$20 Oil by Year's End?

In the world of price forecasting you can be reasonably sure that the consensus view will be incorrect. Everyone looks at the same data to derive their forecasts and they come to similar conclusions. In the forecasting business, it is the unknowns that matter most.

Another consideration in the forecasting business is that the closer your prediction is to the mean of other forecasters, the less media attention it will get. The people like their daily does of freaks, geeks and outliers.

The Globe and Mail reports that University of Calgary professor Philip Verleger is predicting $20 oil by the end of the year.

This isn’t complicated – we are running out of storage space and the economic situation is not getting any better, by winter we’ll have this stuff coming out of our ears.

Verleger says supply is outpacing demand by about two million barrels a day.

Speculators have been filling up storage tanks in hopes of an economic recovery but once those are filled, there won’t be much support for the price.

Interestingly, one of the faint hopes for a recovery in natural gas prices is the steep historical discount relative to the price of oil (1 barrel of oil has the energy equivalent of 6 Mcf of natural gas). A drop in oil prices would also restore that balance.

Comments

[BullnBear:]

I understand that we could run out of Oil sometime in the future, (where has big Tex been lately?), but my concern if I was speculating is exactly what’s being discussed here and that’s the economy.

The storing of Oil to me is no different than buying and storing any other commodity but you had better hope that you can offload it when you want and/or need and I wouldn’t be betting on that with Oil at the moment.

The last paragraph that is talking about a disconnect between the spot price on Oil and Natural Gas is well…spot on. Oil can just as easily back down and close that historical gap and probably easier than Natural Gas can rise to close the gap.

Of course every time that Oil seems to bottom that’s about the time that something goes boom and back up we go

Jul 19 01:51 AM

[TradingHelp...:]

Crude at $20? Never going to happen. Never in a gazillion years. Not that supply would last that long anyway.

Jul 19 03:56 AM

[basehitz:]

My initial reaction was to dismiss Verleger’s prediction as nonsense. But commodities and oil in particular are of primary interest. So I did some research.

From the Bloomberg article, he sets preconditions as:
1) “If the recession continues and it’s a warm winter, it’s going to be devastating.”
2) “China is in a real desperate situation. . . We’re in a situation where U.S. consumers aren’t consuming and Chinese manufacturers get hurt.”
3) OPEC is still over-producing: “OPEC don’t realize the magnitude of the cuts they need to make,” which would total about a further 2 million barrels a day, Verleger added.

So IF all the above play put, then he predicts - “Storage is going to become tight. It’s not clear if there’s going to be enough storage available.”

From above statement, it appears Verleger has not determined how much oil can be stored. EIA provides US data. Additional potential capacity available via storage tankers and foreign countries is unclear. Regardless, if prices dropped too low, oil exporters would throttle production. That would seem to preclude Verleger’s prediction of exceeding storage capacity even if the economy falters.

Here’s the full Bloomberg article:
www.bloomberg.com/apps...

However, it is clear given US storage levels, that many oil traders are not reacting to current supply/demand but rather speculating on economic recovery, value of USD, and/or inflation. Changes in outlook would change oil price targets. And I see that as more the driving force, rather than assuming oil producers would continue to overproduce in the face of disappointing global growth.

Jul 19 07:18 AM

[Tony Daltorio:]

Verleger - professor - no real-world experience. He hasn't a clue about the oil markets.

Jul 19 08:22 AM

[The Greates...:]

Oil between $35-$40 by December, the oil industry pricing has been on life support through out this Feb-July rally. The pure facts are clear, people are not buy anything that they do not need. The recovery is a long way off, like all the jobs that have been lost since July 08. Like the old saying goes, “It is time to pay the piper.” The bailouts that went to the too big to fail did nothing for the US economy, throwing good money after bad money never works. The worlds economy is too global for any amount of bailout to work, it is simply too large of a problem. The over all global economy is going to have to go through a trimming down effect, “cutting the fat” so to speak. And that is why America is losing 450,000 jobs a month today, adding to the 10,000,000 lost over the last year. Everything (everyone’s economy and business’s too) that proceeded the July $147 a barrel peak price was based on using way too much credit to get by on. When the bubble burst, so did the global economy. A lot of money was made up to that point, but where did that money go today? All the run up in the cost of crude did was leave the world with higher prices for every single thing manufactured, shipped, barter or sold today.

Jul 19 09:21 AM

[The Greates...:]

Never before has the theory of supply and demand been proven so wrong in this one commodity product as has been shown in the 2009 rise in the price of crude oil this year. Every available storage facility is running over with supply, gas inventories are working on a three month increase in spite of all the prognosticators predicting drops in inventory. The world is simply over ran with the stuff at this point in time, and yet, the price has risen to around $71 a barrel and gas around $3 a gallon once again. Only recently has the price started to loose some steam, or maybe it was just profit taken. Whatever the reason, one must question the validity of the supply vs demand theory on this one commodity. Seriously, who tells us there is only this much oil left here or there? Where are the inventory reports generated? What entity promotes the “Peak Oil Theory”? OPEC controls around 40% of the oil market, that leaves another 60% from other producers. But then there are the 5 major oil companies who act as the middlemen, who have their finger on the pulse of the world’s economy. It is simply the control of the supply to market that generates the volatility in the commodities industry today, coupled with some inside information creating the speculation of the product. The ability of a few that affects the whole world’s economy. This is sometimes called the “Dark Energy Trading” loopholes, going back to the re-writing of the energy commodity bill by Phil Graham.(2000)
Another example of the effects of speculators in the crude oil commodities market was the “ Rogue Trader” who with a 16 million barrel order of crude, pushed up the price of crude oil $4 in the blink of an eye. (that’s just twice the amount of oil Saudi Arabia’s daily production) So one can keep believing in the supply and demand theory, or take off the blinders.

Jul 19 09:22 AM

[H. T. Love:]

Regardless of storage space (which I believe may become a problem) and the economy (which I believe will continue to cause reduced demand), I believe the price will not achieve that low because of what I mentioned here seekingalpha.com/autho...

"Since early April, we've had a drop of 8.5% in the dollar index ($86.87 -> $79.13 and it was even higher in early March at $89.51). My thinking was that with ZIRP and QE and BHO/Pelosi policies taking control, along with all the other stuff in the economy we know of, that the dollar would continue to weaken".

If we use the march figure, admittedly a possible aberration due the market's 3/6 low point, the reduction is -11.6%, a really troubling number considering the 4 month timespan.

I'll stick my neck out here and *guess* that even when the unload from storage occurs the dollar will be sufficiently weakened to maintain a at least a $45 price. And I really thing it will stay above $50.

"Interestingly, one of the faint hopes for a recovery in natural gas prices is the steep historical discount relative to the price of oil (1 barrel of oil has the energy equivalent of 6 Mcf of natural gas). A drop in oil prices would also restore that balance."

As I posit here seekingalpha.com/artic...

"if the price ratio is to come anywhere near historical levels, oil must come down because natural gas cannot go up. See the oil-specific discussion below".

So far, the n00b is doing ok on this. Better than some others I've seen post on NG and oil. How can that be? Probably because I've nothing to sell.

HardToLove

Jul 19 09:24 AM

[The Greates...:]

A de-facto tax cut for American motorists. Each $1 per barrel drop in oil increases U.S. GDP by $100 billion per year and every 1 cent decline in gasoline increases U.S. consumer disposable income by $600 million per year.
Just a little FYI:
The last 20 years have been characterized by rising U.S. oil consumption, but now
"www.eia.doe.gov/oiaf/a..."
the U.S. Energy Information Agency, incorporating the most-recent changes in U.S. consumer behavior, says there will be no appreciable growth in U.S. oil consumption between now and 2030, with biofuels accounting for all of the growth in liquid fuels.

Jul 19 09:36 AM

[Ferdinand E...:]

You mean that THE Philip Verleger is teaching in Calgary in order to earn his daily bread. I stopped listening to that gentleman's babbling when he was in California or somewhere like that, and now you say that he is a foot soldier in the far north. .

Well, they might be hiring in Guadacanal and Pago.Pago soon, and I'm sure that they would like to hear that motor fuel produced from $20 oil will soon be available to keep their Cadillacs on the high road. Best of luck to you, Dr Verleger. Your wisdom is apparently still valuable...apparently..

Jul 19 09:37 AM

[Dian L. Chu:]

40% drop in E&P capex this year does not translate into $20 oil ever due to the long project time frame for most oil E&P projects (about 4 years, at least). We do have a temporary oversupply situation right now, but as global economy slowly recovers, this overhang will get worked off, and we may see the oil market tightening again.

Jul 19 09:40 AM

[Old Trader:]

For the first time ever, energy consumption by emerging economies was higher than that of developed economies. Unlikely that'll be changing anytime soon. In addition, China is finishing up a second SPR (Strategic Petroleum Reserve), and is talking about starting a third.

I'd agree that oil is currently overbought, but can't imagine any scenario where it would trade down to $20/bbl, even taking into account an temporary "overshoot" on the downside.

Jul 19 10:20 AM

[Houston:]

"it is the unknowns that matter most."

Truer words never spoken. If I've learned anything, it is this.

Jul 19 10:28 AM

[BuddhaHead:]

Seems like most discussions imply the world of oil is centered around the American economy. If you haven't noticed China's GDP is tooling around plus 8% with maybe 12 to 14% forecasted for the second half of 2009 thru 2010. (I think everyone else is minus like the U.S.) China's demand for cars has been soaring over 30% per year and just recently passed the United States in annual sales. (these cars need gasoline) China is doubling it's oil reserves by building additional reserve tanks. China has invested in at least three coal to liquid conversion plants at roughly 5 billion a pop to backup their demand for liquid fuels. Was it Soros that said the Chinese equity market would exceed the U.S. market within 3 years? Looks to me like the green (oil) shoots are in China and to frame the value of oil solely on the American economy may misjudge where prices are going. The Chinese are investing (insurance) in oil from Brazil, Iran, Iraq, Russia, Sudan, etc. Why would they do this if oil is going down? Remember China has over two trillion dollars in foreign reserves, they better spend it before the U.S. dollar becomes worthless. Since oil is priced in dollars, better to buy now then when the dollar is worth less than the paper it is printed on. The Chinese government is encouraging foreign investments by Chinese companies, they are buying natural resources and technology driven companies. Why? Most of China's top leadership are Engineers, most of America's leadership are lawyers. China seems to have a plan and moves very quickly, we seem to get muddled in politics and end up compromising and sub-optimizing solutions. ie we still don't have a national energy plan except the 'Carbon cap and trade". China can build nuclear power plants(albeit French, Russian, and American designs for now) in less than 4 years. It takes us at least 10 years. They build them for around 5 billion a pop, the last ones we built were over 10 billion. We haven't built a new one for over 30 years. China is looking at a ten fold increase in it's nuclear power output from 9GW now to 90GW by 2020. They are looking at 120GW of wind. They are doubling their rail lines, they are increasing their roadways by almost the same amount. Maybe someone should look at the oil, gas, and natural resource demands needed to achieve this? Reminds me of the cartoon of the Roadrunner and the Fox. Are we the Roadrunner or the Fox???

Jul 19 10:33 AM

[sethmcs:]

$20 a barrel is a real possibility IF USA, UK and France clamp down on trading oil futures. Even the announcement of possiblilty knocked down oil futures by $10 a barrel.

Jul 19 11:09 AM

[saltydog:]

oil is too cheap now.
look at all the people out of work because no one is buying drilling equipment,trucks,tanks... so forth.
there needs to be a happy medium around $70.00 to help push economy forward. if oil goes to $20.00,that is about what your paycheck will be for a week.
this teacher is down on the economy big time !!!

Jul 19 11:16 AM

[yank:]

oil will never drop to $20 ever. Period. All that non-OPEC supply everyone crows about is just running in place to meet CURRENT demand. And trust me at $20 oil there will be "massive" cuts in oil /nat gas production. All the bitching about "high" gas prices totally misses the point. Adjusted for inflation pump prices at $2.50/gallon equate out to about .40 cents/gallon in 1973 dollars. The point is that even at $3/gallon, oil is cheap. Geez people. This isn't rocket science.

Jul 19 12:42 PM

[jeandit75:]

Interesting point of view, oil at $20 and Nat gas at $2 on the same issues that storge facilities in Alberta, Texas and California are full. There will be destocking my friends. Get ready for the next drop.

Jul 19 01:09 PM

[H. T. Love:]

On Jul 19 10:33 AM BuddhaHead wrote:

> <snip>

> Reminds me of the cartoon of the Roadrunner
> and the Fox. Are we the Roadrunner or the Fox???

Being an old (literally) Arizona boy, I must uphold our honor! It's not a "fox" it's a "coyote". Not as smart as most fox, but smarter than many "Arizona Boys" I've known! LOL!

HardToLove

Jul 19 05:41 PM

[john boy:]

If you really know the oil industry, you would know that industry people and investors are worried about mexico's serious depletion problem. Also the North sea, Nigeria unrest , Veneszualia (sp) Russia are all in decline. We are worried that it might only be a year until the decline in world production gets close to user rates even without a recovery. if that happens at low prices their will be a world crises.


On Jul 19 09:22 AM The Greatest Rip Off of our Time wrote:

> Never before has the theory of supply and demand been proven so wrong
> in this one commodity product as has been shown in the 2009 rise
> in the price of crude oil this year. Every available storage facility
> is running over with supply, gas inventories are working on a three
> month increase in spite of all the prognosticators predicting drops
> in inventory. The world is simply over ran with the stuff at this
> point in time, and yet, the price has risen to around $71 a barrel
> and gas around $3 a gallon once again. Only recently has the price
> started to loose some steam, or maybe it was just profit taken. Whatever
> the reason, one must question the validity of the supply vs demand
> theory on this one commodity. Seriously, who tells us there is only
> this much oil left here or there? Where are the inventory reports
> generated? What entity promotes the “Peak Oil Theory”? OPEC controls
> around 40% of the oil market, that leaves another 60% from other
> producers. But then there are the 5 major oil companies who act as
> the middlemen, who have their finger on the pulse of the world’s
> economy. It is simply the control of the supply to market that generates
> the volatility in the commodities industry today, coupled with some
> inside information creating the speculation of the product. The ability
> of a few that affects the whole world’s economy. This is sometimes
> called the “Dark Energy Trading” loopholes, going back to the re-writing
> of the energy commodity bill by Phil Graham.(2000)
> Another example of the effects of speculators in the crude oil commodities
> market was the “ Rogue Trader” who with a 16 million barrel order
> of crude, pushed up the price of crude oil $4 in the blink of an
> eye. (that’s just twice the amount of oil Saudi Arabia’s daily production)
> So one can keep believing in the supply and demand theory, or take
> off the blinders.

Jul 19 08:08 PM

[TinyTim:]

Sounds like a great time to take my annual summer road trip.
Gas is already below $2.50/gall.

Given all those preconditions, I could see oil hit $20 for a very short time before cutbacks kick in.

Jul 19 08:30 PM

[User 398494:]

This guy is smoking crayons. It really bugs me to hear this guy make a strong statement with no information to back it up. Please take a look at the BP official website (1).
-Does he know that Global oil consumption declined by only ba a paltry 0.6% in 2008 according to BP? Does he know that:
- China had 6.9% GDP growth in 2008?
- India's economic GDP growth in 2008 was 6.7%.
- The Middle East growth in 2008 5.5%.
- India's population 1.17 billion
- China's population 1.31 billion
- Middle East population 350 million

Also please download the BP excel sheet from the below link(1) and look at the reserves, including all oil producing countries there is 1.25 trillion (barrels) bbl left in the ground in stated reserves. According BP the world has already consumed about 1.5 trillion bbl and the world uses approximately 89million barrels per day.

1.25 trillion divided by 89 million times 365days a year and you will get 38 years. More importantly Saudi Arabia simply states their oil reserves and will not allow third party verification the reserves; must trust them on this critical issue? And you and I know extracting the last half of the oil reserves from the earth is always more difficult than the first half. Note that Saudi Arabia's largest oil field Ghawar is in sever decline and a staggering 7 million barrels of sea water are being injected into the field to prop up pressure to extract. Russia is in 6% decline year to year, Mexico's Cantrell oil field is in sever decline 16% a year according to SeekingAlpha (3) news.

The recovery will be quick and the pressure of oil force it to rise back to $100bbl by summer of next year or even sooner due of inflation.


(1) www.bp.com/productland...
(2) population and growth numbers from wolframalpha.com
(3) seekingalpha.com/artic...
(4)

Jul 19 11:08 PM

[john boy:]

I aggree 100 percent. You said it more precisely than I could. But I don't know exactly about the price. Also Iran is predicted to be having some issues and is in decline and could be a net importer by 2014 or 2015.


On Jul 19 11:08 PM User 398494 wrote:

> This guy is smoking crayons. It really bugs me to hear this guy make
> a strong statement with no information to back it up. Please take
> a look at the BP official website (1).
> -Does he know that Global oil consumption declined by only ba a paltry
> 0.6% in 2008 according to BP? Does he know that:
> - China had 6.9% GDP growth in 2008?
> - India's economic GDP growth in 2008 was 6.7%.
> - The Middle East growth in 2008 5.5%.
> - India's population 1.17 billion
> - China's population 1.31 billion
> - Middle East population 350 million
>
> Also please download the BP excel sheet from the below link(1) and
> look at the reserves, including all oil producing countries there
> is 1.25 trillion (barrels) bbl left in the ground in stated reserves.
> According BP the world has already consumed about 1.5 trillion bbl
> and the world uses approximately 89million barrels per day.
>
> 1.25 trillion divided by 89 million times 365days a year and you
> will get 38 years. More importantly Saudi Arabia simply states their
> oil reserves and will not allow third party verification the reserves;
> must trust them on this critical issue? And you and I know extracting
> the last half of the oil reserves from the earth is always more difficult
> than the first half. Note that Saudi Arabia's largest oil field Ghawar
> is in sever decline and a staggering 7 million barrels of sea water
> are being injected into the field to prop up pressure to extract.
> Russia is in 6% decline year to year, Mexico's Cantrell oil field
> is in sever decline 16% a year according to SeekingAlpha (3) news.
>
>
> The recovery will be quick and the pressure of oil force it to rise
> back to $100bbl by summer of next year or even sooner due of inflation.
>
>
>
> (1) www.bp.com/productland...;contentId=7044622
>
> (2) population and growth numbers from wolframalpha.com<;br/>(3)
> seekingalpha.com/artic...
>
> (4)

Jul 20 04:54 PM