Oil Price Outlook: Steady as She Goes

This is going to be a near-term 2010 call, based on production data charted by Rembrandt Koppelaar, employment and GDP outlook by Mish, and the growing threat of "ruthless default" consumer debt repudiation in the United States:

People do not care about credit scores any longer. What does that give you? Nothing. The lenders are canceling lines left and right. Most people do not qualify for a mortgage. Stores are no longer giving out their CCs. There is no more credit available for those that are near the edge. There is no downside to walking away any longer. Debt repudiation is the biggest systemic risk we face. It is staring right at us.

If we agree that demand for oil is inelastic, which means people will pay whatever it costs to operate their cars, trucks, jet aircraft and military vehicles, then the price of oil is determined entirely by effective (cash-in-pocket) demand.

I don't expect the US dollar to crash or to dramatically appreciate in 2010. There is a demonstrated consensus among central banks to deploy currency swaps as needed, and I disbelieve that commodity speculation is a sticky factor, so my oil forecast for 2010 is based solely on fundamentals.

Let's assume that US and world economic output are joined at the hip. There will be no recovery or net growth in 2009-2010. Mish explains:

In plain English, the first 2.5% of GDP (if not much more) is fictional. When the economy is growing at 2% it feels like a recession because it probably is, even though no one will admit it.

Now consider the implications of a 2.4% GDP forecast for three decades. If Bernanke is correct that it takes 2.5% GDP growth just to keep the unemployment rate constant, and McKinsey is also correct in its 2.4% forecast, we will be stuck with 10% unemployment for decades.

So, the demand outlook is weak -- i.e., fewer dollars in private and public purses, with a continued emphasis on saving more and spending less. Second quarter industrial earnings beat expectations only because they cut costs. I anticipate demand for oil to remain depressed.

Similar weakness in Japan, Spain, France, and Italy:

All eyes are on China and India at the moment, expecting them to grow and consume more oil, therefore bidding up the world price of crude. While it's true that China is on a capex spending spree, acquiring production and reserves wherever it can, Chinese and Indian oil consumption (10 million b/d) is small compared to OECD + OPEC (50 million b/d).

I don't subscribe to the "last barrel" marginal pricing theory. There are too many players and byzantine price regulation in every jurisdition on earth. At present, Chinese growth is picking up slack from soft OECD demand.

Another myth is the notion of OPEC "spare capacity." While it's true that Saudi Arabia can lower their output from time to time, to support an orderly market and keep petrodollar speculation in check, it's highly significant that Saucdi production has been more or less flat for over a decade:

The global picture aggregates OPEC, OECD, and emerging market supply. There is no immediate threat of "peak oil" shortages or shocks in 2010:

I expect global supply to bounce around 73 million b/d, rain or shine, and WTI to trade at $60-$65 the rest of this year and next on 2% World GDP "recovery."

Disclosure: no position in oil, E&P, or commodity indexes.

Comments

[G. L. Turner:]

Hope you will be correct, as $60 to $65 is what teh CEos of US Big Oil say they need to make it work -

However, to that the Financial Speculators will add the 'value of the dollar'....greatly exaggerated of course, and - "and I disbelieve that commodity speculation is a sticky factor, so my oil forecast for 2010 is based solely on fundamentals." - (your statement) will not hold up, cause Government Sachs will se to ti taht we have "COMMODITY SPECULATION" divorced from real supply/demand fundamentals...

So, don't get too happy too soon!

Jul 28 06:02 PM

[MarkitWacha:]

good point about the GDP.

Here's one more calculation:
2010 - 1945 = 65, the retirement age for baby boomers.

As they start to retire in droves, the unemployment rate will tick down, until the loss of their productivity impacts GDP (like Japan) and results in even slower growth.

The population pig in the python is going to cause unforeseen effects like migrant workers in healthcare, more service industries, etc. They won't have to drive to work everyday, either.

Jul 28 06:24 PM

[Larry House:]

Only time will tell if you are right, but I think your conclusion is logically derived from your evidence. The muted nature of the economy for an extended period of time (years) may be the big surprise, although several economists have been expressing that view for some time. To manage the rising national debt, the current administration is expecting 3-4% growth in the U.S. economy NEXT YEAR. It appears virtually impossible. It will have major political consequences.

Jul 28 11:51 PM

[Ferdinand E...:]

10% unemployment for decades, somebody called 'Mish' predicts. You left out the next line...'unless we impeach Obama'.

No thanks, anybody who believes that the US will have that kind of unemployment for decades should be sent to Coventry, or maybe 'Git-More', as I heard a former navy man in my platoon call it one day.

But the business about spare capacity is very correct, and I cannot understand anybody thinking otherwise. The king of Saudi Arabia said 30 years ago that he wasn't interested in making motorists in the oil importing countries happy..

Jul 29 09:48 AM

[Jimbo:]

Ferdinand E: Obama cannot make it better but he could make it worse.

Jul 29 12:41 PM

[semperpax:]

Are you referring to the same Bernanke who said the sub-prime mortgage problems would be confined to sub-prime mortgages? What does he know? He's been wrong every time he's opened his mouth.

Jul 29 01:09 PM

[SeekingTruth:]

Always glad to get good energy articles of this type and nature.
It is a given that China and India will increase their cars in operation over the next many years, but will they be of the electric, nat gas. biofuels, or hydrogen, etc. variety far more than purely gasoline engines?
They have a chance to climb on board alternative fuel cars far better than we (cherry picking , if you will), as they grow their mfg. base and increase their roads and infrastructure, which could moderate their demand for oil somewhat below the general concensus forecast.
Most things considered that I am capable of assessing, it looks like we are in a base 50 to 80 dollar range for awhile with possible spikes above and below for various transient reasons.
Thanks again for a fine article.

Jul 29 01:15 PM

[perceptions...:]

Ever watched the kids in the playground?

The See Saw is a favourite and that's pretty much what's going to happen to Oil Pricing, near term.

Jul 29 08:39 PM

[William Dav...:]

Alan von Altendorf's you should do your Peak Oil for Dummies comments as an Article, its very good. Brush may of not been the most talented of US presidents but he understood Peak oil more than most. I never supported him but I wonder if history may judge him more kindly.

Aug 13 11:31 AM