What Price Oil?

cropped-bob-shapiro.jpg   By Bob Shapiro

I just read an analysis of the crude oil market which laid out some facts which sound reasonable to me, followed by a $200 per barrel forecast for the black stuff in a couple of years. I find that to be less than likely.

The facts are that oil has fallen to the mid $40s in price, and that some projects are being idled. The idled rigs tend mostly to be the oil shale/fracking wells which have a cost per barrel over $60. So far so good.

The analyst then stopped looking at the fundamentals of the oil patch and used Elliott Wave Theory to predict the $200 number. Now, there are technical analysis methods that show decent results in various situations, but this may not be one of those times.

Is $200 oil possible? Yes, anything is possible, but let’s consider what might have to happen to cause this.

  • War. A Civil War or an invasion into an oil producing country could reduce supplies in the short term, which could spike prices up to $200. An Islamic revolution in Saudi Arabia is such a possibility. 

    OPEC

    This certainly is possible, but I wouldn’t want to bet my money on such a prediction.

  • Boom. The major economies currently are struggling and appear likely to be headed into a severe Recession. Is a worldwide surge into Boom conditions possible. Yes, anything is possible, but I’d expect this is even less likely than Saudi Arabia going down the tubes.

 

  • Inflation. We have inflation today in the US at around 8+%, even though the official figures say it’s closer to 2%. Even at 10%, after 4-5 years, that would indicate an oil price of perhaps $80. To get to $200 probably would need inflation to pick up considerably – in the 20+% range. Possible? Yes, most likely of the three. I have very low esteem for Ms Yellen and the FED. As the US markets start to tumble later this year and next, the US should expect the next round of QE, plus real incentives for the banks to start lending some of the previous QE Dollars, sterilized until now. I give 20+% CPI rises about a 1 in 3 chance.

CPINov 14 - 1980

Baring one of the above possibilities, I expect that the recently improved fracking technology will put an effective ceiling above oil prices of perhaps $80 per barrel for the next 4-5 years.

As prices begin getting near that price, projects to capture oil from the shale formations will resume. The technology has improved in just the last 5 years so that a new well can start pumping just 4 days after the drilling starts. And, the price per barrel has started to be competitive even at today’s mid $40s per barrel price.

Production will be put on hold so long as the price stays relatively low. But the exploration data on where to drill won’t disappear! The oil still will be down there. The property may change hands as some companies go bankrupt, but when price rises enough, whoever owns it will start the drilling and pumping.

$200 per barrel within 4-5 years? That does not seem at all likely to me.

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