|2011/6/7||$131 PEAK Forcings:||
$94 SPIKE Forcings:
|$37 TROUGH Forcings:||$107 "Today" Forcings:|
|Windfall Profits via Media Noise||$25||$25||$ 0||$34|
|Hedging/Speculation Activity||$ 3||$ 1||$ 2||$ 8|
|Tighter Surplus Capacity||$37||$29||$ 8||$13|
|Tighter Inventories||$10||$ 7||$ 3||$ 6|
|Currency Debasement||$31||$28||$ 3||$23|
|Weighted Extraction Costs||$25||$ 4||$21||$23|
Sept 7 2011 delayed FreeVenue public release of June 7th guidance @ the TRENDLines MemberVenue ~ The USA Contract Crude Price averaged $107 in May, down $6 over thirty days. The decrease was mostly attributable to Windfall Profits ($-1), USDollar Debasement ($-1) & better Inventory Balance ($-4). At month end, the cost of imported oil ranged from $89/barrel for Canada Heavy to $118 for Malaysia Tapis Light. Including spikes, the contract crude oil's monthly average should settle into a general trading range of $123 to $136/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 (88-mbd) in January 2011. The oil sector is on pace to shatter last year's annual record and monthly production is poised to break the 90-mbd threshold in January 2013. Inventories are above the 5-yr avg and 6% of global capacity is idle.
In short, there has been virtually no reason for the present price run based strictly on industry fundamentals. Yet, May's $107 avg USA Contract Price was 17% 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 $37/barrel eight-month spike. In reality, the Barrel Meter attributes $16 to Windfall Profits that take advantage of subtle fear factors (of which $13 is MENA related) and $13 is associated with USD Debasement. The balance is $5 for increased speculation/hedging activity, $3 due to lesser Surplus Capacity & $2/barrel for higher Extraction costs. These forcings were counterbalanced by $-2 on less tight Inventories balance.
Whereas the 2008 Crude Price spike resulted from a perfect storm of factors assaulting fundamentals, the current price run is very much a classic commodity bubble. The dashed yellow line in the chart above represents the "fair value" of Crude Oil as inferred by its fundamentals (Extraction costs, US$ 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 57% premium during the 1999/Y2k OPEC cutback; (b) a 51% 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 (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 30% 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 $3/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 3% premium by September 2010, the juices began flowing once again upon the start of MENA geopolitical activity last December. The increasing FFV premium was 17% in May ... $16/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-$7 gasoline) by this Summer disseminated by the lamestream media since late February. We heard all the same rationalizations in the Summer of 2008 and our COPF chart (below) is testament to those similarly hysterical musings. Conversely, there was no hint of this geo-political event back in April 2010 when the present spike, founded on devaluation of USDollar, was initially foretold by Trendlines!
US$ SPIKE IMMINENT ~ Having said that, it appears the stars are aligned today and 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 $31 of oil price (see table - above right).
The bursting of the USA's housing bubble led directly to the financial crisis by exposing the subprime mortgage fiasco. The irony of the matter is that by March 2009 (just weeks after the Recession trough), the USDollar had regained virtually all its loss as a different set of stakeholders sought Safe Haven in American investment instruments. Upon inauguration of Barack Hussein Obama, US$ 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 savvy currency traders had lost faith in Congress ability to address its long-term Structural Deficits in 2004, now international markets were being clued in and taking stock. And the secular decline of the USDollar resumed...
In the first year of his Administration, unease with the socialist leanings of Obama and his close advisors and questionable commitment to Deficit reduction led to Debasement running up as high as $12 (from $1). A pause occurred in the Summer of 2010 when 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 2010. And the Debasement factor drifted back to $9.
Unfortunately, the mid-term Elections intervened and irresponsible electioneering reversed the momentum via promotion of an extension of the Bush-era Tax Cuts 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.
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 ... and the Debasement factor 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 renewed forecast of a record Crude Price spike this month assumes the present pause will extinguish upon bond and currency vigilantes dismissing genuine intent by Congress & the President to resolve the Entitlement issues which are foundation to the Federal Govt's Structural Deficits and future Debt Wall. It will take the form of adding another $8 to Debasement ... ultimately $31/barrel.
This currency crisis will be opportune in inspiring a "Tea Party Intervention". Their input conditions will result in successful disposition of the raising of the Federal Debt Ceiling by addressing the long standing Budget & Entitlement issues. At this time it appears they will insist on demanding a dollar in future cuts for every dollar of increase to the Debt Limit. If successful, the US$ will correct precipitously on this welcome news. Unless the Debt Limit negotiations lead to an unexpected short-term agreement, Crude Price will fall to $63/barrel in 12 months.
EFFECT on G-20 ECONOMIES ~ USA contact crude has been over $90/barrel ($3.29/gal pump) since early February - a line in the sand which we have warned (since December 2009) that if breached would strangle the post-Recession rebound of USA Light Vehicle Sales. New Car Sales were decimated upon the crossing of this threshold in 1980, 1990 & 2007. The last event saw volume collapse from a 16-million unit annual rate to 9-million. Sales had rebounded to 13.4-million by February 2011, but have since fallen to an 11.8-million unit pace. It is improbable that sales will surpass the 14-trillion area 'til crude price subsides to the low 90's.
The Trendlines Recession Indicator calculates cumulative high petroleum prices over past Quarters trimmed 1.5% off the annualized GDP growth rate in May ... and ties the record mark set back in Oct/2008. Even if the spike is short-lived, it will take the economy a couple of years to shake out the "baked-in" dampening effect.
Similarly in January 2010, Barrel Meter chart annotations began to warn breach of a second critical threshold would initiate a new round of G-20 Recessions. That definitive Oil/GDP ratio saw 12 G-20 nations sink into technical or severe Recessions after crude price passed the $103 mark. Today the ratio is represented by the $114/barrel milepost. Oil touched $113 in April and UK & Japan are candidates for contractions.
We have high confidence a Summer price spike would eventually be blocked by the same Demand Destruction Barrier (DDB) that firmly arrested the 2008 price run @ $131/barrel ($4.11/gal pump). 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 ($136/barrel in June = $4.34/gal pump) 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.
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 from the presently dysfunctional state. The Barrel Meter predicts Crude Price could dip as low as $55 by 2013Q2 before reaching its 2016 target of $68/barrel.
10 YEAR OUTLOOK ~ Recovering from probable 2017 Recession softness, the Crude Price 2021 target is projected @ $100/barrel.
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 permanently encroach the Light Vehicle Sales Collapse Threshold in 2029. 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 transportation fleets.
Our Peak Scenario-2500 oil depletion model assumes Saudi Arabia's MSC (maximum sustainable capacity) peaked @ 13.05-mbd in 2009. This event is being masked by its high (3-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 in Saudi Arabia and elsewhere. Losing significant spare capacity would be the most critical forcing in raising Crude Price over the next two decades. Peak Oil will not be as much a problem as would maintaining balance in Inventories & sufficient Surplus Capacity in avoiding price shocks in the future.
The Barrel Meter predicts Crude Price will hit an all-time high of $376/barrel in 2033 before settling to $309/barrel - our 2035 target.
original article: www.trendlines.ca/free/peakoil/BarrelMet...