Posted on 03/06/2014 4:21:03 PM PST by rickmichaels
It’s easy to get lost in the incremental gyrations of oil prices. “Oil rises on colder weather,” screams a headline one day, only to be followed the next by “Crude edges down on inventory report.” When not being driven by “fears over the Middle East,” crude is being hammered by “weak Chinese data.” You’d almost think energy analysts have a roulette wheel of explanations they spin each time prices move a notch: “Well, what will it be today? Oh ho! Emerging market turmoil it is.”
Which is why it’s so refreshing—and to be frank, scary—to talk with Bob Hoye, the Vancouver-based financial analyst, professional crisis spotter and student of the long view. Ask Hoye about where oil prices are headed and you’ll be taken on a journey through the coal panic of the 1860s, the collapse of the late-19th-century bubble in whale oil and the energy crisis of the 1970s. Hoye has a knack for looking past the hype in any market and determining when mania has reached a fever pitch. In 2005 he began warning of a recession on the horizon. By mid-2007, when most forecasters expected a mild correction in U.S. house prices, he predicted, “This is likely the biggest train wreck in financial history.”
So what does Hoye see coming down the pipe for oil, that sludgy lifeblood of the Canadian economy? “Somewhere in the next couple of months the price advance in crude will probably have maxed out for this business cycle,” he says. “It’s easy to say that crude oil could fall to 25 per cent of its recent high. It will change things enormously.”
There are several elements to Hoye’s forecast for a 75 per cent drop in prices, but let’s focus on just a couple. Perhaps most important is the energy revolution under way around the world. You’ll have heard of peak oil, the theory dating back to the 1950s and embraced with great enthusiasm last decade, that petroleum extraction will hit a wall as recoverable supplies run out. You’ll also notice you don’t hear much about it anymore. That’s because new discoveries and technologies for extracting petroleum, like hydraulic fracturing, have sparked a boom in production. The U.S. is on track to produce more oil this year than at any time since the 1980s.
A similar story has played out in natural gas. Barely a decade after America feared it was running out of recoverable natural gas, the U.S. is now producing more than it has at any time in its history. The result has been a collapse in prices, from around US$15 per million British thermal units in 2008 to below US$3 by 2012. (The price has recovered to about US$5.) Yet despite the sharp rise in oil production, light crude prices have mounted a bumpy climb from their post-recession low of US$34 a barrel to around US$102 today. If Hoye is correct, that price could soon tumble to around US$25 a barrel, invariably bringing the price of Alberta crude with it.
The second part of Hoye’s forecast rests on the craziness playing itself out in the futures market, where, as the name suggests, traders place bets on the future price of various commodities. While America’s energy revolution has been under way the past few years, he notes, large speculators have continued to believe oil prices have nowhere to go but up. Hedge funds and institutional investors have taken the largest net long position on crude in history, meaning they’re more bullish that prices will go up than ever before. Yet at the same time, commercial traders, who represent companies involved in the production and consumption of crude—and who use futures to protect their profits against falling prices—have their largest net short position in history, meaning they expect prices to drop. “These markets get distorted when you approach a top,” he says. “We’re at a point where it’s close to changing.”
It hardly needs pointing out that a price drop of the magnitude Hoye envisions would be crippling for Canada. While oil sands producers have pared their operating costs in recent years, they would be hard pressed to turn a profit with oil below US$30 a barrel. Nor is it clear the controversial Keystone pipeline would get built, even if Washington were to end its dithering and approve the pipeline’s construction.
Sometimes it’s necessary to step back from the day-to-day noise in markets to assess what’s really going on. But be warned, you might not like what you see.
Just paid 3.53 a gallon. a few weeks, maybe a month or so ago it was 2.99...
It can tank any day now.
Well, Obama might release some crude to drive the prices down and erode Russia’s profits a bit. Shame he didn’t allow the pipeline to go through. See that Obama? STupid decisions lead to stupid unintended consequences.
It’s mostly a Government game dude, they’re doing it with everything.
- Cattle lowest since 1950 because of inclement weather?
- Corn going up, inclement weather?
- Fresh Fruits and Vegatables going up, inclement weather?
- Pork, Chicken .... blah blah, inclement weather?
- Wheat and Soy
Think about it. Everything Obama has done has resulted in making it more expensive to live. They don’t want income redistribution, they just want everybody poor.
Get the picture? Somebody is reinforcing global warming on us.
3.59 yesterday ... 3.60 today
Ping.
What? Oh, sorry, my mind got stuck on that phrase “Incremental Gyrations” . Might be a good title for a novel.
and who can’t recall the good old days when Bush was President and it was either summer of 2001/02 when gas tanked to under 1.00 a gallon.
Gas - 3.039, but Diesel is ~4.099
Sounds nice, I just paid 3.77.9 and that was at Costco.
Yeah, I’d like to at least see SOME downward movement. Imagine where we’d be without fracking.
The cheapest I’ve seen here in SW Pennsylvania is 3.55 a gallon.
same here.
if gas ever tanks to 2.00 a gallon,then the economy will improve and millions more people will find work,then millions more people will vote GOP !!! what will Obama do?
Ping
Gas will not go down significantly regardless of the price of crude.
Gasoline is also driven by insane federal regulations, dozens and dozens of different required formulations for different cities. All for the purpose of driving up gas prices.
How is a single refinery supposed to make 59 varieties of gas (contaminated with subsidized ethanol) and deliver as such.
Face it, the feds will regulate out of the cost of gas any improvements that accrue from lower crude prices.
I went out on the National Guard Training Base, Fort McClellan, Alabama today. It was $2.98 there. Went up 3 cents from last week. Most places around here are $3.07 to $3.19.
I’ll believe it when I pay for it at the pump.
OUCH. And we were just told that a local refinery that supplies most of the gas in this area was "shut down for maintenance" early. Normally they wait till May. Guess they wanted the price higher.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.