The Price Of Oil Is Going Down And Will Bottom In November 2011

13th May '11 by Andrew Butter

13 comments 8029 reads

This is a continuation, after reflection, of an article posted last week which in turn was a reflection on an article posted two weeks ago, which said oil prices were likely to “reverse” sooner rather than later, (which turned out to have been pretty-much correct). As expected those articles attracted a good deal of derision, particularly the one which suggested $64 oil “soon”; which is pretty far from “mainstream” thinking these days.

I must say that I do enjoy it when random strangers feel compelled to write to me and explain in condescending terms, that if I “knew the first thing about “Econ 101” then….my life would be “more fulfilling”, or something along those lines. Actually I can’t remember so many hurtful comments on the wires since May 2009 when I posted an article saying the S&P 500 would head up pretty much in a straight line from 875 to 1,200 and then subsequently reverse by 15% to 20%, but not for long. That was when Roubini was still talking about dead cat bounces down to below 675, and Shiller and Smithers (and just about everyone else), were saying the market was over-priced, so I was distinctly in the minority.

And my take on that is that (a) if you say anything against “mainstream” to an audience that includes economists; expect a lot of “hurtful” personal insults in the mail, and (b) I must get around to having a look at this Econ 101 thing one of these days, particularly since so many important people, seem to swear by it, for example Alan Greenspan, and the Lemmings.

Anyway, here is a mentally-challenged-simpleton’s view of the likely trajectory of the price of oil – soon:

The “logic” is as follows; that’s if you can call drawing pretty colored lines and filling in the “dots” on a chart, “logic” (it’s certainly not “economics”).

1: Most people agree that the upward trajectory of the price of oil in 2008 [B]-[C] was a bubble, although the jury is still out as to whether that was caused by (a) speculators, (b) price manipulation by OPEC, or (c) whether it was a “Zionist Plot,” which was one of the views expressed by someone in Saudi Arabia. My view (for what it’s worth) is (a).

2: Some people think the current dramatic rise in…

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AbAngus

13th May '11

Personally, I just don't see oil dropping to $64 this year. Yes, there may be a current bubble - but this is because speculators all agree that there is increasing demand and reducing supply. I'd suggest that until there is a sudden drop in world demand (as in the 2008 crisis) the bubble is likely to float around with lots of wobbles - but without a complete burst.

Also, what's with this fundamental price based on what consumers can afford? There is no single price below which everyone can afford oil, and above which no-one can. Individuals and companies are very variable - and very flexible. Oil is essential to most industries. There will be ebbs and flows across the commercial scene depending on who copes the best - but since oil is essential, the cost of getting the oil out of the ground is more important in setting the price than is its 'affordability'.

Just my view - and probably wrong! (And I do have a mild worry that we may, in fact, see another '2008' if something like the PIIGS crisis gets out of hand - and combines with some other dreadful event like runaway inflation in China or whatever.)

AA

ohisay

64$ by November ....

Andrew could you let George Osborne know.? And for that matter Mr C Huhne.
It would give me an inordinate amount of pleasure to see the latter parading his recent mantra (apres Keynes)

"When the facts change I change my mind too."

Many Thanks.

emptyend

14th May '11

I must say that I do enjoy it when random strangers feel compelled to write to me and explain in condescending terms, that if I “knew the first thing about “Econ 101” then….my life would be “more fulfilling”, or something along those lines. Actually I can’t remember so many hurtful comments on the wires

I must say that I love it when chartists resort to insults when faced with a logical argument. I'd suggest you grow a thicker skin.

My simple-minded-view is that the “fundamental” price of oil now is a tad under $90 (Brent) and so yes that is a bubble, a big one, like 40% or so over the fundamental.

My simple-minded view is that the picture would look completely different if you used WTI.

Incidentally, the FT report of the Brent price on the 13th, when you wrote the above, says:

In afternoon trading in London on Friday, ICE June Brent fell to $112.70 a barrel, up 3.3 per cent over the week

...just for the record.

Finally:

OK so let’s suppose that the trajectory of the bust in oil prices this time will follow the trajectory of the run-up to what is looking suspiciously like the “top”, in the sense that after a 15% or so drop (even if followed by a bounce), historically oil prices only go one way.

Alternatively, lets suppose that 15% is an arbitrary figure with zero basis in facts or logic and lets suppose that one can't entirely ignore the fact that sharply increasing margin requirements will lead speculators (yes - I admit there are quite a few in the commodities space!) to cut their positions equally sharply (as has happened over the past few sessions).

I don't have any sort of problem with the idea that others might think oil prices might fall or indeed rise from here. I've no idea what path oil prices will take over the next 6 months, but I do know that picking any arbitrary number (like $64) is complete and utter hokum.

rgds

ps...nice picture - good to see your artistic training hasn't been wasted :-)

snickers

I love the scare quotes in this article. I do hope Mr Butler does those air quotes with his forefingers in real life as well: at least twice in every sentence.

nigelpm

The “logic” is as follows; that’s if you can call drawing pretty colored lines and filling in the “dots” on a chart, “logic” (it’s certainly not “economics”).

This particular line makes a mockery of the entire article to anyone with a logical brain.

djpreston

How's this for fence sitting then?

I agree with everyone so far on this thread.

Yep, there is a "fundamental" price for oil. That is then affected by the action of different factors:

The action of speculators - the biggest factor since its the marginal price setter. The MENA crisis raises fears over security of supply so risk premia rises. The degree of premium is dependent on much more fragile sentiment - analysis of politics is hard in normal times, let alone when rebellions and ruthless govts are involved. Then there's the speculation about level of demand growth - not so hard to predict.

So yes, the price will oscillate around the "fundamental" price. What's amazing about that?

Personally I'd say $100 - $105 is fair for now as I don't see much justification for fears on demand growth and a modest c10% premium for risks of supply disruption.

That prices can undershoot is fair due to the perceptions mentioned above and again, the action of speculators at the margin. Do I see $64 - nope.

Arriba

15th May '11

I'm no Economist, but...

Our simple regression time series model and seasonal cycles points to the same conclusion.

marben100

...well, I'm also no economist nor am I going to make any claims of being able to predict short-term oil prices. If I felt I could, my investment strategy would be completely different. I invest more on the basis of a medium/long-term view of oil prices - and try to invest in businesses that are not so vulnerable to short-term swings (which is why I avoid areas like heavy oil and uncoventional resources that are heavily geared to the POO).

What I will say is that a fall to $64 is entirely possible - as is a rise to $150+. Andrew's view that the "fundamental" price is currently around $85 seems reasonable to me - and that, as the chart indicates, that "fundamental" is likely to rise in the future, as a result of inflation. However, my reasoning is different. I base my view much more on what price is adequate to stimulate the development of new hydrocarbon resources to meet demand, rather than attempting to read runes from past price histories.

However there is one truly fundamental (as opposed to "fundamental" ;0) ) factor that could derail Andrew's bold prediction, indicated in this article of 17th April:

(Reuters) - Saudi Arabia's oil minister said on Sunday the kingdom had slashed output by 800,000 barrels per day in March due to oversupply, sending the strongest signal yet that OPEC will not act to quell soaring prices.

Consumers have urged the exporters' group to pump more crude to put a cap on oil, which surged to more than $127 a barrel this month, its highest level in 2 1/2 years amid unrest in North Africa and the Middle East.

Oil Ministers from Kuwait and the United Arab Emirates echoed Saudi Arabia's Ali al-Naimi's concerns about oversupply and said rocketing crude prices were out of the hands of OPEC, which next meets in June…

How does that square with this pronouncement?:

RIYADH: Saudi Arabia is willing and able to plug any oil supply gap and has the capacity to provide all types of oil, including the light, high-quality crude produced by OPEC member Libya, senior Saudi sources said Thursday...

For many years Saudi has claimed that it has ample spare capacity and that the market is well supplied. Very high prices, weighing on the global economy and ultimately leading to demand destruction and substitution are not in Saudi's interests. Yet whenever called upon to make use of its "spare capacity" Saudi seems not to step up to the plate.

As these claims of spare capacity increasingly lose credibility, it wouldn't take too much to cause a market dislocation. It takes a brave or foolish man to attempt to predict the oil price in the short-term --and I somehow doubt that such a "brave man" is risking any of his own cash on the outcome. I wouldn't.

Mark

Mark

Could well be that the Saudi's can't step up to the plate but equally we have to consider that they, and the other Gulf States, want/need a higher "base" to offset the extra spending they are pumping in in order to avoid an uprising as we have seen elsewhere this year.

D

9th Nov '11

The Price of Oil Is Going Down and Will Bottom in November 2011

Errr... perhaps not (ee's comment on the other thread noted ;0)). On the day this article was published, Brent closed at $113.32. It currently stands at $112.87 - rather than the $64 so confidently predicted. Is making bold claims like this really sensible? I actually consider it rather irresponsible, as less experienced investors might be misled into relying on them.

What I will say is that a fall to $64 is entirely possible - as is a rise to $150+.

From the POV of the investor, that seems to me to be a much sensible stance to take, rather than making guesses by projecting charts. Balancing one's portfolio to allow for either possibity (i.e. a mix of investments, some of which will benefit from higher oil prices and some from lower ones). Amongst oil company investments, sticking with companies that have lower costs of production also significantly reduces risk if a big oil price fall were to occur, rather than speculating on companies that will benefit more if the oil price soars, but may fail entirely if it collapses.

17th Nov '11

Quite an interesting chart here, showing WTI in Sterling terms. Obviously WTI has been strong in recent days as a result of the pipeline reversal - but in Sterling terms it has been one-way traffic for the last 6 weeks:

kenobi

18th Nov '11

Very difficult to say anything about oil prices with the instablity in the middle east, clarity is returning to Libya, and their production is recovering, so it's not odd for the saudis to cut back production which they might have upped while the libya capacity was off line. It does seem that opec have decided 100 + (maybe 90 -110 or 100 -120) is the kind of price band they think is fair, and is supportable ?).

The big unknown is Iran. with the recent IAEA report, the drums of war are beating again, it is not ideal timing for the US, with elections next year. Obama has shown himself to be a significant and ruthless pursuer of al queda, to the extent that I can no longer name a single living member of the organisation, although I know the leader is now the cleric adviser of OBL.

So now we have Iran, we have an IAEA report, Obama is no fool, as can be seen in the contrast between Iraq and Libya. Wikileaks tells us that the Iranians don't have many friends in the region. I read an article yesterday saying that the US are fortifying kuwait and other allies in the region, presumably against missile and other attacks in retaliation to a US / Israeli attack ?

So might there be an attack before the election next november ? I think we'd have to be looking at first half of the year. I doubt Obama would want to risk going to the electorate with a war going on.

If Obama looses all the republicans (except Ron Paul), are commited to stopping iran getting a nuclear weapon. (Hermain Caine isn't sure about a chinese nuke which they've had since the 60's so lets hope he's not the next president).

I cannot see any rational basis for predicting oil prices when there must be a 50% possibility of some kind of attack on Iran next year, and if the republicans win the white house surely a near 100% possibilty for the year after that ?

cheers, K

PS maybe it's time to review Hal's thread re where the carriers are ?
Although I suspect attacks may well be missile or ground based rather than carrier based.

22nd Nov '11

Plenty of encouragement for oil bulls in this article, commenting on today's market and the factors underpinning it:

Goldman Sachs, the most accurate oil price forecaster over the last year, now sees Brent at $125 per barrel in 12 months.

Amrita Sen, oil analyst at Barclays Capital, argues the oil market is caught between competing and intensifying influences.

Outside the oil market, the possibility of a major economic failure has grown, but inside the market, spare capacity has eroded and physical market strength has increased, she said: "In our view, it is only the fear of macroeconomic discontinuities that is keeping a lid on oil prices. Without that fear, we believe that Brent would have already reached an all-time high and climbed past $150 per barrel."

...maybe A. Butter was right that the price would be bottoming in November 2011??? ......its just that the bottoming price is about $40 higher than the number he invented ;-)

The Price of Oil Is Going Down and Will Bottom in November 2011

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Andrew Butter

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