Musings I: Why Oil Might End Up At $90.

One cannot open a Bloomberg or WSJ or even ye old upstart turned stale news spigot, YahooFinance these days without seeing gyrations of anxiety over this market, or that market, and this oil price, and that China or those currencies, it’s a deafening roar of bad news. It’s gone beyond skittishness, but not quite into panic. To counter the dominant narrative, and maybe, mirablis dictu, even say something that might prove profitable to someone, either you my reader, or myself, let me drop a few thoughts of mine on one of these major pain points. I’ll start with that dark slimy lifeblood of mammon, oil.

Just this morning, looking at January 2015 futures contracts for Brent and US (WTI) crude oil, this is what you see.

(click to enlarge)OIL

That, my friends is what opportunity looks like. What you think it’s going to show up in fancy green clothes, screaming “here is some money, come make me!”? Nah that would be too easy. It’s when everyone is shitting their pants about everything falling apart that the ones who have the cajones get off their seats and carpe scrotum aka grab the bull by the fucking balls erm, horns. What’s my point? I think oil will rise above $70 before the end of 2015. Maybe even hit $90 again, either by year end or definitely by early 2016. If you have the capital to commit for at least two years, you might want to consider it. Of course I could be wrong, and you could totally lose your shirt, but that’s the nature of prediction as it is the nature of the beast. If you don’t like fire, what are you doing in the kitchen?

But even the most contrarian bets still have to stand up to reason, so what’s my rationale here? Easy. I’ve done a stint in an oil major’s finance and planning department, I know the relative break even prices of more than a few shale plays in the US. Without going into too much detail, let’s just say that only Bakken in the Dakotas, and maybe Eagle Ford in Texas can work at these levels. Every other shale play is going to prove unworkable very soon, if not already. The E&P companies hedged the hell out of their current and near term production volumes, but they’re not going to invest in lot of new production, and some are going to cut back on ongoing projects. The first cracks are already showing.

Bear in mind that under normal circumstances, oil production declines about 6% every year anyway, which is why there’s continuous investment in production just to keep volumes constant. When shale production falls, as it will, and Russia and other non-Opec producers fall, as they will, who is going to ramp up production to meet any shortfalls? Even in OPEC, no country has excess production capacity except Saudi Arabia (about 3mbd). With current low prices, let’s imagine production falls by 6%, that’s easily 5.5mbd, leaving next year’s total production hovering around 90mbd. Demand stands currently at about 93mbd. If Saudi Arabia kicks in their extra production capacity(my guess is, they won’t), and demand stays the same, we will break even. If they don’t, and demand grows say 1% or not at all, or even slumps slightly, we’ll still be short anywhere from 1.5 to 3mbd in supply. Now, shale companies may also decide to tough it out and keep swamping supply, taking losses to beat back OPEC and co, but unless Uncle Sam starts giving them free financing, I won’t bet on it.

So demand outpaces supply once more sometime late in the year, or early 2016, and once again, you’ll need about seventy to ninety American cowries to purchase a barrell of the dark stuff. Who knows, our resident Momma Bear-In-Chief might even crack a smile or two, in joyous relief. I might make a few kroners, who knows. I’m willing to gamble.

There’s reams of other data to support this view, but I only have to highlight the logic and leave you to confirm or disprove them. As always make your own decisions.

As of now, 2017 oil futures are significantly higher than where I want them to be:

futures(click to enlarge)

If they fall below $70, I know I’m buying. I’ve never liked trading commodities (because I like business more than I love economics) but there’s a first time for everything right?

(NB: I want to keep this blog light on numbers, so trust me, nothing here is enough to make actual buy/sell decisions on. I’m adding that for the person who messaged saying they bought a stock because I said something about it.Don’t do that to yourself)

Follow me @eldivyn

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3 thoughts on “Musings I: Why Oil Might End Up At $90.”

  1. I quite agree with yor logic and I’ve also been saying this since last month. At some point this shale madness will tank. Commodities market isn’t always easy to jump into as a lot of doe is needed. So that’s where people are always very careful.

    i like yor blog and I follow it. Nice work

    Like

  2. I’m glad you see it too, at least that encourages the feeling that I am more right than wrong on this one. I’ve stayed away from commodities for the same reason, but hey, I might give it a toss.
    Thanks for the follow. Do share thoughts now and then.

    Like

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