Posts tagged “Oil Prices”
In January of this year, as I do every year, I made several energy predictions for the upcoming year. (See My 2016 Energy Predictions). Now that half the year is in the books, I thought it might be a good idea to check in and see how these predictions are tracking.
As a reminder, I strive to make predictions that are specific, measurable, and preferably actionable. If forecasts are broad and vague, one can almost always declare victory. I would also remind readers that my predictions are based on what I believe will happen, which isn’t the same thing as predicting what I want to happen. My desire for a particular outcome has absolutely no bearing on a prediction. I am simply trying to accurately gauge the most likely outcome.
Here are the predictions, along with an update through the first half of the year. CONTINUE»
A few days after Christmas I appeared on CNBC Asia’s Squawk Box to discuss the volatility in the oil market. Bernie Lo asked a question about OPEC’s strategy, and I characterized their decision to defend market share as “a big, costly mistake” that had already cost the group over $500 billion in 2015 and would likely cost them that much again in 2016.
I followed that appearance up with an article for Forbes called OPEC’s Trillion-Dollar Miscalculation (which went viral and received more than 100 times the traffic of their typical energy article). In that article I detailed the numbers behind my assertion.
Two weeks later, Continental Resources CEO and shale drilling pioneer Harold Hamm went on CNBC and reiterated my argument. He called OPEC’s strategy “a monumental mistake for them, I might add, a trillion-dollar mistake.” While there were a number of responses to Hamm’s comments that displayed varying degrees of schadenfreude over the huge decline in his net worth, I didn’t see much acknowledgement that the point is correct. So let’s review. CONTINUE»
When I made my annual energy predictions a year ago, I noted that I foresaw a “lot of uncertainty in the energy markets” and indicated that “the direction on several fronts is unclear.” That certainly proved to be the case as numerous pundits – including me – missed on oil price predictions.
Unfortunately, the market uncertainty is carrying over into 2016. This has implications for several predictions so, as I cautioned last year, it will be a challenge to repeat 2014′s record. But as always, the context is more important than the prediction itself, because context allows one to adjust one’s own views as events play out during the year. I may predict an oil price, but I also try to provide context as to what could go wrong with a prediction, so that readers can adjust their own expectations as the year unfolds.
As a reminder, I strive to make predictions that are specific, measurable, and preferably actionable. If forecasts are broad and vague, one can almost always declare victory. CONTINUE»
Why Make Predictions?
While there are actually other stories unfolding in the world of energy, you would never know that by my inbox. Most of the correspondence I have received in the past week is still related to oil prices, particularly following the recent huge rally in crude futures. A few readers also wanted to make sure that I noticed that one of my 2015 predictions had fallen last week. I will address that in today’s column.
For background, each year in January I make predictions for the upcoming year, and I provide the context for those predictions. (See My 2015 Energy Predictions). I have been doing this for several years, and at the end of each year I grade my predictions. As I have stated on many occasions, context around a prediction can be more important than the prediction itself. When I grade the predictions, I will talk about the context when I made each prediction, and the reasons the predictions turned out to be right or wrong.
But one reader asked why I would even attempt to make predictions given such uncertain conditions. I make predictions to set up a narrative that describes what I see unfolding in the energy sector, incorporating as much data as I can into making each prediction. While this is not an investment column, I am aware that some readers use it for investment advice. So without overtly recommending investments, I generally try to make predictions that are actionable. I will give 2 examples of that today, one of which is the prediction that failed last week. CONTINUE»
As the price of West Texas Intermediate (WTI) retests the $40 per barrel (bbl) mark, some pundits are again calling for WTI to fall to $15 or $20/bbl. The same thing happened earlier in the year when crude prices tested $40. Lots of people predicted $20, the price went to $60, and the $20 crowd went quiet for a while. Well, they are back:
“There is no evidence whatsoever to suggest we have bottomed. You could have $15 or $20 oil — easily,” influential money manager David Kotok told CNNMoney. “I’m an old goat. I remember when oil was $3 a barrel,” said Kotok, whose clients include former New Jersey Governor Thomas Kean.
Yes, and you could get a candy bar and soda for a nickel. But I will bet him $10,000 we don’t see WTI at $15/bbl unless he has access to a time machine. Today I want to address this argument. I got into a debate on this topic with a person yesterday, and I am seeing enough of these predictions that I thought it warranted addressing. Again. The $20/bbl argument goes something like this: Crude oil inventories are extremely high. U.S. oil production keeps rising. Demand is falling. Something has to give. CONTINUE»
I have been pretty adamant — some may say stubbornly so — about my expectations for crude prices this year. I have argued against the notion that oil prices were going to fall to $20 or $30/bbl for several reasons. In a nutshell, those reasons are:
- This is well below the marginal cost of shale oil production, and you can expect shale oil supplies to begin contracting in response to falling prices
- Growing crude oil inventories will peak soon for seasonal reasons
- Lower oil prices will spur demand
I have made this argument a number of places, including in a recent Wall Street Journal article. Noted oil analyst Philip Verleger made a comment following that article that those calling for collapsing prices are correct, and he patted himself on the back with the comment “A few of us who make a living in the field did (call the price collapse correct)” while arguing that those writing for the Wall Street Journal don’t “seem to understand what is going on” and are “in the dark ages.” Them’s fighting words! CONTINUE»
When I made my energy predictions for 2015, I made some very aggressive predictions. Perhaps the most aggressive was that the closing price of West Texas Intermediate would not fall below $40/barrel (bbl) in 2015. Why do I consider this a particularly aggressive prediction? Because on the day I made it, the price of WTI closed at $48.80, but in each of the previous three months the price of WTI had dropped at least $10/bbl over the course of the month. So if WTI had maintained the same downward trajectory, it could have easily ended January below $40/bbl. My prediction could have been proven wrong before we even got out of January, so I really stuck my neck out on that one.
It’s not that there is anything special about $40, and I acknowledge that it’s possible that we could overshoot. But I made the prediction to highlight my conviction that $40 oil simply isn’t a sustainable price in today’s world.
A number of respected pundits are projecting that we will go below $40/bbl, with some suggesting that crude could even crash all the way to $30/bbl. Last week on CNBC, respected oil analyst Stephen Schork said “I do think this is a dead cat bounce”, elaborating that at least over the next 2 to 3 months that there is too much oil supply relative to current demand. My point is that it has been a widely held belief that oil is going to fall below $40/bbl, so I am definitely on the wrong side of conventional wisdom on this prediction. That’s not a safe place to be, because when you are wrong in that case people think “Everyone read this correctly except for you.”
But I think conventional wisdom is wrong in this case. CONTINUE»
In the past few weeks I have received numerous questions about the role of a “drop in demand” in the oil price decline. These questions are driven by many stories in the media that have referenced a drop in demand.
There are two primary reasons given for this so-called demand drop. One is that years of high oil prices have resulted in reductions in consumption through conservation and improvements in vehicle fleet efficiency. The second reason is due to the strengthening dollar, oil has become more expensive for many countries since oil is generally traded in dollars.
There are elements of truth behind both reasons. There has indeed been reduced oil consumption in recent years in most developed regions of the world. It is also true that the dollar has strengthened against many currencies. But despite the rationale that explains this drop in oil consumption, ultimately the data must support the narrative. CONTINUE»
Saudi Arabia’s decision not to cut oil production, despite crashing prices, marks the beginning of an incredibly important change. There are near-term and obvious implications for oil markets and global economies. More important is the acknowledgement, demonstrated by the action of world’s most important oil producer, of the beginning of the end of the most prosperous period in human history – the age of oil.
In 2000, Sheikh Yamani, former oil minister of Saudi Arabia, gave an interview in which he said:
“Thirty years from now there will be a huge amount of oil – and no buyers. Oil will be left in the ground. The Stone Age came to an end, not because we had a lack of stones, and the oil age will come to an end not because we have a lack of oil.”
Fourteen years later, while Americans were eating or sleeping off their Thanksgiving meals, the twelve members of the Organization of Oil Producing Countries (OPEC) failed to reach an agreement to cut production below the 30 million barrel per day target that was set in 2011. This followed strenuous lobbying efforts by some of largest oil producing non-OPEC nations in the weeks leading up to the meeting. This group even went so far as to make the highly unusual offer of agreeing to their own production cuts.
The ramifications of this decision across the globe, not just in energy markets, but politically, are already having consequences for the global landscape. Lost in the effort to understand the vast implications is an even more important signal sent by Saudi Arabia, the owner of more than 16% of the world’s proved oil reserves, about its view of the future of fossil fuels.
In the previous article, I graded the 2013 predictions that I made a year ago. I scored well on the direction of oil and gas prices, the shrinking Brent-West Texas Intermediate (WTI) differential, and continued growth in US oil production (although it grew even faster than I expected). My only complete miss was that I expected approval for the northern leg of the Keystone XL pipeline. (The southern leg, incidentally, is scheduled to begin shipping oil this week from the major crude oil storage hub at Cushing, Oklahoma to the Gulf Coast near Houston).
Today I offer up my predictions, and the reasoning behind them, for what I think will transpire in 2014. One thing I have learned in making predictions is that they must be specific, and not subject to interpretation at the end of the year.
“The US oil industry will continue to thrive” is much too vague. “The price of crude will rise” is also too vague, because perhaps crude rises for part of the year, or perhaps some crudes rise and some don’t. On the other hand, “The average price of Brent crude will be higher in 2014 than in 2013” is specific and measurable. CONTINUE»