Canada Ping!
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 got the heating bill for January. Astronomical.
$25 crude would require a deflationary collapse and a reduction in demand of at least 40% worldwide. It would also require international calm.
I don't see all those lining up.
WORST CASE, $70 no matter how much we pump.
And, the producers are not dumb enough to produce TOO much. It's money in the ground for them. They can pump slower to milk every last dollar out of each barrel.
Not gonna happen.
Gasoline price per gallon will persist above $3 for at least a couple of years, just long enough to put the Pubbies back in control of both houses of Congress and the White House; that will be engineered by the House of Saud, which is ironic, because the House of Saud would appear at first glance to be the ones to suffer most from a decline in oil prices. The fact is, the Saudis can survive and even thrive when other OPEC members are drowning in red ink, and the House of Saud doesn’t want Iran to get rich.
Obama, on the other hand, DOES, and has been sitting on the Keystone XL project for five solid years because of that, and to keep the late Hugo Chavez and his dictatorship from going down the drain. The Venezuelan dictatorship is allied with Iran (and Russia, and Cuba — begin to see a pattern?).
Obama’s flip on the Ukraine crisis will be breathtaking, and yes, it will happen. He did the same thing in Syria, in Libya, in Iraq, in Afghanistan, and even in GTMO. This is probably inevitable, since Russia can count on the, ahem, cooperation of the EU, reliant as it is on Russian natural gas.
OPEC started de facto pricing in Euros around ten years ago, to keep their product price-stable in Europe during economic integration into a large, single market, and of course at the expense of the Russians, and regardless of what it did to the US economy.
Russia’s been concentrating on natural gas markets in Europe, and has been for decades, while ignoring technological developments which would keep it competitive and profitable in liquid petroleum. That will change.
When the Saudis turn on the Demagogic Party and their rival in OPEC, you’ll notice. And so will the Europeans. Instead of opening their own spigots wider, they’ll push into office a group of politicians who are drill-drill-drill oriented.
US natural gas production is through the roof, oil production continues to rise, and right now we have *one hand tied behind our backs* — when Keystone XL is finally okayed and built, we’ll enjoy a rise in supply.
Once ANWR is opened we’ll be about eight years away from a real oil glut, and that’s give or take various developments in use reduction, conservation, and improvements in recovery technology by the producers, and additional exploration.
With fewer US dollars going overseas to buy oil, the Euro will decline against the dollar; China’s export surplus will decline but we’ll be getting much more for our money, and the Chinese will back down from buying our debt; Russia will have incentive to push up oil production for the EU markets, because the de facto pricing will mean Europe will be paying more and more for oil.
The Russian alliance with Iran can’t and won’t survive that.
http://www.freerepublic.com/%5E/focus/news/2436271/posts?page=164#164
http://www.freerepublic.com/focus/news/1071087/posts
reading between the lines the article is saying that oil is at a high and its relative to the economy and demand. It can possibly drop 75% because of the economy and demand. Which means a whole lot of suffering for everyone.
Ctude oil futures: http://finance.yahoo.com/q/fc?s=CLJ14.NYM
It’s a downward trend, but nothing dramatic.
“” “Somewhere in the next couple of months the price advance in crude will probably have maxed out for this business cycle,” he says.””
Odd responses. As yet, not a single reason why it won't.
There is always somebody playing contrarian so that if his prognostications are correct, he will be hailed as a guru. If he is so sure, let’s see some proof from his own accounts where he is shorting the market.
Pee coil! Pee coil! they cried.
Artile doesn’t seem to be factoring in the massive devaluation of the dollar. $25 a barrel again? No way, no how.
Definitely won't help the price of gasoline.
It's called the "Narrative Falacy":
The narrative fallacy addresses our limited ability to look at sequences of facts without weaving an explanation into them, or, equivalently, forcing a logical link, an arrow of relationship upon them. Explanations bind facts together. They make them all the more easily remembered; they help them make more sense. Where this propensity can go wrong is when it increases our impression of understanding. —Nassim Nicholas Taleb, The Black Swan
CNBC is an entire cable channel pretty much dedicated to the Narrative Falacy.
Retail gasoline consumption has dropped by 40% in the last 10 years. It’s demand destruction from the devastation of our economy.
Yet gas prices go up. That is the red flag of government meddling. And I mean “red” flag in more than one way...comrade.
A price drop of that magnitude could put domestic production back a decade or more. Fracturing isn’t cheap
Diesel contains more energy per gallon and less is produced from a barrel of oil than gasoline. It really does make sense
Nah...they will wait until a month before the next major election
“They can pump slower to milk every last dollar out of each barrel.”
Why would anyone do it differently? They are in business to make money. Do you reduce your asking price just to be a nice guy?
“reading between the lines the article is saying that oil is at a high and its relative to the economy and demand. It can possibly drop 75% because of the economy and demand. Which means a whole lot of suffering for everyone”
For the price to drop that much is inconceivable. Domestic production would grind to a halt like in 1982-83. Low price might sound good, but other things could turn quite bad
Canada Ping!
The difference this time is natural gas may be substituted for gasoline. That’s started in several states including WV. At one point, the US used about 50% of the world’s oil. about 25% of that was produced domestically. If we attain energy independence that 25% of the world’s production will have to find other buyers. Any significant decrease in the oil will force some countries, like Iran, to pump additional oil to maintain enough income to maintain certain absolutes. As more oil floods the market, inventories will increase leading to further drops in price.
How far out can you buy futures? I think the guy has the trend nailed. Not sure about that much of a drop.
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