How Long Will The Price of Oil Remain This Low?

Using the iPath Crude Oil Index ((OIL)) in this graph (click to enlarge), we wanted to highlight the spectacular fall in crude prices:

The question most people are asking is: How long will this last? Well, apparently, the technical specialists seem to think that there could be another 50% slide from current prices and more fundamental analysis also suggests a bit more down side, but not more than another 20%. However, the bottom line is that, as the worldwide economy worsens and governments fight to get countries back on track, OIL prices will suffer.

One of the key issues here is how OPEC will deal with the slow-down and if they will start to adapt supply but cutting production. This is a tricky balancing act as if they cut too much, once things start to get better the increased demand will probably lead to a jump in prices and with speculators jumping back in, we could see another prolonged spike.

On the other hand, if prices fall below 35 USD per barrel, something drastic might have to be done, as this seems to be an important P/L benchmark for the OIL industry (most planning is done at 50-55 USD levels - meaning a 40-50% gross margin).

Nevertheless, what is safe to say is that:

• Commodities always follow these kinds of cycles
• The world is far from being able to replace OIL will alternative energy in the short-term
• The world-wide economy will slowly recover and so will emerging market growth
• We feel it is extremely likely that OIL prices will move back to a minimum of 80 USD per barrel in the next 12 months.

As always, we welcome your comments!

Comments

[mangolfer:]

I'd estimate 24 months for oil to get back above $80, too much economic damage out there now and continuing for the near term...

2008 Dec 03 07:57 AM

[Ferdinand E...:]

Good comment, but I prefer not to believe 'technical specialists' in this matter. The important thing is, as mangolfer indicates, the situation with oil in the near future is a function of the "economic damage" that has been done, and eventually we could be facing some extremely bad news.

2008 Dec 03 09:08 AM

[Steven H.:]

All developed economies have had flat or declining petroleum consumption beginning in the 2004-2005 time frame. The transportation sector was also showing signs of topping out well before the recession. Japan's petroleum consumption has also fallen off a cliff. If you consider them to be early adopters of technology then you can forecast the ROW's position on the "S" curve and in turn forecast a gradual decrease in energy intensity coupled with actual declines in energy consumption ex-recession.

2008 Dec 03 10:42 AM

[Road Runner:]

My guess is $70/barrel in 1 year and $100/barrel in 2 years.

I'm in the camp that says that the massive amount of money being pumped into the world economy by world banks and governments will cause a sharp increase in economy output once there is a "feel" that the world economy is in recovery. Then, it will take off.

The velocity of money now is very low (corporations, especially banks, and individuals are hoarding money) countering the large money supply. Once recovery starts there will be the typical “I don’t want to get left behind” attitude that will cause a large increase in spending of that hoarded money.

2008 Dec 03 10:48 AM

[Alex Filonov:]

According to the latest data, oil companies (I know about Shell, at least) are contracting tankers to store oil. Iran is doing the same for at least 6 months. Which means that production cuts don't matter, there is an extra supply stored just in case price grows a little bit.
In short, I don't see $80 oil any time soon. Not before 2010.

2008 Dec 03 11:49 AM

[Engineer:]

It's interesting to observe the language being used in this debate. Check facts when you hear things like "demand destruction" and "falling off a cliff".

With respect to US demand destruction, petroleum product supplied is down 7% from Apr 18 08 to Nov 28 08. It appears to have bottomed in the second week of October 08 and has climbed back into the normal range since then (for now anyway). This is easily verified at the EIA's website:tonto.eia.doe.gov/dnav....

As for Japan, consumption was well down in August, but I don't quite see a Wile-E Coyote style trend going on here long-term. Consumption continues to hold steady at around 5m bpd. Check the graph on page 2 of this document, again put out by the EIA: www.eia.doe.gov/emeu/c....

To be sure, demand GROWTH will drop somewhat worldwide, but does this justify a 66% drop in value peak to date? I suppose only if the amount of debt used by speculators-gone-bust was on average 66%.

Another thing to keep in mind is that the world's major oilfields are declining at approximately 6% per year. See www.iea.org/textbase/p.... This is the natural progression of maturing oilfields. And with no exploration - doesn't pay at today's values - I can see trends reversing sooner rather than later.

Perhaps some of the oilcos are storing oil in tankers because they know an oil to $US trade right now could end up being a bum deal.

2008 Dec 03 02:04 PM

[jepittman:]

Nice post by Engineer. Good to see a post by an adult.

2008 Dec 03 04:33 PM

[Urbane Gori...:]

Great comments 'Engineer'..... Too much repeating of 'the word' these days. Of course, perception becomes reality. At least until reality becomes reality....

jegan

2008 Dec 03 04:40 PM

[User 312172:]

Since Bush administration gone and Obama investing in alternative energy , i dont see oil prices going 80 anytime before 2010.

2008 Dec 03 05:46 PM

[Nostradamus:]

Oil will rise in lockstep with inflation going forward now that we are at a reasonable price per barrel of oil. You will definitely see a leveling before you see a spike up.

2008 Dec 04 12:50 AM

[Steven H.:]

Engineer,

Your reference to Japan's oil consumption proves my point that Japan's petroleum consumption is in a long term decline. Consumption rose from 1980 to 1996 and has fallen from 1996 to 2007. See the following table:

Year Japan
1980 4,960.00
1981 4,848.00
1982 4,582.00
1983 4,395.02
1984 4,666.00
1985 4,436.00
1986 4,503.00
1987 4,567.00
1988 4,849.00
1989 5,058.00
1990 5,316.00
1991 5,392.00
1992 5,484.00
1993 5,403.00
1994 5,664.00
1995 5,699.84
1996 5,746.45
1997 5,711.22
1998 5,515.44
1999 5,631.50
2000 5,511.72
2001 5,415.13
2002 5,317.22
2003 5,427.62
2004 5,318.22
2005 5,324.21
2006 5,197.73
2007 5,006.66

This trend is real. The explanations could be shifting demographics, population growth, diffusion of efficiency innovations and market price. The current decline began in 1996 and has continued for 11 years. You can't argue with the data.

US consumption of petroleum for all uses rose at a total rate between 1978 and 2007 of just 10% and is continuing to slow. By way of comparison the rate of petroleum consumption growth between 1949 and 1977 was 220%. In 1978 annual US petroleum consumption was 6.9 billion barrels and by 2007 it was just 7.5 billion. There are steady downward trends on the slope of the growth curve across all developed economies for petroleum. Price has been a big determinent of slowing total petroleum consumption in the US from 2004 to 2007 which saw an actual decline from 7.6 billion barrels in 2004 to 7.5 billion barrels in 2007. Price is the major determinent in this present decline. On the other side of this recession you have to consider the diffusion of many innovations into the fleet and a complete fteet turnover in less than 20 years and what downward pressure this will place on quantity of petroleum consumed. Trends in place in Japan indicate that we will see a steady decline in total petroleum consumed in the US over the next decade.


Source: DOE/EIA Annual Energy Review and other data

2008 Dec 04 10:41 AM

[blu:]

We experienced $145+ oil due to the fact that the markets were seeing peak oil as fact. Peak oil has not evaporated. Huge swings in the price of crude is a symptom of peak oil. The next high to be reached by oil will exceed the $145. Higher highs and higher lows will be forthcoming in an almost routine manner. Speculators will abound in such an oil market, thus magnifying price moves.

Demand growth may be slowed for a while, but world-wide demand will again exceed supply in the near future. The reduction in capital expenditures by oil producers will add to the shortfalls in the long term, thus causing the higher highs.

Oil is not a bad place to be at the present, if you are a patient investor.

2008 Dec 04 11:22 AM

[JasonC:]

Oil prices will get back to 80 sometimes, in the next 12 --- years. Not months. In the short run, oil gets crushed, no relief, relentless, no rebound, no saviors. The spike price crushed demand for 5-7 years. The other side of stickiness on the way up is catastrophic adjustment when people finally can and do change their lives around high oil prices. Oil is going to $30 and maybe below, and the industry will be lucky if it stablizes around 40 a year from now, instead of around 25. Forget about numbers like 80 for a decade, they are gone.

2008 Dec 04 04:26 PM

[smurphny:]

As "engineer" above has noticed, the % fall in crude prices is way out of line with decreases in consumption. The run-up in price was manipulated to unrealistic levels by people who have nothing to do with crude oil and could not possibly take delivery or use it. Regulation is needed to remove the gamblers out of this essential commodity. This is not coffee or pork bellies, it's a national necessity that should have a different set of rules to trade it. In any case, now that all useful parameters and fundamental valuations have been trashed, oil will probably swing down to equally ridiculous levels. On my inflation adjusted long-term chart, if you take out the 2 major spikes and just draw an average line, it looks like oil should probably be trading around $35/brl. If you figure in general inflation using the 10X rule, it looks like oil should be around $40. I think companies like Exxon keep oil on their books at $45 or so. These numbers are probably somewhere around what a "fair" price should be and probably where it will finally settle. Let's hope there is some sort of sensible regulation put in place to take Vegas out of oil markets so this does not happen again. There ARE places for government, this is one of them.

2008 Dec 04 06:02 PM

[applejak:]

what I would like to say is this. It seems that all of you want oil prices to go up again. I am very angry at the prospect of oil prices returning to those ridiculous prices. I think that the high cost of oil contributed greatly to the downturn in the economy and am really perplexed as to why nothing is being done to bring in alternative fuels. Why are we still driving automobiles that rely so heavily on oil if there is going to be a shortage of oil. Are people that greedy and callous to not care about the affect on the middle class as well as the poor. This is what I think is going to happen, oil prices go up in the midst of the recession. throwing us even deeper into a recession, the cost of food will go up as well as all other things, prices will inflate and money will eventually become worthless. Then what will those big oil and automobiles companies. Throw themselves off a tall building when they start to lose their fortunes made at others expense.



On Dec 03 02:04 PM Engineer wrote:
`

> It's interesting to observe the language being used in this debate.
> Check facts when you hear things like "demand destruction" and "falling
> off a cliff".
>
> With respect to US demand destruction, petroleum product supplied
> is down 7% from Apr 18 08 to Nov 28 08. It appears to have bottomed
> in the second week of October 08 and has climbed back into the normal
> range since then (for now anyway). This is easily verified at the
> EIA's website:tonto.eia.doe.gov/dnav....
>
>
> As for Japan, consumption was well down in August, but I don't quite
> see a Wile-E Coyote style trend going on here long-term. Consumption
> continues to hold steady at around 5m bpd. Check the graph on page
> 2 of this document, again put out by the EIA: www.eia.doe.gov/emeu/c....
>
>
> To be sure, demand GROWTH will drop somewhat worldwide, but does
> this justify a 66% drop in value peak to date? I suppose only if
> the amount of debt used by speculators-gone-bust was on average 66%.
>
>
> Another thing to keep in mind is that the world's major oilfields
> are declining at approximately 6% per year. See www.iea.org/textbase/p....
> This is the natural progression of maturing oilfields. And with no
> exploration - doesn't pay at today's values - I can see trends reversing
> sooner rather than later.
>
> Perhaps some of the oilcos are storing oil in tankers because they
> know an oil to $US trade right now could end up being a bum deal.
>

2008 Dec 04 08:43 PM

[MR CC:]

Just an opinion. Oil pries will go down to the $30 range for a brief period, slowly rise to $60 stabilize for a while and again rise to $80-90 before December next year. There will be a bit of a roller coaster ride involved in that time period. The price of oil will continue to rise in 2010. The price will again stabilize to the $100-110 dollar range then creep up $10 a month until the $140-150 range then again stabilize until 2011. I suspect the sky is the limit after that possibly over the $200 range. Foreign economies will stabilize much faster then the US economy and resume massive growth. The US economy will be left in the dust for a few years and may never fully recover. US demand will not mean much to the overall price of oil. The past is the past, this is new ground and we have serious competition. Enjoy the cheap gas while you can.

2008 Dec 05 06:52 PM

[Trucking In...:]

Sorry to be the bearer of bad news to you, but the transportation industry is taking such a huge hit due to the economic breakdown right now, that trucks are just sitting everywhere. This being said untill the transportation industry picks back up to at least 75% of where it was this time last year we will not see the price per barrel increase. Incase any of you are interisted, If the trucks are not moving, they are not buying the fuel, and there is no demand. Reason for this, People are scared of a depression and they are not buying at the stores, End result is, nearly 50% less from this time last year is being shipped over the road.

Thank you,
The Trucking Industry.


On Dec 03 07:57 AM mangolfer wrote:

> I'd estimate 24 months for oil to get back above $80, too much economic
> damage out there now and continuing for the near term...

2008 Dec 06 01:36 AM

[Trucking In...:]

Everyone I know is buying up gas so fast, that honestly I don't think there are any empty tankers around. And by the way, a tanker is the Semi that delivers the fuel to the gas station...


On Dec 04 08:43 PM applejak wrote:

> Perhaps some of the oilcos are storing oil in tankers because they
> know an oil to $US trade right now could end up being a bum deal.

2008 Dec 06 01:44 AM

[Trucking In...:]

Oh, Hey, Last week I went through a little town in Wyoming and gas was $1.17 a gallon, and then went through 2 days later and it was $1.02 a gallon. The National report for cheapest gas in the US did not have this listed, but I have a datedphoto on my cell phone :)

The Trucking Industry.

2008 Dec 06 01:50 AM

[Crude(Oil)Dude:]

My aren't we all just jerking madly on the head of a pin. I enjoy seeing the doom sayers of oil price going up and the tired masses craving to fill their tanks for less than 60.00 a time.

While I assume no position in the arguement, I will point out a couple of things.

1. Oil prices eventually have no where to go but up.

2. If oil price had not crashed we would be seeing a further developing world depression.

Numerically, I find it interesting that when gas was 147 per barrel we, as a nation were paying on an average 4 dollars per gallon. Base cost from 147 would be roughly less than 3 dollars per gallon. 1 dollar for processing and such. Now at 47 (last week cost) we pay 1.60-1.70 per gallon. Real roughly mathematics an extra .60-.70 for processing of the product.

So I guess my question would be to all is why the overhead cost added to the fuel changes as the price of fuel changes. I know this doesn't take into account variances in state taxes on the gasoline, This is primarily why you see such drastic differences in cost of gas from state to state. The state taxation rate on each gallon of gas varies greatly from state to state.

Endpoint.... The gas companies are going to get their money... they saudi, central americans and all who provide the oil are going to get their money. Our government will get its money.

There are too many hands in the barrel to say that oil prices will stay down. The reason its allowed to stay down at this point is to ward off the worldwide depression.

2008 Dec 06 03:26 AM

[User 318059:]

Gas is $1.48 (12/12/08) where im from in florida just 3 months ago (9/12/08) it was $3.90 !!!!
It took $47 to fill up my saturn , it now takes only $17 to fill it up !!!

4 Cyl's. FTW : )

I think im gonna buy a barrel or two and fill them to capacity and keep em in my shed haha , i love this !!!!

2008 Dec 12 06:34 AM