A SEASONAL fall-off in demand for oil, rising concerns over the Chinese economy and worsening global oversupply of crude could push oil down into the $30 dollars a barrel range, a majority of analysts surveyed by the Wall Street Journal now believe.
And money manager David Kotok has told CNNMoney that oil might even fall to as low as $15 a barrel.
This is good news, as the consensus opinion is now catching up with what I have been warning about for many months now – that the recovery in oil prices from early February to the end of July was built on very shaky ground. I have long felt that we were heading back towards the historic average prices of $30 a barrel. In the process, you also cannot discount the possibility of prices substantially undershooting this level.
But what worries me is that some people in the chemicals industry might have seen this coming. Are they therefore facing inventory losses on raw materials and finished products, and do they have realistic expectations of future prices and margins?
As recently as May, at the Asian Petrochemicals Industry Conference in Seoul, South Korea, most people I spoke to talked of a New Normal of oil prices remaining stable in the $60-80 a barrel range.
What encouraged this kind of thinking? Here is what I believe:
- A lot of people in the chemicals industry have seen almost nothing but crude in the region of $100 a barrel for their entire professional careers.
- Many people in the industry can obviously remember back to 1999, when oil was last at $15 unadjusted for inflation. But most analysts had been saying for a long time that we had entered a new paradigm of supply being insufficient to meet demand. Old thinking dies hard when you’ve heard the same thing over and over again. Some chemicals executives who could remember back to 1999 were thus reluctant to change their views.
- And central to the problem is the failure to grasp that it is financial markets that have long driven the price of oil. Now that stimulus is being withdrawn by the Fed and China, financial markets are losing their muscle in the crude market. So real supply and demand fundamentals are reasserting themselves, and real supply is far in excess of real demand.
You should also separate the short term from the long term here. The short term factors, you might want to argue, will soon go away. These include, as I have already mentioned, a seasonal slowdown in demand because of maintenance work at US refineries. Storage at the key Cushing terminal in the US could also overflow in two months, with a force majuere at BP’s Whiting refinery further lengthening. Then we have Iraq production at record levels as Iran prepares to return to the market.
So, if you read further into the Wall Street Journal I linked to above, you will see this: Most analysts still expect prices to bottom out soon and trudge toward $70 a barrel by the end of next year.
I think this is dangerous thinking as it doesn’t take into account the secular, long term decline in demand for oil, which I discussed last week.
So we are heading to $30 crude, or lower, both over the short and long term.
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