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Is Oil Returning To $100 Or Dropping To $10?

Is Oil Returning To $100 Or Dropping To $10?

If you have been following the price of oil over the last few months, the chances are you’re a little confused. On the one hand you have the likes of A. Gary Shilling who, in this Bloomberg article, loudly trumpets the prospect of oil at $10/Barrel, and on the other there is T. Boone Pickens, who, at the end of last year was predicting a return to $100 within 12-18 months. Pickens prediction has moderated somewhat as WTI and Brent crude have continued to fall, but in January he was still saying that oil would return to $70 or $80/barrel in the near future. So, who is correct?

The answer is neither one. As with most things in life it is unlikely that the truth lies at either extreme. Pickens, and Shilling and other commentators suggesting that oil will fall to levels not seen since 1998, purport to have sound reasons for saying what they do, but the real reasons for such comments are most likely the two oldest human motivations in the book, greed and hubris. “Talking your book” is nothing new in financial markets and, while Pickens has an insider’s knowledge of the oil business, he also has a massive stake in driving oil higher however he can. Shilling is in the business of garnering eyeballs and clicks, hence the competition for the most outrageous prediction among the bears. Related: Why The Stock Market Likes Cheap Oil

I know it isn’t sexy and it probably breaks some unwritten rule of internet hackery to say it, but the most likely scenario is that WTI futures will bounce around current levels for a while before gradually recovering to the $60-$70/Barrel level. It could even reach Pickens’ revised $70 or $80 level before too long, but we are unlikely to see $100 in the near future without some major external influences.

Now that the dust has settled somewhat, the reasons for the big drop are becoming clearer, and it is clear that supply was not the only factor. It was obvious for a while that as fracking unlocked oil deposits in shale and sand that had previously been thought unreachable, supply, particularly in the U.S. would grow considerably. That wasn’t seen as too much of a problem by the market, though, until questions about slowing global economic growth and a rapidly appreciating Dollar were added to the mix in the middle of last year. Once that happened and OPEC made it clear that they would not immediately cut supply and hand power to the upstart U.S. shale producers, the collapse began.

The drop halted at a logical level. In 2008 and 2009 when a complete global economic collapse looked on the cards oil was trading in the mid $40s and that is where support was eventually found. According to EIA data, global oil production in 2008 was an average 74.016 million barrels per day and in the first 10 months of 2014 averaged 77.427 million barrels, an increase of around 5%. Consumption in 2008 was 86.045 million barrels per day and in 2014 was 92.13 million, an increase of 1.2%. Related: EIA Inventory Announcement Scuppers Oil Rally Hopes

Put simply, supply has increased faster than demand, so a rapid return to oil over $100/Barrel looks extremely unlikely. That said though, in order to believe that the price will fall much further you have to believe that the economic outlook today is worse than it was at the beginning of the deepest recession since 1929. That too seems like a bit of a stretch.

The only logical conclusion then is that in the near term oil will trade in an approximate range of $50-$70. Incidentally, the bottom end of that range represents the inflation adjusted 100 year average price, according to one Morgan Stanley analyst quoted in another Bloomberg article. We shouldn’t, therefore, be shocked that oil is here any more than we should be shocked that publicity hungry columnists and heavily invested oilmen are predicting further wild swings.

By Martin Tillier for Oilprice.com

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Leave a comment
  • Daniel in Rockford on February 23 2015 said:
    Thank you Mr. Tillier for a well thought out article. I think it hits the price range right on the head. Good one...well held my good man.
  • Don on February 23 2015 said:
    It is not a true free market. Saudis own oil and US owns the currency of oil. Therefore barrel by the dollar. If Saudis, want oil to rise, just shut of their pumps. Your see oil rise then. They can't pump such a large quantity forever, so oil will rise someday.
  • Royce on February 23 2015 said:
    Martin: I like the article and agree with the premise. Please help me understand the consumption calculation in the last sentence of the 5th paragraph.
  • stoneman on February 23 2015 said:
    Give me a break! They are both full of it! Show me a person that can go to Las Vegas and say "I'm gonna beat the house every time!" There are way too many things involved that can change oil prices. War, Opec etc....no one can predict what tomorrow brings in the oil business! If you think you can then you're full of yourself. All you can do is ride it when it's good and hunker down like a whipped pup when it's bad. When I started my trucking business in the 90's oil was 10.50 a barrel. Can it go back that low? Maybe! Can it go back up to 100.00? Maybe! Tomorrow? Maybe! A year from now? Maybe! Point is get real guys.
  • Will on February 24 2015 said:
    Yes that calculation regarding consumption doesn't look right...
  • Robert on February 24 2015 said:
    Thanks for the analysis. As someone totally unfamiliar with the oil industry (except as a consumer) I had assumed that the price drop was a coordinated effort between the Saudis and the Obama administration to destroy the US shale oil industry (each for their own reasons). And that once they were successful at it, the Saudis would cut back on production and send the price skyward again. Do you think that plays into it even in a minor way?
  • John on February 24 2015 said:
    As noted prior:

    Quote: "Consumption in 2008 was 86.045 million barrels per day and in 2014 was 92.13 million, an increase of 1.2%"

    Isn't the increase ~7% and not 1.2%?
    92.13/86.045 = 1.0707: Then 1.0707-1.000 = .07: Then 0.07 * 100 = 7%

    I believe that's the correct number.
  • Matt on February 24 2015 said:
    The production figures are too low, there cannot be such a large gap. I saw a number from last year: consumption 91 million bpd, production 86 million bpd.

    In any event, why is oil falling if consumption exceeds supply? Is there missing production in the numbers?
  • Gary on March 09 2015 said:
    Matt was the only one that pointed that out? The supply and consumption equation doesn't make a sense.
  • Joe on September 14 2015 said:
    Throw all of the economic indicators out the window. The American Government is using the Saudis to break the Russian economy. They did the same thing to the Russians when the Soviet Union fell in 1989.

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