In July 2014 I made a wager. I said that before March 2016 (don’t ask me why this date, it just sprung into existence out of nothingness) WTI would go below 28 USD. We have seen a huge slide in the oil price over the last 12 months so I refined my stance in February 2015 by adding that WTI would even be below USD 28 for an entire trading week (i.e. from Monday to Friday). Back then – this was still pretty strong stuff.
In July 2014 I was laughed at and I had no difficulty finding someone who took the wager. Let’s not forget that in July, WTI was still 3 digits albeit by the slimmest of margins. Below 70 seemed unlikely, below 50 looked impossible and below 30 was utterly ridiculous.
Oh, did I forget to say that long before that, I said that China’s bubble would pop? I did so in December 2012, a whopping 32 months before this bubble eventually really started popping. Oh, and I also said that the oil price (and the LNG price with it) would eventually come down well before 2020. That was in November 2012.
There is no escaping gravity.
Let’s come back to the wager. Yesterday, WTI was on 38.24 and all pointers go down. I might still get lucky with my 5 days of below 28 USD before March first 2016 or would you place a large sum of money to prove me wrong today? I know you would probably have jumped on the proposal just some 6 months ago and certainly so in July 2014.
But this one goes deeper. Why is it, that a large part of some of the finest experts in oil and gas got everything so fundamentally wrong? Why is it that we always run after what seems to be obvious or also after some totally freaky idea? Why is it that human nature makes us think that high prices are a good thing or that countries coming back from decades of oblivion are the new stars when in fact they rather play catch up with the rest of the developed world?
But maybe, the more interesting question is – why did we get here and what’s ahead and how, yes how can one make sure that in the future you are not on the rotten end of such a bargain?
Let’s be frank – even I was not sure that things are going to play out exactly as they eventually did. This one little but important feature I share with the rest of the planetary population. I don’t know the future. If I did, I would have long ago predicted the correct numbers at some lottery and would enjoy riches on some Caribbean beach. But I am not.
Is my wager pure luck then as this sure cannot be superior knowledge?
I have delved into the fundamentals of oil and LNG pricing more than once on this blog and I sure don’t want to repeat the process to many times (you will still have to endure some iterations as the topic won’t go away so quick so bear with me here). But one thing that seems not to get into people’s minds is that although nobody can predict what exactly will happen in the future, one can sure discern some broad trends and those trends then give us a pretty clear picture.
When I was a manager I read a quote saying “One cannot predict the direction of the wind but one can sure get better at setting sails”.
Same is true for the oil world and indeed for just about anything in the human world. When LNG projects get built in defiance of exploding cost stacks it’s not far-fetched to guess that one day they will crumble when markets come down. If sellers of oil start to behave like spoilt children for too long and the world starts to treat them like Wunderkinder when in fact they just got lucky, one is right to wonder how long this all is about to hold up. When markets get bombarded by deluges of new product we should take shelter because at some point saturation is going to kick in.
OK, let’s stop the banter for now – I might come back to it later. Vanity has me in its grip.
What are the odds for my wager to turn true? We are still 10 bucks away from the magical threshold and this would have to endure for a full trading week.
First of all, oil production in the lower 48 is still rising and that’s the single most potent driver keeping the market oversupplied well into next year. Production should peak towards the end of 2015 as then the 2014 drilling overhang should lose its steam. But OPEC is still pumping at capacity and some of their members even need to do so for their bare survival. Countries like Venezuela are on the edge and Iran craves for making some quick cash on oil sales. Saudi Arabia just suffered downgrades and is contemplating budget cuts (is anyone actually taking this all in for its real significance – the Saudis reign in spending) which means they need every dollar they can lay their hands on plus markets are failing.
China just started to show what’s in the store for the long term as the eternal growth paradigm in China deflates back to much more humble numbers. This shaves off huge previously anticipated and planned for demand. So, until well into the first months of 2016 we face more and more black glibber and less and less real demand. Mind you that all those new shiny Petchem plants in the Mideast and in China produce stuff that won’t be needed anymore as well. They will have to scale back or even mothball.
No matter where anyone puts the thresholds for profitability for shale drillers in the US – I think we all agree it sure is above 28 bucks. This means that in the end production will go down as no money can be made anymore with new drilling. But there are lots of drilled wells that have not been finished and it really does not make much sense not to bring them to production. A buck is a buck in the end.
Besides, never underestimate those shale drillers’ innovative juices. As I said many times, if you are squeezed into a tight corner you wiggle until you find a way to get out of the bind and there is an awful lot of wiggling right now. There is some downward potential on costs, I am sure about that. And if things get real crazy some sweet spots in the US might be able to pump for less than 28 USD.
One thing is sure by the way – you can kiss that high price year’s good bye as we won’t see 3 digit oil prices anymore in a long, long time. If ever.
And I am getting ready to cash in my espresso on March 1st 2016. That’s what’s in the pot.