Think back to the aftermath of the 2008 market crash.
Oil prices fell off a cliff, from $147 per barrel in July, to $33 on one frosty morning in early 2009. So could we see oil prices decline further, from $79 to a lower number?
Hey, never say never.
Still, I believe we’re at or near the price-bottom.
There are six reasons why we’ve hit bottom…
ONE: THE COMING CLOSED-DOOR SESSION
On Nov. 27, OPEC will hold its 166th scheduled meeting in Vienna. If pre-meeting comments from OPEC big shots are indicators, the closed-door session will feature incandescent arguments over cutting back oil output from numerous nations.
The fact is that, with just a little bit of collective production discipline, OPEC can arrest tumbling prices and turn things around. By the time of the post-meeting press conference, I suspect traders will already be bidding oil prices back up.
TWO: THE BALANCE OF THE BOOKS
Outside the doors of OPEC meetings, there’s another price dynamic at work. Relatively low oil prices, of late, are playing havoc with national budgets of many oil exporting nations.
Nigeria, for example requires about $130 per barrel to balance its national books (fat chance!), while Russia needs prices near $100 to pay all the bills. In general, there’s a global push, from many quarters, to find ways to increase oil prices. The current number, hovering around $80, is too low.
THREE: VAPOR LOCKS AND NATURAL GAS SNARES
Meanwhile, close to home winter is coming. That means it’s going to be… cold and snowy, and not just if you live in Buffalo, New York. Highly-credentialed weather-guessers are forecasting another frigid winter, with more polar vortexes just like last year.
Energy demand will be strong in North America and Europe. Out in the field, expect harsh weather negatively to impact U.S.-Canadian oil output by making it harder to operate in sub-zero conditions of oil patches from the Bakken (North Dakota) to the Marcellus (Pennsylvania) and more. Remember last year’s ‘vapor locks’? I do. Long story.
FOUR: BIG OIL BACK IN BUSINESS
At the same time, across North America and other continents, refineries that scaled back for maintenance this fall are now coming back online. They need crude oil to flow through all those clean, shiny new pipes. This is positive for overall crude oil demand.
FIVE: SECRET CHINESE STOCKPILES
Chinese economic growth will do whatever it does. Actually, according to no less than investment guru Jim Rogers, you can’t trust most economic statistics out of China anyhow.
Still, I’ve seen hard numbers to the effect that China is using the current low oil price environment to fill its strategic petroleum reserve tanks, across the country. This oil doesn’t show up as ‘economic output’ in Chinese statistics, but it makes for global-levels of demand just the same.
SIX: FRACKING SMACKDOWN
Finally, I’ve heard from acquaintances up and down the supply chain that the falling oil price environment of the past six months has already caused a slowdown in scheduled drilling and completions in the North American oil patch.
Thus, as 2015 kicks into play, I suspect we’ll see lower numbers of rigs, using less drill pipe, bits, services and more. It’ll lead to a slowdown in rising oil output from U.S. fracking, which will create its own price dynamic of perceptions.
Sincerely,
Byron King
