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Oil Prices: Collapse Now, Spike Later

Oil prices fell sharply this…

The Oil Bubble Has Burst. What Now?

oil barrels

Those analysts who warned that oil prices can’t go on rising forever now have the chance to tell everyone else “I told you so.” Brent and WTI have fallen by 9 percent since the highs they hit in late January, with the international benchmark slumping to US$64.42 today in midday Asian trade, and West Texas Intermediate falling to US$60.61 a barrel.

The problem with bubbles is that they are so irresistibly shiny while they expand, but sooner or later every bubble pops. Sometimes the bang can be deafening, which is what happened four years ago. This time it was quite loud, too.

Energy analyst Tom Kloza from the Oil Price Information Service warned at the end of January that there is a “tremendous speculative bubble.” He warned that the price is due for a serious correction. Reuters’ John Kemp noted that bullish bets on Brent, WTI, and the four most popular oil product futures are at all-time highs, which also suggests a correction is pending.

Now, the correction is taking place. It may have started with the stock market slip on Monday, prompted by higher bond yields, but it continued with the Energy Information Administration reporting that the United States have breached the 10-million-bpd oil production threshold for the second time since last November—and apparently much earlier than most observers expected.

U.S. drillers produced 10.25 million barrels of oil daily last week, the EIA said in its weekly petroleum report, and prices slumped further as doubts about the global oversupply—which is still lingering—were reignited. But the weekly report was just additional kindling to EIA’s latest Short-Term Energy Outlook, which forecast that U.S. oil production will top 11 million bpd in 2019. Related: Venezuela Is Moving From Crisis To Collapse

Bulls will be bulls, but with so many signs that U.S. drillers are not quitting production growth, a selloff was only to be expected. Some highly disappointing numbers from a few oil majors may have made things worse, too. ExxonMobil and Chevron, in particular, spooked investors when they revealed fourth-quarter earnings that badly missed expectations. In an already jittery market such as the one for oil, such misses could sometimes outweigh the robust results of all those who beat forecasts, and they were the majority this reporting season.

It is also telling that the latest outage of the Forties pipeline did not have a positive impact on prices, which would have been the normal thing. When the Forties system was shut down in December, prices got a major boost thanks to the fact that the Forties transports more than 400,000 bpd of crude to the UK. Now it’s down again, but prices have not reacted in the normal way. In fact, some analysts warn that prices have yet to fall further. The driver this time will be Fed’s plans for at least three rate hikes this year.

Adding insult to injury, Iran’s Energy Minister earlier this week said the country has the capacity to boost production by 100,000 bpd within five to six days of an end to the production cut deal. Now, while Bijan Zanganeh was likely speaking hypothetically, he also said that he sees no reason for OPEC to extend the cuts beyond June this year.

Some warier investors started exiting their long positions ahead of the bubble’s burst, truth be told. Their numbers are likely to swell in the coming weeks, despite investment banks’ optimistic price forecast revisions for Brent and WTI, unless short memory once again plays its trick on the market and another bubble rises from the remains of the last one.

By Irina Slav for Oilprice.com

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  • Kamamura on February 09 2018 said:
    The so called "oil bubble" did not burst, because no such thing existed. There was a notable strain on the under-invested supply side, that manifested by the constant drain of physical barrels in the US reserves.

    There is of course a bubble going - the so called "US shale revolution", that, as Chanos correctly called, is burning most of it produces as capex, because new and new holes must be drilled, since the production of the existing ones is declining sharply after opening.

    So what basically happens is that USA is importing a lot of oil, uses the energy to drill to produce marginally more oil, and exports some of it to create the image of "oil superpower". No economic analyst uses the EROEI metrics for the so called "shale revolution", because it would debunk it right on the spot.

    And what happened this week is that the rise of the oil price has triggered another round of the boated stock market crash - a scenario similar to 2007-2008, almost exactly ten years ago. The oil is tanking with the stocks, of course, because the economy outlook is turning bleak - that has nothing to do with bursting oil bubble. These things must be seen in context.
  • Alex on February 09 2018 said:
    The oil market is obviously in an anticipated correction. However, name one sector that is not in a correction right now! When the correction is over, the bulls will be rolling back again.
  • rahul on February 09 2018 said:
    Commodities and tech are two different industries with two very different metrics. So talking of bubble for oil doesn't make sense to begin with. You hear of bubbles in tech industry primarily because stock trade at over 200 P/E (Amazon) or are overvalued despite having -$11 EPS (Tesla). Silicon valley is primarily can very easily be called something shiny group of industries since they depend on gimmicks such as putting a car in space to hide bad quarter results (Tesla) despite heavy government subsidy.

    Oil stocks are still trading at huge discount. One has to spend money to service the wells and to replace the reserves. When you are cutting cost like you did in past two years, you simply setting stage for future supply crunch....
  • CorvetteKid on February 10 2018 said:
    Burst bubble ? What bubble ?

    If the fair price for oil is about $50-$60, how does getting into the high-$60's qualify as a bubble ?

    2008 with $140/bbl...a doubling of price in a few months....now THAT was a bubble.
  • Chip Campbell on February 10 2018 said:
    This would have been a much stronger article had the author checked back in with both Kemp and Khoza to get their updated price forecasts. As is, it's barely worth a read.
  • Disgruntled on February 11 2018 said:
    Supply, supply, supply, but yet not one word about demand? Demand marches on. This is the "correction" alright, and after this there will be another correction up. It looks like the corrections "up" will outnumber the corrections "down" for the next few years, due to demand going only one direction, up. Yes, supply will go up as well, but a piece that only focuses on supply is not a balanced piece.
  • ziggy on February 11 2018 said:
    This is a standard correction, based on the the market, refiner matenance seasonality and long futures being liquidated to cover some other postions being sold out. All and all ist healthy.

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