Wednesday, January 14, 2015

Oil Prices: What Goes Around Comes Around

Oil Prices: What Goes Around Comes Around

by Stephen Lendman

As this article is written, West Texas Intermediate (WTI) crude stands at $45.69 a barrel. Brent at $46.59.

Down from their $114 a barrel 2014 high. Off 14% in 2015's first eight trading days. Steady at the moment as this is written. 

How low can prices go? Forecasts are suspect at best. Revised as conditions change. Especially when as fast-moving as now.

The latest US Energy Information Administration forecast estimates an average $58 a barrel 2015 price. Around $75 a barrel in 2016.

In October, the World Bank forecast $96 a barrel oil in 2015. In December, the IMF estimated $85 a barrel in 2015.

Goldman Sachs cut its three-month forecast from $80 a barrel to $42 for Brent. WTI futures from $70 to $41. Warning that prices could fall within a $30 - $40 range.

Tyche Capital Advisors analyst Tariq Zahir estimates $40 near-term. "(B)ut everything seems to be happening quicker than expected," he said.

Price Futures Group's Phil Flynn believes "from a technical standpoint, there's no reason to try to pick a bottom right now."

Reuters said despite new lows, Saudi Arabia and other Gulf states "appeared no less resolved to maintain their market share…"

Various reasons explain falling prices. Including manipulation affecting all markets. Demand. Productive capacity. Current and expected future output.

According to the Oil Drum, a drop in demand of one million daily barrels accounted for a price decline from $110 to $80 a barrel. 

Less demand. Lower prices. Lower still with sustained high output. How much lower will prices drop? Most forecasts are notoriously unreliable.

Who foresaw $2.81 a barrel 1973 oil exploding nearly fourfold in 1974? Prices more than doubling in 1979?

Plunging from a November 1985 $31.82 a barrel high to an April 1986 $9.75 low. Losses weren't recouped until 1990.

In December 1998, oil sank to $9.39 a barrel. New millennium oil rose from $30 a barrel to an all-time mid-2008 $150 a barrel high. A 2014 $115 a barrel high. 

Heading south perhaps for $40 a barrel or lower. Maybe $30 or $20 if world economies weaken more than expected.

The Washington Post put current prices in perspective. Declines since June don't reflect a "new normal," it said.

It's the "old normal." The last eight years saw historically high prices. 

"(H)igher (adjusted for inflation) than any time since the 1979 to 1983 period when the Iranian Revolution and Iran-Iraq war disrupted oil supplies from two of the world's biggest oil exporters."

Average prices in 2008, 2011, 2012 and 2013 were higher than any years since the 1860s. Adjusted for inflation.

Weeks earlier, Zero Hedge noted lots of black swans and elephants in the room. (Including) conflict in Ukraine…"

"(O)ngoing Syrian and Iraq wars…" Weakening economic growth. "(A) new credit crunch…(A)ll bets are off," it said.

On January 12, Oil Price.com headlined "Could The Oil Bust Last?"
Saying industry booms and busts are commonplace.

"(B)ut the depths to which oil prices have plunged have surprised everyone. Could the bust now persist much longer than many think?"

The World Bank just cut its global growth forecast. Its chief economist Kaushik Basu saying:

"The global economy is running on a single engine…the American one. This does not make for a rosy outlook for the world."

The so-called "growth engine" is sputtering at best. More fantasy than real. Where's the growth, asked Paul Craig Roberts?

"Where did (it) come from? Not from rising real consumer incomes."

"(Or) rising consumer credit. (Or) rising real retail sales." (Or) from the housing sector. (Or) a trade surplus."

Government data are notoriously unreliable. Manipulated to deceive. Fiction substituting for fact. "(T)he illusion of economic recovery must be kept alive," says Roberts.

The official narrative no matter how false. GDP growth numbers fly in the face of plunging commodity prices. 

Perhaps the best indicator of global weakness. On Wednesday, copper sank to a five-and-a-half year low.

"(I)n the process halting the market due to the severity of the plunge," said Zero Hedge.

An indicator perhaps of things to come. On Wednesday, Bloomberg reported copper-led commodities at a "12-year low." Down 26.5% since their April peak.

Copper is down 18% since July. A bellwether commodity like oil. So is iron ore. Off 50% since June.

Australia-based Morgan Stanley commodity analysts believe cheap energy may encourage mining companies to increase production. Despite lower demand.

Sumitomo Mitsui Trust Bank market strategist Ayako Sera blames economic weakness for slumping prices.

"There are a lot of uncertainties, and it’s hard to see a reversal in sentiment for the time being. As an investor it’s hard to proactively take on risk at the moment," he said.

Danske Bank commodities analysts noted a "broad-based risk-off sentiment." Heightened by low oil and copper prices. As well as shaky equity markets.

On Tuesday, Bloomberg headlined "Oil Collapse of 1986 Shows Rebound Could Be Years Away."

Oil Price.com said the last decade's commodity boom appears over. Vast supplies overwhelm demand. According to BNP Paribas commodities analysis Stephen Briggs:

"Supply has been outstripping demand not because demand has been particularly weak, but because there was too much supply. It looks like this won't change anytime soon."

Saudi Prince Alwaleed bin Talal said "(i) supply stays where it is and demand remains weak, you better believe (prices are) gonna go down more."

"I'm sure we're never going to see $100 anymore." Never is a long time. What goes around comes around.

Things can get weaker before improving. Stay depressed longer then most people expect.

Goldman's latest assessment said "we believe prices need to stay lower for longer" before conditions are favorable for improvement.

How long remains to be seen. Wood Mackenzie (WM) is a global energy, metals and mining research consultancy group.

"When could low oil production halt production," it asked? Brent at $40 or below is needed for "producers (to cut it to) a level where there is significant reduction in global oil supply," it believes.

Even then, WM sees no guarantee it'll happen. Operators may keep producing at a loss. Rather than shutting down.

Especially "large projects (like) oil sands and mature fields in the North Sea."

WM believes US onshore ultra-low output wells most likely will shut down. Once production costs exceed revenues. 

Incrementally. Not all at once. Many producers will keep operating to service debt. At the same time, refinancing is impossible if costs exceed revenues.

Insolvencies will increase. Less production will follow. Saudi and other Gulf states will maintain production rates. So will other OPEC countries.

It's too early to know whether current global economic weakness portends something much more serious.

Markets in bubble territory heighten the risk for trouble. The late Bob Chapman predicted economic collapse years ago.

"Untenable political and financial decisions put US and European economies on a collision course with disaster," he said.

In his International Forecaster and on the Progressive Radio News Hour. 

"Bailouts and market manipulation delay the inevitable," he explained. A tipping point approaches. Only its timeframe is unknown.

The longer untenable conditions continue, the more disastrous the eventual consequences.

It's not a matter of when things will implode, he believed. Just when and how severely. His insight is sorely missed.

Lower bellwether commodity prices reflect increasing global economic weakness. The canary in the coal mine.

Perhaps bloated equity markets are starting to realize what analysts like Bob Chapman highlighted years ago. The fullness of time will tell.

Stephen Lendman lives in Chicago. He can be reached at lendmanstephen@sbcglobal.net. 

His new book as editor and contributor is titled "Flashpoint in Ukraine: US Drive for Hegemony Risks WW III."

http://www.claritypress.com/LendmanIII.html

Visit his blog site at sjlendman.blogspot.com. 

Listen to cutting-edge discussions with distinguished guests on the Progressive Radio News Hour on the Progressive Radio Network.


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