Peak Oil

[Derec]

April Oil futures have just taken out 43 on an intra-day basis. That's called a lower low, no guarantee that Derec will lose his ridiculous bet, just a bitch slapping for his misplaced optimism.

I thought you'd get excited over that.
By the way, you never actually agreed to the bet which is why we never cleared up technicalities like if we mean WTI or Brent (still well above $50).

The market seems to be treating Derec's invisible stop sign with the respect it deserves.

I never said anything about any "invisible stop signs". It is the stuff of "technical analysis" which I think is definitely limited. I merely said that I thought it very unlikely that oil would go as low as $35.

Oddly Derec seemed to argue that it was possible that oil could go below zero in his reply to that post, at the same time maintaining that it could not go below 35. This shows why he is such a formidable debate opponent.

Where did I say that?

Maybe UCLA making the NCAA BB tournament qualifies as something truly crazy.

Funny man. First of all, $43 can still be considered mid-40s and refinery strikes and shutdowns are much more relevant development than NCAA. Especially since the cockamamie law that only allows refined products, but not crude oil, to be exported. All that caused an increase of WTI-Brent spread over the last few weeks. In other words, the latest oil slump is mostly a US-centric thing, not a worldwide thing.

Meanwhile, some forecasts have oil averaging $35 for this year... they're talking about an average, not a little hickey.

We will see.

 

[semiopen]

By the way, you never actually agreed to the bet which is why we never cleared up technicalities like if we mean WTI or Brent (still well above $50).

I know you are joking, but you offered the bet on 1/20 after you gave a quote of about $48 for WTIC (West Texas Intermediate Crude) on 1/15 and I had made a very amusing reply that the price was now $46 also on 1/15.

The chart below shows what has happened between 1/15 and yesterday.



Generally speaking if a price breaks a resistance point you can expect a decline equal to the distance between the resistance point and the high.

Depending on how you look at it, there was high of 54.x in February and resistance points of 47.x. Therefore we can expect a decline of 7 points from 47 or to about 40. We could also call 43.x a resistance point but that is not that well defined in which case the decline could be to 32 - 54-11 = 43 43-11 =32. I'm not sure that is a correct interpretation though... 40 is a pretty conservative estimate of the target on this move.

Like I've been saying it's not set in stone... but the good guys are feeling pretty good at the moment.

 

[Derec]

You were saying, semiopen?

 

[semiopen]

Is it at $100 a barrel yet? Seems like it's a little lower than the price you recommended buying it at.

 

[Derec]

Is it at $100 a barrel yet?

Is it $35/bbl yet?

Seems like it's a little lower than the price you recommended buying it at.

I never made any buying recommendation and you know it. I merely said that the oil is much more likely to go to $100 than it is to go to $35, as you said it would. I do not see it going anywhere close to $35 anytime soon.
That said, oil went north of $60 for a but so pretty penny could have been made on the upswing.

 

[fromderinside]

Is it $35/bbl yet?

Seems like it's a little lower than the price you recommended buying it at.

I never made any buying recommendation and you know it. I merely said that the oil is much more likely to go to $100 than it is to go to $35, as you said it would. I do not see it going anywhere close to $35 anytime soon.
That said, oil went north of $60 for a but so pretty penny could have been made on the upswing.

Same could be said if one shorted at $60.

 

[Derec]

Same could be said if one shorted at $60.

True. I was just pointing out to semiopen that there was significant upward movement of the oil price for a while.

 

[semiopen]

Is it $35/bbl yet?

Seems like it's a little lower than the price you recommended buying it at.

I never made any buying recommendation and you know it. I merely said that the oil is much more likely to go to $100 than it is to go to $35, as you said it would. I do not see it going anywhere close to $35 anytime soon.
That said, oil went north of $60 for a but so pretty penny could have been made on the upswing.

Unfortunately, your bet was that it would go to $100. I discussed the $60 level above, that turns out to be an important number for shale production costs, so it's not surprising that sellers appeared at that level. Granted you haven't lost the bet yet.

Perhaps this is giving too much credit to your thinking, but I thought our disagreement was over the likely duration of the slump in oil prices.

Oil Market Embraces Lower-for-Longer Price View as Futures Sink

The global oil surplus increasingly looks like a problem that’ll take years rather than months to solve — and the market is pricing that in.
U.S. crude futures for delivery in five years have broken below levels seen during the financial crisis. With leading OPEC members pumping at a record, supplies from elsewhere holding up and Iran close to reviving exports, the market is signaling the glut will persist.
The global oversupply has already prompted oil companies to warn that the price rout will continue. Royal Dutch Shell Plc said Thursday it’s braced for a “prolonged downturn,” echoing a forecast from BP Plc Chief Executive Officer Bob Dudley that prices will stay “lower for longer.”

This was sort of my guess from the technical nature of the downturn. Still, this view might be wrong, but it appears that knowledgeable people are supporting it.

 

[Derec]

Unfortunately, your bet was that it would go to $100.

It was that it would go to $100 before it went to $35. My purpose was to say that $35 oil is very unlikely indeed that we will see $100 oil first. And in the last 6 months I have seen nothing to change my opinion on that.

Granted you haven't lost the bet yet.

Nor will I.

Perhaps this is giving too much credit to your thinking, but I thought our disagreement was over the likely duration of the slump in oil prices.

No, the disagreement of the bet specifically was over where the oil was bottoming out. In post #39 you talked about oil breaking the $35 level and even going into 20s. In the very next post I laid out my reasons why I think that is unlikely.
That said, I do think forecasts of this slump lasting years are unrealistic. We will be back into higher territory sooner that many people think.

The global oversupply has already prompted oil companies to warn that the price rout will continue. Royal Dutch Shell Plc said Thursday it’s braced for a “prolonged downturn,” echoing a forecast from BP Plc Chief Executive Officer Bob Dudley that prices will stay “lower for longer.”

But not even they seem to be predicting a $35 price.

This was sort of my guess from the technical nature of the downturn. Still, this view might be wrong, but it appears that knowledgeable people are supporting it.

Your view was that the market will go much lower than it actually did.

 

[fromderinside]

It was that it would go to $100 before it went to $35. My purpose was to say that $35 oil is very unlikely indeed that we will see $100 oil first. And in the last 6 months I have seen nothing to change my opinion on that.

Granted you haven't lost the bet yet.

Nor will I.

Perhaps this is giving too much credit to your thinking, but I thought our disagreement was over the likely duration of the slump in oil prices.

No, the disagreement of the bet specifically was over where the oil was bottoming out. In post #39 you talked about oil breaking the $35 level and even going into 20s. In the very next post I laid out my reasons why I think that is unlikely.
That said, I do think forecasts of this slump lasting years are unrealistic. We will be back into higher territory sooner that many people think.

The global oversupply has already prompted oil companies to warn that the price rout will continue. Royal Dutch Shell Plc said Thursday it’s braced for a “prolonged downturn,” echoing a forecast from BP Plc Chief Executive Officer Bob Dudley that prices will stay “lower for longer.”

But not even they seem to be predicting a $35 price.

This was sort of my guess from the technical nature of the downturn. Still, this view might be wrong, but it appears that knowledgeable people are supporting it.

Your view was that the market will go much lower than it actually did.

Who was it who forecast oil to go over $150 a barrel? Who told us oil had bottomed around $50 a barrel when it actually went to $41 a barrel. Who forcast the price was going back up when it briefly got to $60 a barrel. Who's always wrong because he has so much faith in the 'free' market. So why are you always so wrong ....

just askin' ...

 

[Derec]

Who was it who forecast oil to go over $150 a barrel?

Matthew Simmons? Certainly not I. In the range >$100/bbl you have the same negative feedback loops that you have when price drops to current levels. I.e. if price goes up supply increases and demand decreases and vice versa if the price goes down.

Who told us oil had bottomed around $50 a barrel when it actually went to $41 a barrel.

It didn't go to $41 as far as I recall.

Who forcast the price was going back up when it briefly got to $60 a barrel.

And it was going up. And in the medium to long term it will go up. Unlike semiopen, who seems to be a short term trader, I am more interested in longer term trends.

Who's always wrong because he has so much faith in the 'free' market.

Yes, much better to have government set the price of oil by fiat. Price controls are working out so well for Venezuela currently.

So why are you always so wrong ....

Certainly not as wrong as the guy who predicted oil would break $35 resistance and go to upper $20s.

 

[fromderinside]

Certainly not as wrong as the guy who predicted oil would break $35 resistance and go to upper $20s.

So confidently written when Iran's increase to supply isn't felt yet ..... and who knows whether those who frack find ways to frack for less. Seems to me pressure is a way to get changes in methods. Looking for fracking and tar sands processing to be profitable at $35 in the near future. Scale should have some effect as well.

 

[Derec]

So confidently written when Iran's increase to supply isn't felt yet .....

I think the anticipated contribution from Iran is included in the current price. Also Iran doesn't want oil prices to be this low and will be judicious in bringing any additional supply on too quickly.

and who knows whether those who frack find ways to frack for less. Seems to me pressure is a way to get changes in methods.

While I am sure there will continue to be technological developments (and advanced technology is what enables us to produce 95 million barrels of oil each day in the first place) they will result in diminishing returns over time. Also, the fact is that low-hanging fruit gets plucked first. That means that over time the deposits still left to be produced will be harder to access and thus more expensive. I do not think technology will be able to compensate for that.

Looking for fracking and tar sands processing to be profitable at $35 in the near future. Scale should have some effect as well.

When the oil prices fell early this year it resulted in a large reduction in "drill count". But that reduction was not uniform. Least productive (and thus more expensive) areas got dropped first, while most productive (and thus least expensive) areas are still being drilled vigorously.
So yes, the overall cost per bbl is reduced by selecting cheapest areas to drill while the prices are low so you can still make profit. But that reduces overall production potential of course, and more importantly it means that since cheapest areas are the only ones being actively produced right now the overall cost will rise when they increasingly get played out. Shale has the tendency of wells dropping off much faster than conventional oil (due in large part to use of "superstraw" technologies), which necessitates drilling more new wells more often.

I actually benefit from low oil prices given that my current vehicle doesn't exactly get great mpg and I don't plan to replace it until next year, so I do not wish oil prices to go up. But I still think prices will not go as low as some here think or remain relatively low for years.

 

[arkirk]

Certainly not as wrong as the guy who predicted oil would break $35 resistance and go to upper $20s.

So confidently written when Iran's increase to supply isn't felt yet ..... and who knows whether those who frack find ways to frack for less. Seems to me pressure is a way to get changes in methods. Looking for fracking and tar sands processing to be profitable at $35 in the near future. Scale should have some effect as well.

So do you really just think the only problem is getting the oil out of the ground? Global warming rings up oil company profits in a DIFFERENT SORT OF WAY. When I start to hear the petro chemical companies refer to product such as coal, oil and natural gas as transitional, I will feel these companies are beginning to come around. So far, they are all just seeking further growth. That means bigger carbon footprints. That means these outfits are prepared to let our societies get overcooked by the sun for the sake of their almighty profits.

 

[semiopen]

Derek, my buddy Ruy Lopez also called me a short term trader. Since you have selective amnesia about him, he recommended gold at $1800 (give or take) in 2012-13 and now is in danger of seeing a 50% loss. Don't worry, you can still pretend to be perfect, even though basically the same kind of guy bets on both.

When I consulted my oil trader friend six months ago, he was not very short term bearish because contracts for later delivery were not getting hit hard, and a move up to $60 in the short term was distinctly possible.

Oil bulls' hope for quick price dip dimmed by 2020 crude under $70

However, that situation doesn't exist anymore.

...the value of Brent crude oil for five years in the future slid from nearly $90 a barrel in late November to around $72 almost two months later.

Over the past month, however, it has dived anew, reaching nearly $66 a barrel on Tuesday, its lowest since 2009.

Last week, analysts at ABN AMRO cut its 2016 oil price forecasts by $10 a barrel on a mix of factors including falling production costs, disappointing demand, a stronger U.S. dollar and deteriorating market sentiment.

FWIW, usually an oil price forecast is given as an average price for the year. ABN AMRO lowered their Brent forecast to $65/barrel for 2016. I just bring this up because you made a rather odd comment about nobody forecasting $35/barrel. Our bet didn't involve an average price, just one barrel of West Texas Intermediate crude changing hands for $35 or lower on the spot market.

I've also noticed that the oil bulls are getting very vocal - investment of a lifetime kind of thing.

With my kind of luck, they're right... but I'm going to try to hang on until #35 anyway.

 

[semiopen]

Here is a title that Derec wouldn't have expected seven months into his bet -

4 Reasons Why Oil Will Not Trade Much Below $40

This is interesting because it takes Derec's mythical, absolute, no questions asked stop sign at $40 and changes it to a caution sign.

The reasons given don't really apply to $40 so much, just that at some point oil will probably go up, and the author thinks it won't go down that much more.

Maybe he's right but it's a sneeze and a hiccup away from $35. Meanwhile the guy says "everyone" is bearish, like all of a sudden, all the right wing commodity nuts have been raptured away.

At any rate, it is an interesting interplay of forces in the market.

 

[lpetrich]

semiopen, could you please summarize those 4 reasons for us? I can't read that article.

 

[semiopen]

Oil is under siege; everyone is bearish.
Reason one: Refining spreads remain strong.
Reason two: U.S. production will decline - China prepares to buy.
Reason three: The political premium.
Reason four: Open interest rising - shorts back in town.

SeekingAlpha.com is free to join. I don't know about the quality of this guy's advice; assuming his reasons are all legitimate bullish points (not to mention true) why would they be good enough to halt oil's decline just below $40? He doesn't explain that in the article.

 

[fromderinside]

When I start to hear the petro chemical companies refer to product such as coal, oil and natural gas as transitional, I will feel these companies are beginning to come around. So far, they are all just seeking further growth. That means bigger carbon footprints. That means these outfits are prepared to let our societies get overcooked by the sun for the sake of their almighty profits.

I haven't seen any Clean Coal commercials recently. We apparently don't need to drill more holes right now because of how quickly we're getting better at getting stuff out and processed at lower cost. I'm using evidence that american production isn't dropping while number of working holes is dropping.

 

[fromderinside]

I think the anticipated contribution from Iran is included in the current price. Also Iran doesn't want oil prices to be this low and will be judicious in bringing any additional supply on too quickly.

and who knows whether those who frack find ways to frack for less. Seems to me pressure is a way to get changes in methods.

While I am sure there will continue to be technological developments (and advanced technology is what enables us to produce 95 million barrels of oil each day in the first place) they will result in diminishing returns over time. Also, the fact is that low-hanging fruit gets plucked first. That means that over time the deposits still left to be produced will be harder to access and thus more expensive. I do not think technology will be able to compensate for that.

Looking for fracking and tar sands processing to be profitable at $35 in the near future. Scale should have some effect as well.

When the oil prices fell early this year it resulted in a large reduction in "drill count". But that reduction was not uniform. Least productive (and thus more expensive) areas got dropped first, while most productive (and thus least expensive) areas are still being drilled vigorously.
So yes, the overall cost per bbl is reduced by selecting cheapest areas to drill while the prices are low so you can still make profit. But that reduces overall production potential of course, and more importantly it means that since cheapest areas are the only ones being actively produced right now the overall cost will rise when they increasingly get played out. Shale has the tendency of wells dropping off much faster than conventional oil (due in large part to use of "superstraw" technologies), which necessitates drilling more new wells more often.

I actually benefit from low oil prices given that my current vehicle doesn't exactly get great mpg and I don't plan to replace it until next year, so I do not wish oil prices to go up. But I still think prices will not go as low as some here think or remain relatively low for years.

What a bunch of rationalizations. So your explanation for increasing levels of production with decreasing levels of drilling at recession prices are that its just a negative bubble? Care to bet on $35 dollar price yet?