Harry Peterson
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5 reasons to bet against a big rebound in crude

Production of petroleum isn’t plunging

If you needed any evidence that no one knows what oil will do next, look at the chart for Tuesday – up in the morning, down at mid-day, and up again late, settling for the day at $53.24.

But there are at least five big reasons to bet against the price of oil CLH5, -3.72% climbing anywhere near last year’s peaks – and the balance of risks points to lower prices ahead, if not this year then in two years. Here’s why — and in assessing these stats, remember that the world oil market is about 90 million barrels per day, and the gain in U.S. production since 2008 that has reshuffled the market has been about 4 million daily barrels:

First, U.S. oil production hasn’t fallen yet — and won’t any time soon.

Yes, the number of U.S. oil and gas rigs in place is falling as oil companies slash capital spending, down almost 25% in the last year, according to drilling-services company Baker Hughes. But rigs that are out there are getting more productive all the time.

That’s why Goldman Sachs is predicting this week that U.S. output will actually rise by 600,000 barrels per day this year, comparing the fourth quarter of 2015 to late 2014 — after the price collapse was fully on. That’s less than U.S. production has been growing — but still enough to meet two-thirds of the 2015 global demand growth predicted by the International Energy Agency.

Second, the current price is close to the cost of U.S. production.

One thing that drove the collapse in oil last fall was the market’s discovery of data suggesting that the average cost of North Dakota oil was less than we thought — about $42 a barrel on average, with some counties boasting average costs of $29 or less.

It’s hard to come up with a national figure for the cost of U.S. production — Goldman last week put it at $60, the same figure Rystad Energy floated to me in November. Whatever it is, the market price is high enough to sustain a large and rising share of U.S. production — and foreign direct costs of oil production are much lower. Plus, most oil producers still need to drill freely to prop up expensive welfare states. They’re not cutting.

Bloomberg News

Third, even ISIS isn’t driving down OPEC output.

As hard as it is to believe, Iraqi oil output rose in December compared with a year ago, according to the U.S. Energy Information Administration. The reason is simple: Iraq’s biggest oil fields are in the south, far from the fighting. With ISIS now fomenting chaos in Libya, production there is falling. But Libya was already a mess. After a stab last year at getting local drillers’ act back together, Libyan production that once was 1.7 million barrels per day is down to 200,000. Even if it goes to zero, Libya won’t matter.