Falling USDollar has boosted Crude Oil Price by $20/barrel since 2009 ~ Light Vehicle Sales Poised to Collapse
July 12 2011 delayed FreeVenue public release of April 12th guidance @ our MemberVenue: The USA Contract Crude Price averaged $104 in March, up $13 over thirty days. The increase was mostly attributable to Windfall Profits ($6), further Currency Debasement ($3), Speculation/Hedging activity ($3) & tigher Surplus Capacity ($1). The cost of imported oil ranges from $90/barrel for Canada Heavy to $122 for Malaysia Tapis Light. Including spikes, the contract crude oil's monthly average should settle into a general trading range of $103 - $140/barrel thru the balance of Q2 & Q3.
Global production has increased dramatically from the Recession low of 83-mbd (Jan/2009), setting new monthly records in Oct, Nov, Dec & 89-mbd in January 2011. Inventories are in balance and there is 6-mbd of Surplus Capacity. Trendlines Research attributes only $9/barrel to the recent MENA events. There is absolutely no merit to the plethora of pundit forecasts for $200-$250 oil by this Summer. We heard the same rationalizations in the Summer of 2008 and our COPF chart (below) is testament to these similarly hysterical musings.
The many pundits who since late February have been forecasting upwards of $250/barrel crude rationalize their musings on concern surrounding Libya and other MENA unrest. Conversely, there was no hint of this geo-political event back in April 2010 when this spike, founded on devaluation of USDollar, was foretold by Trendlines! Since the inauguration of Barack Hussein Obama in January 2009, US$ Debasement has become a $20/barrel component of Crude Price ... up $17.
Whereas the 2008 Crude Price spike resulted from a perfect storm of factors assaulting fundamentals, the current price run is very much a classic commodity bubble. The dashed yellow line in the chart above represents the "fair value" of Crude Oil as inferred by its fundamentals (Extraction costs, US$ Debasement, Surplus Capacity & Inventory balance).
It is seen Crude Price (red line) runs quite close to the Fundamentals Fair Value.
Our new inset reveals Crude Price detached once again from FFV in March 2009, attaining a premium of 32% by January 2010 - a level not seen since late 2002. As Trendlines predicted, Producers were rewarded with obscene record reported earnings. After calming to a mere 7% premium in September 2010, the juices began flowing once again upon the MENA geopolitical activity. The FFV premium was 21% in March ... $18/barrel above Crude's $86 fair value.
The current price spike has foundation in the devalued USDollar. As early as January 2010, the Barrel Meter has been indicating the formation of a USD Debasement related event. At first, the climax was measured in years; but as the months progressed the peak target was accelerated. By September, we were forecasting a Sept/2011 peak.
The secular decline of the USDollar (since January 2002) correlates with dissatisfaction by foreign Investors of Congress to address its structural deficits and an eventual Debt Crisis. After a period of flight to safety, the decline resumed upon the election of President Obama due to unease with his socialist background. Those fears were virtually dispelled when early last Autumn it appeared Congress was ready to terminate the Bush Tax Cuts.
Unfortunately, midterm election rhetoric prevailed and capture of the House of Representatives by the Republican Party further renewed talks for a dreaded extension. Obama's agreement to a full extension w/o addressing Entitlements plus presenting of his $1.5 trillion Deficit Budget has resulted in the USDollar Debasement component rising to $20/barrel. We presently expect this metric to rise to $37 by July 2011.
Ever rising petroleum prices will have dire consequences. Since 2009, the Barrel Meter chart has warned that sustained breach of certain price levels will decimate North American Light Vehicle Sales ... as occurred when a distinct Gasoline/GDP ratio was exceeded in 1980, 1990 & 2007 (dashed brown line). That threshold was the equivalent of $86/barrel in Spring 2008 and was $90 ($3.34/gal pump) when breached in early February 2011. It is no coincidence that USA New Car & Light Truck Sales had a first hiccup in March (see chart at our GasPump site) and we expect a reversal to develop thru Q2/Q3. But it gets worse...
Unless political mitigation occurs during negotiations surrounding the raising of the USA Debt Limit, today's short term outlook projects a second threshold ($108/barrel) will be breached in Q2 giving rise to a new round of G-20 Recessions. Should Crude Price continue its upward run even further, the Barrel Meter model projects a potential spike to $151/barrel will be truncated.
We have high confidence the rise will eventually be blocked by the same Demand Destruction Barrier (DDB) that firmly arrested the 2008 price run @ $131/barrel. The negative effects of rising energy costs on the disposable income of consumers and the profits and viability of businesses and institutions eventually takes a toll against the economy. The Demand Destruction Barrier represents a definitive Crude/GDP ratio ($140/barrel) where certain feedbacks come to fruition. As happened in the Summer of 2008, Demand will be reversed as alternative energies, substitutes and conservation measures are pursued.
Looking down the road, we expect Crude Price to enter a period of softness as the USDollar recovers after "a Tea Party Intervention"... dipping as low as $57 in 2014Q2. Ever rising Extraction Costs and gradual trimming of Surplus Capacity will together drive a two decade secular uptrend. Probable business cycle Recessions in 2017, 2026 & 2034 may give short respites.
Crude Price will again encroach the Light Vehicle Sales Collapse Threshold in 2030 in massive fashion - and lasting several years. Any demand destruction will be mopped up by eager developing markets. It is at this juncture policy makers must aim all their efforts to have infrastructure in place for the transition away from the domination of gasoline/diesel fleets.
The model predicts Crude Price will hit an all-time high of $379/barrel in 2033 before settling to $305 - our 2035 target.
In comparison to our outlook, the similar WTI Futures Contracts for the 1-yr & 5-yr targets are $109 (up $6 from 30 days ago) & $102 (up $1) respectively today. Look for the futures prices to plummet $32 on the short term & fall $30/barrel for 2015, as they catch up with current realities. Our comparative figure for the final futures date of Dec/2019 is $86/barrel, significantly less than the $103 (down $1) for today's contract.
Today's March 2011 avg contract price of $104/barrel compares with Trendlines Research's predicted $86 back in March 2010; the WTI futures contract was $82.Earlier significant exceptions (see FFV chart inset) were: (a) the 56% premium during the 1999/Y2k OPEC cutback; (b) a 50% premium in the lead-up to the Iraq2 invasion; and (c) the 24% deficiency in December 2008 - at the depth of the Great Recession. Our consistent position that the July 2008 record price spike was indeed not a Bubble is graphically supported by the fact that its $131/barrel peak was actually 9% below Fundamentals Fair Value.