Oil down to $12/barrel? Unthinkable? Maybe not

When oil reached well over $100/barrel, the “peak oil”, Malthusian scenarios were dusted off and regurgitated ad nauseum.

Then came the drop in demand after the financial crisis and prices came back under $100 as reality set in. The disturbances of reduced production from Iraq, Libya and sanctions-hit Iran could not bring the price back up with demand as low as it was. Then came fracking and flooded the market with oil. Price came down to c. $60. Saudi Arabia did not decrease production but instead started a price war to kill of the nasty frackers and to maintain their market share. Prices should have dropped to less than $30 but stayed up above $50 on hopes of increased demand eventually coming through and hopes that China would get going again. Inventories have grown to record levels.

Oil inventory August 2015

Oil inventory August 2015

But now the hopes of a Chinese recovery anytime soon are beginning to dissipate. Prices have dropped below the psychologically important $50/barrel.

Business Insider: ….. WTI crude oil futures are trading near $42 a barrel while Brent futures are just above $48 a barrel.

And now the talk of oil prices below $20/ barrel, perhaps even as low as $12 are no longer looking ridiculous. David Kotok was talking to Bloomberg.

Oil prices have hit six-year lows, and Cumberland Advisors’ David Kotok thinks the worst may be yet to come.

We could go back to $15 or $20, this is a downward slope, we don’t know a bottom,” Kotok said in a Monday morning interview on Bloomberg TV. …….. 

Kotok said that despite the oil industries apparent belief that things will get better, there is little reason for anything to change.

Hope is not a strategy, it’s a myth,” he said. “The fact is, we don’t have the drivers.”

The good news is that there’s good news. When asked about the lack of an increase in consumer spending despite the more favorable oil and gas prices, he said it will come.

When the oil price goes down that means you get the first kick, but the you have to wait for the consumer to wake up and say ‘Gee, I’m going to have more money for longer, I’m going to spend it’,” Kotok said. I think that there is a huge boost in consumer spending coming when people begin to accept the fact that this is a permanent shift not a temporary shift.”

Some net oil consuming countries will get a “windfall” to help them kick-start their economies. But prices could stay down for a long time yet until a sustained, global consumer boom truly develops.

Advertisements

Tags:


%d bloggers like this: