Oil Is Still Heading to $10 a Barrel
JUNE 28, 2016 12:00 PM EDT
A. Gary Shilling
Back in February 2015, the price of West Texas Intermediate stood at about $52 per barrel, half of its 2014 peak. I argued then that a renewed decline was coming that could drive it below $20, a scenario regarded by oil bulls as unthinkable. But prices did fall further, dropping all the way to a low of $26 in February. Since then, crude rallied to spend several weeks flirting with $50 per barrel, a level not seen since last year. But it won't last; Im sticking to my call for prices to decline anew to $10 to $20 per barrel.
Recent gains have little to do with the fundamentals that led to the collapse in the first place. Wildfires in the oil-sands region in Canada, output cuts in Nigeria and Venezuela due to political unrest, and hopes that American hydraulic fracturing would run out of steam are the primary causes of the recent spurt.
But the world continues to be awash in crude, and American frackers have replaced the Organization of Petroleum Exporting Countries as the worlds swing producers. The once-feared oil cartel is, to my mind, pretty much finished as an effective price enforcer. Even OPECs leader, Saudi Arabia, is acknowledging the new reality by quashing recent attempts to freeze output, borrowing from banks and preparing to sell a stake in its Aramco oil company as it tries to find new sources of non-oil revenue.
The Saudis and their Persian Gulf allies continue to play a desperate game of chicken with other major oil producers. Cartels exist to keep prices above equilibrium, which encourages cheating as cartel members exceed their allotted output and other producers take advantage of inflated prices. So the role of the cartel leader, in this case Saudi Arabia, is to cut its own output, neutralizing the cheaters to keep prices up. But the Saudis suffered market-share losses from their previous production cuts. OPEC has effectively abandoned restraints, with total output soaring to as high as 33 million barrels per day at the end of last year:
more...
http://www.bloomberg.com/view/articles/2016-06-28/why-oil-is-still-headed-as-low-as-10-a-barrel
ffr
(22,669 posts)leveymg
(36,418 posts)When that last was last quietly floated back in 1997, oil did fall to $10/bbl, and a quiet civil war started among various factions of the Saudi elites, involving western oil interests, a conflict over succession and economic control of the Mideast that led to 9/11 and the invasion of Iraq.
redstatebluegirl
(12,265 posts)One guy I know sold his Prius to get a Ford Explorer.. Crazy if you ask me, I still think at some point it is going back up. I don't even claim to understand the economics of it, I just listen to Oklahoman's talk about the bust and boom nature of the oil business. I'll keep my little car thanks very much.
Travis_0004
(5,417 posts)I'm certainly not rich, but honestly, I don't really know much much gas is right now. If the tank says E, I pull in the nearest station and fill it up.
redstatebluegirl
(12,265 posts)It really has surprised me I guess. I don't notice the price as much as I used to when I did not fill the tank unless I had to.
yurbud
(39,405 posts)SoCalMusicLover
(3,194 posts)If he really thinks that oil is going to $10 a barrel, he's on some mighty fine drugs.
I love how he justifies it by saying...."see, it went to $26." That's 260% of $10.
I don't see it happening.
yurbud
(39,405 posts)The Saudis and others know if the price drifts too high, dirtier oils like those become more profitable (or profitable at all) to extract and refine, putting a natural cap on their potential profits.
Likewise, as people in major consuming nations become more concerned about global warming and since a lot of us consumers aren't seeing our wages go up, demand for their product will slow.
Pretty soon they'll be selling whale oil when everybody wants kerosene.
That can't happen soon enough.
I can't wait to to step over a homeless oil exec or Saudi royal on my way to Starbucks.