395. OIL BULL FALTERING?
Since the crash started in summer 2008, the general view in the peak oil community has been that the current low prices are an anomaly, and that prices will soon return to their upward trajectory. A number of voices are starting to question this view. The main issue seems to be this: Is the economy going to actually recover any time soon?
It reminds me of an inconsistency I often noticed when oil prices were skyrocketing. Many doomers were simultaneously claiming that: a) the economy was dying, and b) oil prices would continue to go through the roof. Something had to give, and as we all now know, that turned out to be claim b).
Now we've got the same contradiction all over again. Naturally the doomers are jazzed that the credit crisis is sending the economy into a death spiral, but at the same time they keep talking about oil prices soaring "when the economy comes back". It doesn't add up. If the financial crisis is a death spiral, the economy isn't going to come back for a long time. I keep wondering, are they just in denial, hoping for their oil portfolios to come back?
Consider the Asian Financial Crisis of 1997. That was peanuts compared to what we've got happening now, and it knocked the price of oil down to $10 a barrel -- equivalent to only $13 a barrel in 2009 dollars. It would seem that oil has a lot more room on the downside.
The Wall Street Journal Blog is starting to wonder:
With already tottering demand getting even weaker, oil bulls are having second thoughts. Barclays Bank, which for months has warned oil prices will rebound because of supply shortages, slashed its 2009 forecast for Brent crude to $61 from $70.Another skeptic says the unthinkable in Your Oil Stocks Aren't Coming Back:
Remember when Intel (INTC), Microsoft (MSFT), Dell (DELL), Lucent (ALU), Yahoo (YHOO) and Cisco (CSCO) ruled the markets? There was an era, roughly 1997 to 2000 when those stocks actually mattered. They were important companies doing big things in terms of providing the technology needed for the next century’s communications and internet build-out. And then, they just didn’t matter anymore. Once the dot com bubble burst, every bounce or rally in these names was basically a selling opportunity…for 8 years and counting! See the above chart for a notion of how frustrating it must have been to stay positive on NASDAQ tech names.Traders talking about "dumb money" in the oil markets:
It took a long time for people to get it through their heads that these stocks had seen the best valuations and prices that they would ever see. Investors couldn’t imagine a world where these stocks would no longer be important, but with each passing quarter and year, these NASDAQ Generals diminished in stature and market cap.
I believe that this story is repeating itself in the oil patch. Market participants seem to be in a state of disbelief that Chesapeake (CHK), Transocean (RIG), National Oilwell Varco (NOV) and ConocoPhillips (COP) aren't important anymore. These stocks may have have seen the best levels they will ever see, at least for a long time.
Flynn expects oil prices to eventually drop well below $30 a barrel in coming months as manufacturers cut operations and millions of laid off workers stop commuting to work.More in the same vein from Rigzone (hat tip to OilFinder):
"We're getting ready for a tailspin, but you just don't know what's going to happen," Flynn said. If it weren't for the new federal stimulus package and promises of further OPEC production cuts, "we'd probably already be there."
Trading on the Nymex has been erratic because of a influx of "dumb money" entering the market, analyst Stephen Schork said. Amateur investors are flocking to energy funds that have bet crude prices will eventually spike again.
"They're looking at the fact that crude went to $150 a barrel a year ago, and its in the 30s today," Schork said. "They think it's going back up."
Oil Cos' Bet on Swift Price Rebound Has Its Risks
Major oil companies are trying not to repeat the mistakes of the last price slump in the late 1990s, when cutting back on investment left them ill-prepared to meet growing demand in later years. This time they promise to maintain investment through the current price dip, but the risk is growing that a prolonged slump could stymie their plans.
If the years ahead follow the pattern of the last major recession in the early the 1980s, where global oil demand shrank during the downturn and remained well below production capacity for years, even as the recovery accelerated, prices may stay low for much longer than current expectations. Steady as she goes may be their mantra for 2009, but oil chiefs may be on course for some tough choices in 2010.
We are barely six months past the last peak in the oil price, but OPEC already has 8 million barrels a day of spare oil production capacity after big output cuts, said the group's Secretary General Abdullah Al-Badri. The group is very concerned about the impact the economic downturn will have on the medium- and long-term oil demand, he said.
OPEC's spare capacity looks likely to grow. Thanks to investment in the boom years, the world's productive capacity should grow faster between 2009 and 2012 than it did from 2003 to 2008, said a report from U.S.-based consultancy Cambridge Energy Research Associates.
Companies May Face Massive Cash Outflows
If companies do not reduce their upstream investment at all during the current economic downturn, CERA said spare capacity could reach 10 million barrels a day by 2013. "This would be an unprecedented margin and would tend to undermine the oil price," the consultancy said.