What price is oil going to?

4th Nov '18 by Stocktaculous

87 comments 37659 reads

A decade ago, many oil analysts thought $10 a barrel was the new normal. Just six months ago, when prices were just below $150, forecasters said $200 oil was not out of the question. http://www.rferl.org/content/The_Perils_And_Pitfalls_Of_Oil_Price_Forecasting/1360914.html

So the question for all your Stockopedes if you dare is as follows: factoring in all the variables (supply-and-demand, recessions & demand destruction, civil wars, major geopolitical crises, the weather, the development of alternative energy), where's the price heading in a) 6 months (i.e. on 21 June 2009), b) the next 2 years (on 21 December 2010) and c) 5 years (on 21 December 2013) ? Let's have your votes.

Answers on the back of a postcard please or using the form below. I want to see your guess and the supporting rationale. The person who's closest to the actual price on each date will win a copy of "Dirk Gently's Holistic Detective Agency" and their very own barrel of Brent Crude Oil. :-)

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CityTrader

9th Jul '09

I was out in Saudi Arabia recently. Now apart from the local mad Immans who postulated that Allah would replenish the oil fields they recently announced new finds. Though to be honest I felt they had found them years ago and were only just now going to open them up. The finds totalled about 2,000 barrels a day. MY first thoughts were why announce this now and are they really getting so desperate to start announcing such small finds? I have read Matthew Simmons excellent book Twilight in the desert and so know there have been no significant finds since the mid 80's just south of Riyadh.

Just as an aside last year several garages ran out of diesel in Riyadh which naturally struck me as odd but then local consumption must now be huge compared with the past as the population is simply exploding there. Not quite sure what they will all do once the oil runs out though.

lfc

Hi CT

"MY first thoughts were why announce this now and are they really getting so desperate to start announcing such small finds? I have read Matthew Simmons excellent book Twilight in the desert and so know there have been no significant finds since the mid 80's just south of Riyadh."

Snippet from 'Oil 101' (M Downey) which I currently have on library loan;

'Saudi Arabia's large fields, purported spare capacity, and ability to increase production, were almost entirely based on dry land. However, between 2004 and 2008 offshore dayrates for jackup drilling rigs suddenly soared from $30,000 per day to over $150,000 per day due to demand from Saudi Arabia. The only time a crude oil producer goes offshore is when onshore production opportunities have been maximised. Offshore exploration is much more risky and production costs are 4 or 5 times higher than onshore. The Saudis going offshore in a rapid manner indicated that they may be struggling to maintain current onshore production rates, and with it, the worlds only remaining spare capacity.'

rgds

10th Jul '09

Hi lfc

Interesting as you say because these finds were indeed offshore.

muckshifter

The other thing which convinces me that the Saudis are planning for the day that their oil production peaks / begins to decline, is the huge increase in investment in mining throughout the kingdom over the last couple of years.

Info here for anyone interested.

http://www.maaden.com.sa/eng/history.htm

Gradders73

Oil has dropped below $60. Must be those pesky speculators, oh sorry that's the wrong way . Anyway, buy it now, while it's still cheap, I say.

At the G8 summit, the leaders agreed that a price between $70 - $80 a barrel was about right, which fits with OPEC members statements that $75 was appropriate. It is an interesting thought - if they introduce a pricing collar around crude, what this will do is peg the dollar. No nation will want to allow their currency to appreciate too much vs dollar because the oil costs will harm growth, so the global economy will hitch it's wagons to the US and will ride off the end of the cliff together.

16th Jul '09

Check out this comment - the lowest prediction yet, $20 a barrel this year.

I think the guy must have been in a particularly low mood, but I find it amazing what Bloomberg chooses to publish

http://www.bloomberg.com/apps/news?pid=20601087&sid=auTu3RI8WC1A

“China is in a real desperate situation,” said Verleger, who publishes the Petroleum Economics Monthly. “We’re in a situation where U.S. consumers aren’t consuming and Chinese manufacturers get hurt. Economists are looking for growth in all the wrong places.”

JPGH

17th Jul '09

More debate on this $20/bbl oil article over on Tullow bulletin board (over on TMF). See link http://boards.fool.co.uk/Message.asp?mid=11617258&sort=whole#11617522.

The theory of $20 oil goes that as more and more strategic storage is filled, more crude carriers are used for storage and as consumption stagnates then soon there will be nowhere for excess production to go....leading to a drop in price....etc.

I cant see this scenario happening (too much demand in China/India outstriping declines in OECD economies) but then again I got burnt badly last year when I also didn't see POO dropping all the way back to $40.

Any thoughts on the possibility of $20 oil in short term (i.e. 2009/2010) would be most welcome.

18th Jul '09

I've been reading a great deal on why asset allocation theory proved totally unable to cope with the recent financial crisis. I think it was because the driver of the chaos was leverage, i.e. people long assets and short cash. A further point in this is that things that were assumed to be cash, such as highly rated ABS, were not under closer inspection. It is the fact that these instruments were no longer within the broad M3 definition caused the deflationary (as in money supply) effect that the central bankers have been fighting against.

Anyway, I see the oil price collapse as a result of the overall panic, especially the mad scramble for cash, but also because there were some pretty large short positions put on futures markets.

However, we are now in a new stage of the crisis. The US and UK governments and central banks have sucked as much toxic assets as they can onto their balance sheets and have essentially subsumed as much of this risk into their own debts and currency as they can. There is now huge risk associated with government debt and currencies.

Where does oil fit into this?

I would go far as to say that oil is the one true store of economic value in the early 21st century global economy, even compare with gold, because it has a constant measure of economic utility. Therefore those countries with oil reserves do not need to exchange these for currency reserves, unless they absolutely have to. If they do, the Chinese will offer cash upfront for long term oil contracts, as a way to diversify their $2 trillion of foreign cash reserves, so no need to flood the markets with crude.

As regards the short term supply demand, I think the US is trying to put downward pressure on price. There is clearly a drop in demand in the US, but I think demand is far less elastic than people like to think. The huge risk for the US is that oil prices reflect than the global economy is growing far more strongly, thereby crimping demand for the "safe have" of Treasuries at a time when they still need to issue in excess of $1 trillion of bonds before the end of the year. To put this number in context, Japan Post is the world's biggest bank by deposits at c. $2 trillion, so this number is simply massive. Therefore, any concerns they can't sell this debt could be catastrophic.

I could ramble on, but I think anyone who sold oil at $40 a barrel will be sitting there saying, "never again."

I stick by what I said a few weeks ago, $60 - $80 range until end of August rising towards $100 before year end (won't breach until early next year), but I don't think we will ever see $40 again, never mind $20.

emptyend

9th Aug '10

I thought perhaps it was worth revisiting this old thread, just to log a passing thought that perhaps doesn't (yet) merit a thread of its own......

....a few days ago there was an ineffective terrorist attack on a Japanese tanker passing through the Straits of Hormuz. The press reaction to this was very muted - after all, it had merely been dented and slightly delayed......

.....but perhaps we should actually be considering the questions:

1) Why now?....and....

2) What if it had succeeded?

The US is plainly racheting up the pressure on Iran. Does Iran want to respond by closing the Straits - or procuring the closing of the Straits?

If an attack should succeed and sink a tanker in the Straits, what happens then? Here, I can refer you to a discussion that just took place on CNBC - in which the guest "oil specialist" suggested that oil prices would go to $200 in a heartbeat (not quite what he said.....he talked about the market "not waiting to parse" the information).

Now we've had that discussion before, in and around 2003.....and $200 ish was indeed a figure being tossed around at that point. So it perhaps doesn't seem unreasonable, especially when you consider that over 20% of the world supply of oil actually goes through the Straits!

So that leaves us with a question - does Iran intend to use the "Hormuz weapon" to counter American pressure?

I've no idea - but it is perhaps a question that we might all usefully tuck away and watch for developments?

Meantime, I notice that regional tensions are looming large in disparate press articles, such as in the FT, The National of Abu Dhabi and the Hindu .......and it might be that this security aspect to the oil market is underpinning the firm tone to prices?

extrader

Hi ee,

A timely observation ! I saw a recent throwaway line in Stockwatch Gumshoe (talking about an Israeli generics drugs manufacturer) alluding to Israeli political risk, "rising in view of Israel's recent deployment of 2 nuclear- cruise-missile capable diesel submarines (allegedly with US naval surface cover) into the Persian Gulf....".

Google certainly seems to suggest that there's a lot of not-so-playground posturing going on ATM !

Where's that man Hal ("Where are the aircraft carriers ?") when you need him ?

Mattybuoy

From what I read it was an "Al Qaeda linked group" who were thought to be behind the attack, not Iran.

I doubt that Iran would cut off its nose to spite its face unless things were really desperate i.e. an actual shooting war. However, the AQ boys have tried to cut of Saudi oil supply before by attacking the export terminal (the name of which escapes me). This would hurt not only the US but also the Saudi establishment, who they would dearly like to get rid of.

Hallucigenia

10th Aug '10

Ta to ee for the headsup.

Can't stop long, but the way I see it - as I quoted JPM (http://boards.fool.co.uk/Message.asp?mid=12005149&sort=whole) "While this highlights security concerns at the world’s most important oil supply choke point, the scale of the attack seems pretty low-brow."

I'd imagine that this lot are linked to Al Qaeda in the same way that Dave Cameron supports Aston Villa - they watch the odd match on TV, they're not season-ticket holders. A lot of amateurs brand themselves as Alkyada just to make themselves sound more impressive than they are. And this effort seems particularly feeble, but they will get better. There's a particular angle now that ~20% of UK gas is coming through Hormuz from Qatar.

Yes there's a lot of sabres being rattled at the moment, but I wouldn't get too hairy about the immediate situation - I'd be more worried about the general economic position in terms of POO, I can see us drifting back down to $65-70 for sure.

As for the carriers, I ought to do another update some time, but I think at the moment that they've only got the Truman and Eisenhower in the region, which is roughly what they've had for a while - one in support of Afghanistan and one to cover the Gulf/Somalia. So that doesn't point to any imminent action - in any case it's past the campaigning season in the Gulf, and the Yanks wouldn't do anything during Ramadan (although the Israelis are capable of anything). More interesting is the way the Washington has been tweaking the Chinese navy's nose off Korea.....

The other point is that there's a reasonable amount of product floating around at the moment (plus eg gas in storage that could be used by dual-fuelers), and in general there's a bit more slack in the system than there was a few years ago. Yes the market might go bonkers, short-term, but I'd be looking for no more than $150 than $200.

Hi H,

So that doesn't point to any imminent action - in any case it's past the campaigning season in the Gulf, and the Yanks wouldn't do anything during Ramadan (although the Israelis are capable of anything).

No - I can't see the US doing anything military either. The Israelis, OTOH, are a different matter entirely - and unpredictable! But I was more interested really in what Iran's response will be to a tightening of sanctions. I'm not sure what might happen - but getting rolled over by US-insired sanctions doesn't sound a likely first choice course of action......

Fangorn

At least we can rely on the Israelis when the going gets tough. I wouldn't be surprised if Iran is on the receiving end in the near future. Their continued aggressive posturing will, imv, end in tears.

macroeconomix

11th Aug '10

Speaking of aggressive posturing... seems Iran are manufacturing speedboats with big guns and torps:

http://www.telegraph.co.uk/news/worldnews/middleeast/iran/7938334/Iran-navy-produces-armed-copy-of-Bladerunner-51-speedboat.html

A senior commander said Iran would arm the copy vessel with missiles and torpedoes as it continues to build its military presence in the Strait of Hormuz.

Hi macroeconomix,

I'm not a fan of Jeremy Clarkson, but remember well his attempted 'test to destruction' of a basic Toyota LUV, pitting it metaphorically agst the West's finest......

For decades now, Iran has had fleets of basic, high speed fishing boats (30-40 kts.) for smuggling tobacco and other 'naughty but nice' stuff across the Gulf.

I remember seeing them moored up on Abu Musa (the jointly - Iran/Sharjah- controlled island in the middle of the Gulf, site of Crescent Petroleum's FSU), on a site visit in the 90's.

Having a few Bladerunner knock-offs may justify some extra Western 'spend', but there's a lot more 'bang for your buck' - esp. if you have suicide volunteers like the baseej - to be had elsewhere !

13th Aug '10

The Bladerunners are a sideshow, they're just an upgrade to the dozens of Boghammars used by Iran in the 1980s tanker war. They're quick by surface standards, but 30kt or 60kt makes little difference when you're trying to outrun planes or missiles. The real problem is the (lack of) payload they can carry - Boghammars had some 4" rockets, machine guns and RPGs which can make a lot of bangs but can't do much to actually hurt the average VLCC. Fill them with explosive and turn them into manned torpedoes, then maybe you can cause a problem, but the Ghadir minisubs are more of a threat in conventional military terms (ie non-suicide).

As for Iran's response - the big unknown is the extent to which sanctions hit the populace, and whether it's enough to prompt a proper revolution. I'm not sure that Hormuz is the obvious place for Iran to start kicking things off - much better to carry on playing the role of the CIA in supplying weapons to the mujahideen fighting a superpower in Afghanistan, and building up Hezbollah's capabilities. In conventional strategic terms they've got a big problem in losing Russian and Chinese support in the UN, and it's in their interests to do something about that, not least by not inflaming the Russians and Chinese any further, but I don't think they see it in those terms. We'll see.

However, if you read only one piece on Israel's attitudes, it should be this one : http://boards.fool.co.uk/Message.asp?mid=12008751&sort=whole - Jeffrey Goldberg in The Atlantic reckons that Israel will attack in Q1 in the absence of other events.

MrT

Good article, thanks. This topic deserves a thread of its own - perhaps we could dust off this one (http://www.stockopedia.com/content/events-in-iran-30132/) - but an attack on Iran by Israel would surely be a complete catastrophe. I get most of my Iranian news through the unusual filter of Oxford Girl's tweets (www.twitter.com/oxfordgirl) but her view seems to be that any attack would consolidate the population behind the regime like nothing else. I can see her point so it would surely be completely self-defeating?

Another question Israeli planners struggle with: how will they know if their attacks have actually destroyed a significant number of centrifuges and other hard-to-replace parts of the clandestine Iranian program?

Well, exactly. I just can't see how a military solution works in anything other than the very short-term. One has to hope that the Iranian population eventually overthrows the regime, otherwise the world will have to deal with a nucleurised Mahmoud Ahmadinejad whether it wants to or not.

Israel thinks that if they don't "fix" the short-term, then there won't be a medium term. Whether they are correct to think that is another matter, but that's what drives their strategy.

Their overriding priority is to stop Iran having nukes, and it's not that important whether they shore up Ahmadinejad or not - politicians are temporary, nuclear technology is permanent.

I think that Israel would have some justification in saying - certainly by the end of the year - that sanctions have been tried, and have not yet unseated Ahmadinejad, so where do you go next? Whoever is in Tehran you're not going to get a Sadat-Begin style reconciliation, at least not in this generation, so trying to influence Iranian politics may not get Israel where it wants to be.

Dealing with the mess that results, is another matter. But a world in which the GCC states align under Iran's nuclear umbrella ain't exactly great, either.

I have replied but switched threads as I felt this was straying quite far away from the original topic (although, if it happens, clearly this would be the most significant factor in the oil price of any I can imagine). Further thoughts here: http://www.stockopedia.com/content/events-in-iran-30132/?comment=12#12

What price is oil going to?

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Stocktaculous

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