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TRENDLines Barrel Meter: US$ Debasement = $24

click to enlarge ... more peak oil charts @ my SA Instablog & website

2011/5/16 $131 PEAK Forcings:

$94 SPIKE Forcings:

$37 TROUGH Forcings: $113 "Today" Forcings:
Windfall Profits via Media Noise $24 $24 $ 0 $35
Hedging/Speculation Activity $ 3 $ 1 $ 2 $ 8
Tighter Surplus Capacity $38 $30 $ 8 $14
Tighter Inventories $10 $ 7 $ 3 $ 9
Currency Debasement $31 $28 $ 3 $24
Weighted Extraction Costs $25 $ 4 $21 $23

Aug 16 2011 delayed FreeVenue public release of May 16th guidance @ our MemberVenue ~ The USA Contract Crude Price averaged $113 in April, up $9 over thirty days. The increase was mostly attributable to Windfall Profits ($4), further USDollar Debasement ($4), tighter Surplus Capacity ($2) & reduced Speculation/Hedging activity ($-1). At month end, the cost of imported oil ranged from $97/barrel for Canada Heavy to $131 for Malaysia Tapis Light. Including spikes, the contract crude oil's monthly average should settle into a general trading range of $109 to $141/barrel thru the balance of Q2 & Q3.

Global production has increased dramatically from the Recession low of 83-mbd (Jan/2009), setting yet another monthly record in January 2011. The oil sector is on pace to set a new annual record this year and monthly production is poised to break the 90-mbd threshold in January 2013. Inventories are in balance and there is over 5-mbd of Surplus Capacity.

In short, there has been virtually no reason for the present price run based strictly on industry fundamentals. Yet, April's $113 avg USA Contract Price was 24% over its $91/barrel Fundamentals Fair Value. The lamestream media, pundits & politicians would have one believe uncertainty and speculation surrounding the Libya situation is the root cause of this $41/barrel seven-month spike. In reality, the Barrel Meter attributes $18 to Windfall Profits that take advantage of subtle fear factors (of which $14 is MENA related) and $13 is associated with USD Debasement. The balance is $5 for increased speculation/hedging activity, $4 due to lesser Surplus Capacity & $2/barrel for higher Extraction costs. These forcings were counterbalanced by $-1 on less tight Inventories balance.

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).

FFV INSET ~ It is seen Crude Price (red line) runs quite close to the Fundamentals Fair Value. Earlier significant exceptions (see FFV chart inset) were: (a) the 58% premium during the 1999/Y2k OPEC cutback; (b) a 52% premium in the lead-up to the Iraq2 invasion; and (c) the 23% 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 (monthly avg) peak was actually 9% below the then current Fundamentals Fair Value. Our components table (above right) dissects the Crude Price forcings both in 2008 and today.

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. Price discovery was utterly non-existent during this episode. Only $2/barrel can be attributed to increased spec/hedging activity. It appears the 2010 spike was mostly media (fear-factor) driven.

After calming to a mere 1% premium by September 2010, the juices began flowing once again upon the start of MENA geopolitical activity last December. The FFV premium was 24% in April ... $22/barrel above Crude's $91 fair value.

PUNDIT IDIOCY ~ There continues to be absolutely no merit to the plethora of pundit forecasts for $200-$250 oil (& $5-$7 gasoline) by this Summer disseminated by the lamestream media since late February. We heard all the same rationalizations in the Summer of 2008 and our COPF chart (below) is testament to those similarly hysterical musings. Conversely, there was no hint of this geo-political event back in April 2010 when the present spike, founded on devaluation of USDollar, was foretold by Trendlines!

US$ SPIKE IMMINENT ~ Having said that, Crude Price may indeed be poised to break the $131/barrel monthly record set July 2008. The current price run is actually the culmination of a secular trend that commenced June-2004. At that time the secular devaluation of the USDollar that started Jan-2002 finally began to be factored in as a price component of Crude Price. By July 2008, Debasement made up $31 of oil price (see table).

The bursting of the USA's housing bubble led directly to the financial crisis by exposing the subprime mortgage fiasco. The irony of the matter is that by March 2009 (just weeks after the Recession trough), the USDollar had regained virtually all its loss as a different set of stakeholders sought Safe Haven in American financial investment vehicles. Upon inauguration of Barack Hussein Obama, US$ Debasement was in remission and a mere $1 component of Crude Price.

Wall Street took glee at that time to shine a light on Deficit & Sovereign Debt to GDP ratios of a barrage of jurisdictions. The lamestream media enabled focus to be switched away from the USA problems and on to Iceland, Dubai, Ireland, Greece, Portugal, Hungary, Spain & Italy. Inevitably when they ran out of countries, the same scrutiny was finally openly spotlighted on the US Federal Gov't. Just as petroleum stakeholders and policy makers had lost faith in Congress ability to address its long-term Structural Deficits in 2004, now international markets were clued in and taking stock. And the secular decline of the USDollar resumed...

In the first few months of 2009, unease the socialist leanings of Obama and his close advisors and a commitment to Deficit reduction led to Debasement running up as high as $12 (from $1). A pause occurred that Summer as it appeared the CBO had convinced the President & Congress to let the Bush-era Tax Cuts expire in December. This sentiment was so entrenched that our own Barrel Meter extinguished its forecast of a $141 2011 spike in September. And the Debasement factor hovered as low as $9.

Unfortunately, the mid-term Elections intervened and irresponsible electioneering reversed the momentum via promotion of an extension of the BTCs as a means to maintain fiscal stimulus in the face of a phantom double-dip. The Trendlines Recession Indicator sported the earliest alerts of a potential downturn but had already dismissed a renewed contraction by its Sept/2010 outlook. But, facts were not allowed to ruin strategic campaign rhetoric. The Tea Party won big in November.

Thus, regardless of a newly Republican-dominated House of Representatives, Congress severely disappointed the international investment community by its irresponsible disposition of the Bush-era Tax Cuts by extending them fully intact ... even for the top 1%. The Obama Administration then added to the disgust with its own proposal of a $1.5 trillion Deficit 2011 Budget. "Overnite" in relative terms, the Debasement factor had rocketed to $24 by April.

Presently, the markets are digesting Obama's unexpected second kick-at-the-can following the Paul Ryan lower house budget proposal. Both cut trillions ... not billions. The lamestream media continues to fawn over the worst President in memory and continues to associate high gasoline prices instead to fear factor surrounding the MENA geopolitical events. On the contrary, the Trendlines Barrel Meter attributes only $14/barrel to this element since Tunisian demonstrations commenced Dec 17th.

As such, our forecast of a record Crude Price in June assumes the present pause will exhaust upon bond vigilantes dismissing genuine intent by Congress & the President to resolve the Entitlements issues that are foundation to the Structural Deficits and future Debt Wall. It will take the form of adding another $8 to Debasement ... ultimately $32/barrel. This currency crisis and its associated potential for imported inflation will be opportune in inspiring a "Tea Party Intervention". Their input conditions will result in successful disposition of the raising of the Federal Debt Limit by addressing the long standing Budget & Entitlement issues. The US$ will correct precipitously on this good news. Unless the Debt Limit negotiations are short term, Crude Price will fall to $64 in 12 months.

EFFECT on ECONOMY ~ USA contact crude has been over $90/barrel since early February - a line in the sand which we have warned (since November 2009) that if breached would decimate the rebound of USA Light Vehicle Sales - and $108 - a threshold which if crossed for any amount of time should bring a new round of G-20 Recessions.

We have high confidence a Summer price run would 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 DDB represents a definitive Crude/GDP ratio ($139/barrel in June) 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.

The Trendlines Recession Indicator calculates cumulative high petroleum prices over past Quarters is trimming 1.5% off the annualized GDP growth rate ... just a tad below the record 1.6% back in Oct/2008. It will take the economy a very long time to shake out the "baked-in" dampening.

5 YEAR OUTLOOK ~ Looking down the road, we expect Crude Price to enter a period of softness as the USDollar recovers and international controls on speculation/hedging activity restore Price Discovery to a presently dysfunctional system. Crude Price could dip as low as $56 by 2013Q2.

2035 OUTLOOK (see chart below) ~ 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 2029 in massive fashion that may be permanent. 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.

Our Peak Scenario-2500 model assumes Saudi Arabia's MSC (maximum sustainable capacity) peaked @ 13.05-mbd in 2009. This event has been shielded by its high (4-mbd) Surplus Capacity and post-Recession OPEC quota restrictions. PS-2500's currently projects maximum production will take form of a Demand Peak of 101-mbd in 2033 ... not the 2047 potential Supply Peak (based on the current trend of converting proved reserves to new capacity). The benefit of a Demand-inspired scenario is that it puts less pressure on exhausting Surplus Capacity. Losing significant spare capacity in the next decade will be the most critical forcing to raising Crude Price over the decades. Peak Oil is not as much a problem as is maintaining balance in Inventories and sufficient Surplus Capacity in avoiding price shocks.

The model predicts Crude Price will hit an all-time high of $377/barrel in 2033 before settling to $311 - our 2035 target.

NYCE WTI FUTURES COMPARISON ~ In comparison to our outlook, the similar NYCE WTI Futures Contracts for the 1-yr & 5-yr targets are $98 (down $11 from 30 days ago) & $93 (down $9) respectively today. Look for the futures prices to plummet $34 on the short term & fall $28/barrel for 2016, as they catch up with current realities. Our comparative figure for the final futures date of Dec/2019 is $92/barrel, a tad less than the $95 (down $8) for today's contract.

Today's April 2011 avg contract price of $113/barrel compares with Trendlines Research's predicted $121 back in April 2010; the WTI futures contract was $89.