue over when those production drops come and how steep they will be. In all cases, they argue that any drop in production will be answered by a rally in oil prices, to the degree that U.S. shale players again ‘turn on the spigots’ and reestablish the gluts that have kept us under $50 a barrel for most of the last year. In this scenario, production never – or at least exceedingly slowly – rebalances to match demand.

I see it much differently. I could argue that the shale players, even with their low well drilling costs and backlog of ‘drilled but uncompleted wells’ (DUCs) cannot in any way repeat their frantic production increases they achieved from 2012-2014 ever again. I believe this because of financing constraints and the lack of quality acreage among other reasons – but I don’t have to even “win” this predictive argument. Related: Why We Could See An Oil Price Shock In 2016

Longer-term projects from virtually all other conventional and non-conventional sources that have not been funded for the past two years will see their results, in that there won’t be the oil from them that was planned upon. Chevron estimated in 2013 that oil companies would have to spend a minimum of $7-10 trillion dollars to 2030 to merely keep up with demand growth and the natural decline of current wells. And this was without factoring in the drop in exploration spending that is occurring now and throughout the next two years. Severe capex cuts from virtually every oil company and state-run producer over the last two years has put this necessary spending budget way behind schedule.

You can see why I tend to have a much more radical view of the decline line in production beginning in late 2016 and lasting, in my view, at least until the middle of 2018, when production again only begins to get the funding (and time) it needs to try and “catch up”.

Meanwhile, there will be, as I see it, a violent crossing of the demand and supply lines in my graph – and an equally violent move in the price of oil because of it.

Finally, when this trajectory becomes obvious, the financial markets will waste no time taking full advantage of it – with a massive influx of speculative money, driving up prices even more quickly and steeply.

I’ve seen that before – and am currently alone in believing how close we are in seeing it again.

By Dan Dicker of Oilprice.com

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  • Werner J. Casotti on April 04 2016 said:
    I think that the tittle has a mistake: one should remove the 1 from the 120 !!
    Best regards.

    Werner J. Casotti
    Oil Engineer, Mendoza, Argentina
  • Nony on April 04 2016 said:
    1. Using price versus time charts rather than P-Q curves shows a fundamental lack of understanding of basic micro economics (right out of a 101 textbook).

    2. The whole rationale for 120 oil is that we are underproducing. However, if it is a rational outcome to predict 120 in the future, the projects would be getting done now, despite current low prices--banking on 120 in the future.
  • Natronic on April 04 2016 said:
    Ok, I had to comment on this ridiculous article. I understand oilprice.com is based around energy and hydrocarbon energy especially but this article is just disingenuous. Oil has never hit $120/barrel and as soon as it hits $80 frackers will jump back in and lower the price. I could see the price settling about $60 in a year and a half. Iran is going to be exporting more all year long and next year. The current low price of Oil will do exactly what the low price of gold for 5 years did to gold mining companies. It will force them to get better at what they do and become more efficient.
  • Sajjad on April 04 2016 said:
    I think rally will start this week and oil will end up this year averaging 50 dollars/barrel. Iran return to international market is over rated
  • Saif on April 05 2016 said:
    Reading the comments section makes me happy. Nothing is better than trading against misinformed people. Please keep these "facts" in your mind: shale producers have a tap that they can open and close in no time. There was no bubble created by debt. The lead and lag time to adjust production based on price is 5 seconds. OPEC with 30% of market share and no extra production capacity can control the market.There is no limit on the number of wells drilled in a basin. One day, technology will convert water into oil (and wine as well). Oil should be treated like gold, despite that fact that oil is continuously depleted while the amount of gold on earth stayed fixed since the creation of earth (ok, I converted some of those gold flakes on chocolate into poop; talking about magical powers).
  • baizhan on April 05 2016 said:
    say that as soon as the price of oil will cost 150 to 300 dollars per barrel and that by 2020 because nekoroyh countries have already run out reserves
  • Bill Simpson on April 05 2016 said:
    There is no way to know when it will break $100 because there are too many unknown variables on both the supply, and the demand side. China has a recession, and it might not get there until after 2020.
    How much can Iran export? The Iranians might not even know. Will the 2 religious factions turn on each other in Iraq, after the 'Islamic State' is defeated? Production won't keep increasing if a big civil war starts there. It could spread too, since Iran and the Saudis are likely to take opposite sides in such a war. It would be Syria squared. And if Iran and Putin start winning, do you think the US will sit by and watch Putin and friend take over the world's gas station? Not too likely.
    The only safe bet is that within 4 years oil will be substantially more expensive than it is today. The main reason is the cut back in sending on exploration today, especially offshore.
    Be thankful for the invention of horizontal drilling, along with the amazing fracking advances. Without them, we might be looking at $200 a barrel already. A little more US oil production on the margin has changed everything. But it won't last forever because the supply of easy oil is being depleted at an increasing rate. In the not too distant future, no amount of investment will be able to stop the supply of oil from declining. Within a couple of years of that happening, all hell will break loose, as the global economy is forced to start shrinking from less work getting done. That shrinking could threaten the entire over leveraged global financial system. Banks aren't designed to function for long in a shrinking economy.
  • Jeffrey J. Brown on April 05 2016 said:
    Emad Mostaque is an oil analyst who was bearish on oil prices in the summer of 2014 (contrary to prevailing opinion), but who was bullish on oil prices in November, 2015 (also contrary to prevailing opinion). Following is an excerpt of a November, 2015 article on Mr Mostaque’s analysis.

    The link below has a video clip that is well worth watching. The article I linked to has a small error. The article suggested that Mostque was expecting oil prices as high as $130 by late 2016; he actually said it was possible that oil prices could hit $130 in 2017, before falling back to an $80 to $100 equilibrium range. He also touched on net oil exports, noting that Saudi net oil exports this year could easily be a million bpd below their 2005 rate (and I concur).

    Oil could hit US$130 as U.S. output 'falls off a cliff': Analyst (November, 2015)



    Unlike many analysts, he says U.S. shale production is set to decline, and as such won’t provide the necessary stop-gap to supply the increasing appetite in world markets.

    “U.S. production is about to have a Wile E. Coyote moment where it literally falls off a cliff. One-hundred-and-twenty-thousand barrels, maybe even next month, will drop off,” said Mostaque. He says the notion that shale producers can suddenly boost their output as needed is a common misconception.

    The controversial call pushes against bearish sentiment from Wall Street titans like Goldman Sachs. The investment bank’s head of commodities research, Jeff Currie, said last month that he does not see the price of oil breaking above US$50 a barrel in the next year.

    Mostaque was early to bet against oil, forecasting between US$50 and US$70 per barrel last summer (summer of 2014). He raised concerns about the commodity’s price stability before oil started its dramatic decline in 2014.

    Now he’s calling prices to rally as four to five million barrels disappear from global markets over the next four to five years.
  • aaron on April 05 2016 said:
    It is reasonable to question the $120, which is pulled from thin air (though it has been significantly higher than that in the past). However it is very true that media and analysts are focused on the short term and are certainly underestimating the deferral of future production. I agree with the author that the scale of projects currently being canceled or delayed will cause a price spike in the near future. U.S. shale production will not come back fast enough to stop a price spike. What happens after the price spike is another matter...

    As for why companies are not taking advantage of this, just take a look at their balance sheets. They can't spend money they don't have, and need to protect their ratings and (try to) maintain dividends.
  • Mario Neiva on April 05 2016 said:
    @Natronic. "Oil has never hit $120/barrel" are you sure? 2008 reached $140, 2011 and 2012 reached $120. I somewhat agree with the article, most of offshore Major Capital Projects (those several million dollars projects to increase and/or maintain production) have been stopped or completely dropped. When that happens it takes years to refinance the projects. By the time the price is right and investments start again, the supply will not be enough for the demand.
  • Kieran on April 05 2016 said:
    I agree that there's been a massive and prolonged reduction in capex, and down the line that will have consequences, including heightened tensions in the middle east particularly Saudi Arabia, but I think you are missing one thing. The market is oversupplied. With storage at record highs, the market has been oversupplied for over a year and now at 1.5mbpd not even your estimates see this falling for at least a year. By the time demand outstrips supply, the world will have years of excess supply to work off, effectively reducing the immediate effects from demand outstripping supply thereby suppressing the price of oil for longer.
  • Gary on April 05 2016 said:
    I tend to agree with a lot of what you're saying but what about the global glut in oil; would this not act as a buffer. As this diminishes then there should be a more steady increase in oil price and not the violent crossing of the lines as you state.

    Would this buffer not allow the national and independent E&P companies to set their house in order with regards Capex spend?

    Petroleum Engineer, UK
  • Albert Hulzebos on April 05 2016 said:
    Great article. I think that March 2015 there was a think tank group presenting at Davos that predicted a similar case. It seems that the media and many others are fixed in looking no further than where the rest of the herd is.
  • luc on April 05 2016 said:
    Propaganda... Absolutely not true ! $30 /barrel for a while ,7 years minimum .
  • Matthew Biddick on April 05 2016 said:
    I give up on predicting an exact, or even a range, for future oil price, but it WILL be going up sooner rather than later. For people who think that it's as simple as "turning it back on", I've got news for you. It takes enormous amounts of people, equipment, money, and time to get any kind of large task accomplished, even fracking hundreds of DUCs, much less drilling the thousands of new wells that will be needed, too. And if I were running some of these big companies with their enormous debt loads, when the price comes back I'd be paying down my debt instead of drilling more wells. That would further restrict supply and maintain the price level and get my company the hell out of debt!
  • Earl on April 05 2016 said:
    This is the time where Demand starts to spike, part of the issue that most are ignoring is that cars have been much more efficient. People are electing for total electric transportation with the increased range. China is starting to rebuild it's infrastructure towards green, clean cities with zero emmissions or reliance on Oil. Oil had a GOOD run for 5+ years of gouging the masses propped up on speculative reasoning. In essence...they have priced themselves out of business. Need proof? The price of oil keeps dropping but magically the price of gas goes down and jumps up overnight to brace for the next drop in oil value. Completely ignoring the basic laws of economics. Evolve....or go extinct
  • kamakiri on April 05 2016 said:
    $120? Definitely by 2018. Possibly in 8 months.

    Once production declines catch up with rig counts, the spike will be inevitable. It may not last long, but the spike is coming.
  • Tom on April 05 2016 said:
    I think the comment "remove 1 from 120" is spot on. The problem is that oil "experts" see oil consumption go up and peak oil sometime around 2040 or even beyond that.

    The truth is single model of Tesla "people" car pre-sold 250k units. Chinese capital is right now super polluted and they are moving into electric bikes / cars - some whole cities already banned anything but electric.

    Sure some may say this is very small change - only few percentage points of all cars in the US will be electric - but oil moves by such amounts - such small changes will move peak oil closer to 2017 / 2018.

    This implies we will need less oil from the peak => prices will stay low as decreased production from existing oil infrastructure will be offset by lower demand.
  • James on April 05 2016 said:
    Why does anyone take any notice of people who purport to predict things? Did any one bet that there would be a crash in oil prices to below $30 AT such a rapid rate? If so, who made the killing? Too many wild predictions based on data that can be interpreted as the so called analysts wish...
  • steve from virginia on April 06 2016 said:
    Where is the money for $120 oil going to come from?

    Not the oil drillers' money ... they can simply borrow more from their desperate lenders ... the customers' money!

    The customers cannot borrow because they have nothing to offer as collateral, only their willingness to waste a non-renewable resource for fun ... and for absolutely zero return. The absence of return is why the industry is insolvent, its cash flow is entirely borrowed.

    The more loans offered to drillers, the more QE; the more 'extraordinary' monetary policy ... the more government support (borrowed), the further the customer fall underwater. The fuel/credit system as it functions today is undermining itself. In its attempt to stay alive one more day, the drillers are destroying their longer term prospects: without solvent customers there is no oil industry!

    Now, someone please tell me how onrushing oil shortages are going to make customers richer? Tell me how customers who cannot afford $50 oil are going to afford $120?
  • Luís on April 07 2016 said:
    Mindless gibberish.

    Demand is a function from the quantity domain to the price codomain. Throwing in time the domain becomes a two-dimensional plane, not a line as this article implies. This is high-school maths, it can not possibly be a "mistake".

    "Sorry to those environmentalists who pray for an end to carbon use growth in the next decade – virtually no one currently believes it will happen."

    In what fossil fuels is concerned, emissions are bound to peak certainly before 2025 and possibly still within this decade. Neither gas nor coal seem set to replace the loss in oil production in the coming years:


    Good luck in finding non fossil CO2 sources to replace that.
  • grahamzilla on April 07 2016 said:
    I find it funny how some think there is global climate change. That has been true since time was recorded. I look at rocks and drill wells . Drilling one now for that nasty liquid as i type.
    Electric Cars. What a joke. How many batteries does it take to pull a 55 ton load of bricks one city block. How many power plants does it take to recharge that many batteries. How much will those batteries weigh.
    One gallon of diesel will pull that load 8 miles. How much does a gallon of diesel weigh.

    Democrats. Born ignorant and die stupid.
  • Lol on April 08 2016 said:
    Yeah, keep dreaming. $120/b oil is right there with the gold buggers' dream of $5000/oz gold. Any day now, honest injun.
  • Peter Rail on April 10 2016 said:
    I am not from oil or investment business, but from point of my 55 years life experience I can tell one general thing : Cheap prices don't last long.
    Therefore buy, buy till it's not too late.
  • Taxcpamba on April 19 2016 said:
    Oh you are not alone at all! I am right there with you on that number!
  • Zorro on May 21 2016 said:
    There are more sleeping oil fields and producers in North America than ever, they just have to wait until it pops above $50 and all will be back in action. IMHO, you should learn more about oil. Canada and US don't need Saudi oil anymore, they have extra for exporting now just like their gas surplus. It's not like 2008.
  • Sukhbir Singh on August 25 2016 said:
    In 2017 the oil may hover around 60 usd. Justification in this article for usd 120 could be made more clearer and logically convincing

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