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Better Times Ahead For Oil, If You Can Believe It

Things will get better because they can’t get worse. We’re at or near the bottom. Better times ahead.

But you’d never know that based on oil prices or the news. WTI dropped more than 3 percent on August 11, hovering near prices not seen for more than six years, since the dark days of 2009. The commentary is universally bearish. Everyone from analysts to oil company CEOs are saying what you see is what you get for the foreseeable future. Comparisons to the great price collapse of 1986 and the 15-year nuclear winter that followed are again making headlines. It’s not awful; it’s worse.

Numerous challenges exist. Every day there’s yet another reason why oil prices will never increase or economic conditions improve. Iran. China. Greece. Global inventories. OPEC overproduction. Rising North American rig counts. Carbon taxes. Corporate tax increases. Royalty reviews. No pipelines. The news is so depressing, more are saying this downturn is the worst ever, although there is significant evidence to the contrary.

This is not new. What the industry has always done is extrapolate; whatever happened yesterday will continue. If things are good, they always will be. If it is bad, it will remain so forever. After 36 years of writing about the always-volatile oilpatch, the only constant is the herd is usually wrong, regardless of the direction it is headed.

There are two buckets of information essential to reaching a reasoned independent analysis. Bad news first.

• The modern oil industry has never operated without Saudi Arabian or OPEC supply management. When prices went too low, the Saudis would always withdraw output to stabilize markets. In 1986, the Saudis shut in over 5 million barrels per day to get crude back to US$18. Today the Saudis claim to seek market share, not price. OPEC production in July was reported at 31.5 million barrels per day (b/d), 1.5 million above its June 5 quota of 30 million b/d. This is about 2.3 million b/d above stated OPEC internal demand for 2015. The specter of Iran increasing production, if its nuclear inspection agreement is ratified, weighs heavily on market sentiment.

• Commodity prices as a group – oil, potash, iron ore, coffee, and copper – are at lows unseen since early this century. This is made worse by a strong U.S. dollar. Hedge funds specializing in commodities are losing money and shrinking as profits become more elusive. The futures market for oil is very bearish. WTI five years out for September 2020 was only US$61.80 on August 7, reflecting the fact that nobody figures the price of oil is going anywhere and no speculative...


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