$25 Oil Could Happen Before a Return to $100 56 comments
- Visit IndexUniverse.com
-
- DataAll US Listed ETFs, Sortable 42 Data Points
- ETF WatchAll ETFs under registration
- Breaking News
- Research
- Features
- Subscribe to RSS feed
- More articles
-
Font Size:
-
Print
- TweetThis
By Matthew Hougan
Jim Wiandt says that oil will go to $100/barrel before it hits $25/barrel. I'm not so sure.
The reason I'm confident that the Dow Jones industrial average will top 10,000 before it hits 6,000 is that stocks are a leading indicator. They anticipate recoveries, typically turning upward 6-9 months before the economy as a whole. We are already one year into the recession, so I'm guessing we are getting close to the point where stocks will turn the corner. When you add in the fact that valuations and yields are the most attractive I've seen in my adult investing life, the outlook for equities is quite good.
Oil, on the other hand, reflects mostly immediate, near-term supply and demand. If the economy gets worse before it gets better, stocks might see the light at the end of the tunnel, but oil won't. It can't. Prices will keep falling as demand deteriorates in real time and the current supply glut gets worse.
Remember, oil is expensive to store. For the most part, it won't just sit around waiting to be used if there is a lack of demand. (Some can be stored, but not that much). It must be sold and used at whatever the current clearing price is.
And we have yet to see the magnitude of supply cutbacks in the oil market that we've seen in aluminum, copper and other commodities. The world is continuing to pump out millions and millions of barrels of oil.
Here are a few facts to consider:
- Oil has averaged a nominal price above $50/barrel in just three years in the history of the world: 2005 ($50.04/barrel), 2006 ($58.30/barrel) and 2007 ($64.20/barrel).
- On an inflation-adjusted basis, oil has averaged an annual price above $50/barrel for just 12 of the 62 years of the post-war era.
- The average inflation-adjusted price of oil in the post-war era is $33.65/barrel.
- Oil traded below $25/barrel as recently as 2002.
As the saying goes, "This time it's different" are the four most-expensive words in investing. So why not $25/barrel oil?
I was amazed during the recent oil price retreat how quick people were to say that $100/barrel was the "right" price for oil. $100/barrel is off the charts historically, and completely neglects both the supply and demand impacts that high oil prices have.
To put it another way, stock prices are now trading where they were in 1997. What's to say oil shouldn't be trading where it was in 2002?
The truth is, I have no idea where oil prices are headed. But I don't think it's a gimme that they're going back to $100/barrel. In fact, if you gave me 2-1 odds, I'd bet they hit $25/barrel first.
P.S.: One more thought about oil. Even if you strongly disagree with me and think crude oil is a screaming buy, please be careful before you buy a crude oil futures ETF like the US Oil Fund (NYSEArca: USO). Oil is in a violent contango. A fund like USO faces a 3% monthly headwind from contango right now, meaning oil prices must rise about 3% each month just to offset the losses from rolling contracts forward. Until that situation is reversed, investing in crude oil futures could be challenging... even if I'm wrong about crude oil prices.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
TraderMark
-
2
Don Dion
-
3
Cliff Wachtel
-
4
Mike Havrilla
-
5
James Quinn
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 56 comments:
At the same time everyone I read and hear say it is impossible to know the future of the price of oil. There are just too many variables. Then Isn't it highly irresponsible to throw out such "crying fire in a crowded theatre" pronouncements?
My question is, do you think we learned our lesson this time?
I keep reading to find reasons to change my mind, but it only gets more and more re-inforced.
I just hope everyone saves what they have left, and prepares for the worst while hoping for the best.
And, yes, oil like all commodities are going to be on the mat for some time.
> jack
On the other hand, Americans have an infinite capacity to forget and ignore the historical lessons that were recently learned as evidenced by the move to the monster SUV in the late 80's and 90's. Remember, we had an OPEC induced energy shortage in the early 80's. Time to get off the fossil fuel and move to something sustainable.
I'll take your 2-to-1 wager. At $25 a barrel, all of the unconventional, most of the US onshore, and half of the Gulf Coast gets shut in. Equilibrium is ~$50 on reduced demand in China.
Offset somewhat by the fact that it now costs only half as much to fill up gas tanks.
Industrial demand for energy is clearly down and will stay down ...
I'm too stupid to figure out the details on that stuff
BUT as Alan points out...
As the price of oil slides the marginal (highest cost) producers have to shut down in the longer term ... yes???
If the cost to produce a barrel of oil from the tar sands is $70 why would I go to the trouble to produce and sell only to loose $20/bbl. Indeed I have some fixed overhead I would like to support etc.. but do I not continue to do what is already being done... stop CapEx for expansion and hunker down
How much SUPPLY gets extinguished incrementally as the price of oil drops and producers throw in the towel and go home?
Further... since it is much easier to take production OFF-line than it is to put it back ON-line ... will we not wake up some day after a cold snap wishing for more oil only to find that it will take producers 3 months to bring some extra production back on line?
My head hurts as bad as my commodity-over-weight portfolio....
Concentrated solar power by use of mirrors and thermal storage (needed for baseload power) is a very real solution once oil prices do rebound to that point where it would be cheaper to mass produce all them mirrors.
With that, there would be no more having to import oil and millions of local jobs (no more global warming either)!
It seems that the oil companies know this. We can't let the other side of the world become our energy producers by becoming our own solar energy producers! (They have the money to... right?)
Oil has been stored in the earth for millions of years. And that's where it can remain stored until needed. Think about it.
Pressed by necessity (the mother of invention) at last this year we witnessed intense efforts to cut back this dependency from oil with new investments in electrical cars, renewable energies and a globally sustainable new economy.
But already the electric cars makers suffer more than the big 3. In England, only 249 electric cars were sold this year, a pity.
The peak oil is already behind, thus, sooner or later, oil price will reach $200. As for me I would have hoped a barrel at $200 right now, to FORCE Obama's plan to have America energetically independent by 2020. But with a barrel at $25 where is the incentive in doing so?
Fire burn, and cauldron bubble.
1) How much oil supply do the major producers have in reserve?
2) What will the effect of China and perhaps India be?
The first factor is unknowable. Estimated oil reserves are practially state secrets. Furthermore, oil producing nations routinely come online and go offline due to politics and wars. Examples: Iraq, Nigeria, Sudan, and Libya. Iran's underinvestment in oil production can also be seen as a consequence of politics. In summary, short term supply is so complex, we will never figure it out. We know a shortage-driven permanent price spike will occur someday within our lifetimes, but we cannot know when with any accuracy.
The second factor can be estimated through research. How many cars were sold in China last year? What is average annual fuel consumption in those countries? Is mass transit being expanded fast enough to take up the slack?
Full Report on:
www.oiltradersblog.blo...
Is a massive short covering rally just around the corner?
what a joke. Oil is stored in reservoirs for billions of years, at no cost at all.
Even with demand standing still, reservoir decline will lead to a day of reckoning. It is too easy to dismiss $140 oil as "only a bubble". The most ominous feature of the oil markets, until demand started to fall off, was how tight it was--notably, the Saudis didn't have the reserve "swing" capacity to counter tight supply. That is how this differs from the 1970s.
The above writers are correct--the collapse towards $25 oil will only sow the seeds of a tremendously tight and expensive oil market moving forward. It will take a dedicated effort (in terms of $$ and time) to bring new sources of oil on line. Instead, we are going to have a wax-on, wax-off approach, driven reactively rather than strategically, because--despite the surge in oil revenues in the past years-- a lot of oil companies have a lot of debt on their balance sheets they need to service. Look at CHK---almost went under.
The way I see it.. Yes, the DOW could cross 10,000 before going down to 4,000 or lower, but I smell a BEAR TRAP and I won't go long in non-PM equties in today's market, no matter how tempting. I seriously doubt 10k will be crossed again because there's far less liquidity that investors are working with to get the market there. What I see:
1) The economy contracting short-to-mid term into a severe recession or mini-depression:
Why is oil down? Why is gold/silver being hammered? Why are all commodities being depressed? Liquidity being driven into the system by the Fed is part of it, hedge fund selling that has driven demand for dollars is another. The former can continue into oblivion, the latter will cease in a few weeks or months at the most. If there was a means I could hedge fuel prices the way the airlines do, I'd do it right now before India and Pakistan go back into their nuclear-tipped boxing ring, but picking the exact bottom, spare near-term geopolitical events, will prove difficult even now. I can virtually guarantee that precious metals and commodities will rebound when the dollar demand has finally topped and oil bottoms, likely at the same time. For now, I don't see this happening.. Sorry, but even this silver bug will have to hold tight a while longer. It's simply NOT time yet for all this to shine, yet they will. Just before that point, the short-covering you expect will commence. There remains manipulation in gold and silver, but those days are becoming numbered as long as more longs continue to demand delivery of physical on their COMEX contracts. I agree with Jim & Dan that its GAME OVER for the mega-shorts once enough metal has been taken from the warehouse. Besides, the demand and disconnect between paper/physical price is gradually accelerating. With fewer mines operating today, expect a crecendo to come!
2) quickly becoming severe hyperinflation, requiring more "Helicopter Drops" from Ben, Hank & The Gang until they wisen up and raise the interest rates to where others, especially the Chinese, are quite willing to invest in the risk again:
They did in the early 80s and eagerly look forward to 16%+ interest rates. That WILL eventually happen. Washington will do idiotic things between now and that point in time. Investors who lock on to these actions can make plenty of $$, yet caution is advised and I wouldn't "bet the ranch" except on a combination of physical gold/silver and quality gold/silver equities. Is it possible the dollar will be revalued or even ditched for an NAU Amero currency? This has been brought up by a number of concerns and something which I won't rule out could happen, especially if the hole gets dug deep enough. At any rate, some cash is always prudent for emergencies and taxes, but as in all investing, 'don't keep too much' is the key!
What's to stop the producers from cutting production?
Like most other players, they overcomitted in the good times and they very much need the oil revenue. They have (relatively) big and (relatively fast) growing populations and much govt spending to keep the people content. They think if they cut production they'll gross less than if they keep production high.
On Dec 05 07:56 AM DavidYou wrote:
> I hope oil goes to $25, even though I am invested in USO fund. But
> there is not an unlimited supply of oil and what is to stop the oil
> producers to cut production?
The desire to manipulate the commodity prices to collapse their options values is where the demand is. The arguments that are being used to collapse these prices are cooked up to justify these actions.
On Dec 06 03:35 AM devich wrote:
> They have (relatively) big
> and (relatively fast) growing populations and much govt spending
> to keep the people content. They think if they cut production they'll
> gross less than if they keep production high.
>
On Dec 06 02:28 AM Konsta wrote:
> everyone, help GM by going out and buying a Hummer
On Dec 05 09:39 AM therealjg wrote:
> If oil goes back to $100/bbl, we WILL be giving a lot more of our
> wealth to "these dirtbags"
All this bailout money would have been better spent on energy independence other than letting banks fatten up their balance sheet or hand out funds to buy up competitors. Remind me again, what was the purpose of TARP?
When the tide turns and oil gets expensive again, we will find out that we squandered the funds needed for what really had to be done.
>I think are economy has turned to an "unpresidented" situation.
You may have meant "unprecedented'. But if you alluded to the negligibly thin resume of our new president elect, that we trust this crisis to resolve, I will book it as funny.
As they say, hope is not part of the equation.
China and India will recover from America's recession very quickly. Consider adding a billion new motor vehicles to the demand side in the next few years...
Could oil hit $25 soon? Absolutely, and I vote for likely and soon. Will it stay there? Inconceivable. It will be three digits "guaranteed" in a year or two. Think about the inflation caused of how many trillions of $ (and pounds and yen and euros and...) that have been dumped in the economy, and how many more there will be.
I'm not going to argue with you (or anyone else) about the future price of oil because no one can predict price movements with any certainty. However, your discussion of the USO "contango headwind" is wholly incorrect. The USO fund does not buy the same amount of futures contracts every time it rolls. It adjusts the amount of futures so that the fund comes out dollar neutral. For example, let's say the fund owns 10 contracts of Jan and Jan is $50. This would mean the fund has $500k in assets (50k per contract x 10 contracts). So when the fund goes to roll into feb, and let's say feb is $55, they will only buy 9.09 contracts. (500k / $55). The fund does not take take a 10% haircut. Similarly, the fund would not generate extra returns if the curve were in backwardation. Please amend your post-script.
Oil is a "fossil" fuel. It takes millions of years for oil to form.
Oil is a "finite" and "limited" resource.
After we use all the oil on the planet now, it will take millions of years for more to form. Water evaporates and goes up, and comes back down as rain. Oil goes up as smoke and fumes and doesn't come back down. Did you ever see it raining oil? Water comes right back, After we use the finite and limited oil that's here now, it will take millions of years to replenish itself.
A double-edged-sword, the population is increasing and using more oil and at the same time the finite non-replenishing shrinking supply of oil is dissapearing.
I'LL TELL YOU "EXACTLY" WHERE THE PRICE OF OIL IS GOING-
As the non-replenishing supply gets less and less, the price will go ever higher and higher. Gasoline will go to 5$ a gallon, then 10$,15$-20$ a gallon. When it's somewhere around 20$ a gallon- we run out of oil on the planet!!! The ONLY way to stop this is to stop OVERPOPULATION!!! That's the BIGGEST problem we face as a species bar none. If we don't stop OVERPOPULATION, we will USE UP "ALL" OUR RESOURCES AND POLLUTE THE "WHOLE" PLANET AT THE SAME TIME!.......... AND WE'RE "ALL" TO BLAME! WE GET WHAT WE DESERVE! If you're able to grab on to and comprehend the above, please pass this information on to other people!
On Dec 07 02:57 AM Smoothest wrote:
> Not very many people realize the following.
> Oil is a "fossil" fuel. It takes millions of years for oil to form.
>
> Oil is a "finite" and "limited" resource.
> After we use all the oil on the planet now, it will take millions
> of years for more to form. Water evaporates and goes up, and comes
> back down as rain. Oil goes up as smoke and fumes and doesn't come
> back down. Did you ever see it raining oil? Water comes right back,
> After we use the finite and limited oil that's here now, it will
> take millions of years to replenish itself.
> A double-edged-sword, the population is increasing and using more
> oil and at the same time the finite non-replenishing shrinking supply
> of oil is dissapearing.
> I'LL TELL YOU "EXACTLY" WHERE THE PRICE OF OIL IS GOING-
> As the non-replenishing supply gets less and less, the price will
> go ever higher and higher. Gasoline will go to 5$ a gallon, then
> 10$,15$-20$ a gallon. When it's somewhere around 20$ a gallon- we
> run out of oil on the planet!!! The ONLY way to stop this is to
> stop OVERPOPULATION!!! That's the BIGGEST problem we face as a species
> bar none. If we don't stop OVERPOPULATION, we will USE UP "ALL" OUR
> RESOURCES AND POLLUTE THE "WHOLE" PLANET AT THE SAME TIME!..........
> AND WE'RE "ALL" TO BLAME! WE GET WHAT WE DESERVE! If you're able
> to grab on to and comprehend the above, please pass this information
> on to other people!
It is inevitable that when the ecomony recovers, India and China and others will push oil back up over $100, eventually to over $200. Simple supply demand reasons.
This sounds just as stupid.
looking at November data. It is one the highest amounts ever.
tonto.eia.doe.gov/dnav...
On Dec 05 09:36 AM fatpitch2 wrote:
> I keep trying to figure out how much of the demand is discretionary
> and will be extinguished by consumers turning down thermostats and
> etc...
The only question worth asking is, what is a fair price for oil? The fad of the moment is demand destruction... when will we begin talking about supply destruction, as a result of falling capital investment, abandoned oil fields, and nationals like PDVSA being cannibalized by their respective regimes? A year ago it was inevitable that clean energy was on its way in, and even now there is a certainty in the air that an Obama administration will usher in a new paradigm. But does anyone really believe that in the current investment environment, the luxury that is clean tech will escape the downturn, much less merit further investment?
jimrogers-investments....
As for me, im in long now i id like to see a rebound near 40$ to max 60$. And then its all about OPEC decision on 17th december - if we will see 1.5-2mbpd cut we can meet some bottoming process.
Then when a group of them are right, they will stand up and take credit for making an accurate "prediction" and pronounce the entire field of economics a wonderful success!
Talebs Black Swan tells us why we should listen to economists less from a more utilitarian view point, John Ralston Saul tells us why we should ignore them from a moral and ideological stand point, that they have in fact become a swollen ideology of pseudo-religion.
We are not short on economic theory, just on practical, moral common sense action by political power holders.
Reject the rationalistic arguments of our corporatist structure and look towards creating an equitable society based on humanistic concerns.
I have had enough of economics.
https://fp.auburn.edu/...
Dr. Madjd-Sadjadi has been an unwaivering critic of the oil boom and had this to say in December 2007 when oil was at $100/barrel:
"12/14/07 Message from Dr. Zagros Madjd-Sadjadi:
I thought you might like to see a Wall Street Journal article on the price of Oil (hey, they might be the only ones who agree with me right now, but I really think that we have a speculative bubble right now). I recently was speaking to an audience about speculative bubbles and the discussion turned to our bet on oil. I told them that the longer the current oil bubble lasts, the more likely it will burst and fall and then we will see the inevitable OVERCORRECTION (hopefully bursting in about 18-24 months from my own financial perspective--LOL), which based on past falls will probably take oil down to $20-$30/barrel."
Gee, the only thing he got wrong was that it burst even faster...