Tags: oil | price | crude | invest

Next Stop in Oil's Free-fall: $20?

Tuesday, 13 January 2015 07:37 AM Current | Bio | Archive

Speaking at the sixth Gulf Intelligence UAE Energy Forum in Abu Dhabi, UEA energy minister Suhail Al Mazrouei made a few interesting statements:

“… OPEC won’t adjust its output … we cannot continue protecting a certain price … we have seen the oversupply coming primarily from shale oil and that needed to be corrected … we are concerned about the balance of the market but we cannot under any circumstances be the only party that is responsible to balance the market … shale producers need to stay … all producers need to be rational so that fair prices could allow shale production to continue …”

The million dollar question for all investors is: “What are fair prices for crude oil?” now the $50 threshold for Brent crude, which is the major trading classification of sweet light crude oil that serves as a major benchmark price for oil purchases worldwide (Brent crude futures for February 2015 at $45.76) and for West Texas Intermediate (WTI), also known as Texas light sweet (light crude oil futures for February 2015 at $44.70 has been breached.

On Sunday, Goldman Sachs released its latest oil research report under the title: “The New Oil Order — Shale is creating a new more dynamic margin of adjustment,” in which it revised substantially down its 3-, 6- and 12-month price forecasts for:

Firstly, it expects Brent crude to be priced at $42/bbl (-48 percent from latest estimate), $43/bbl (-49 percent) and $70/bbl (-22 percent) respectively and which was substantially down from their earlier estimates that were respectively $80/bbl, $85/bbl and $90/bbl.

Secondly, it revised WTI prices down for its 3, 6 and 12-month price forecasts to $41/bbl (-41 percent), $39/bbl (-48 percent) and $65/bbl (-19 percent) from $70/bbl, $75/bbl and $80/bbl respectively.

I couldn’t help it, but when I read the report I thought back to March 2008, or merely 7 years ago, when the same institution stated at that time: “… as the lack of supply growth and price-insulated non-OECD demand suggest a future rebound in U.S. gross domestic product growth or a major oil supply disruption could lead to $150-$200 per barrel oil prices…”

I don’t mention this here in the negative sense, but only to underline how extremely difficult it is, even for one of the most eminent institutions in the field, to forecast prices/markets.

No, nothing is written in stone, and that’s the only thing that’s for sure.

No doubt there is a lot of uncertainty about how far oil prices could further go down in the foreseeable future.

I still don’t think oil prices have reached their bottom yet. I want here immediately to reiterate it is extremely difficult if not totally impossible to call precisely a bottom for a commodity, equity, currency, etc. beforehand. Anybody who hopes to buy at “bottom” prices will always will need a lot of luck.

That said, there is no doubt whatsoever we are in a crude oil price bear market and bear markets always exaggerate to the downside, as bull markets always do to the upside.

In this context, today we know commodity funds are still holding very important long positions in oil at the commodity futures exchange, the NYMEX (New York Mercantile Exchange), even after they have been liquidating about one quarter of their long positions since July.

But what's maybe more important, at least in my opinion, is that even if these commodity funds would liquidate another quarter of their long positions, they still would have extremely important long positions. No, this wouldn’t be a total liquidation operation as sometimes happens with funds and which they are legally permitted to do if it is adequately mentioned in their related prospectuses.

To me, that’s the huge unknown catalyst that could provoke a sudden and substantial further price collapse in the price of oil that hangs over the markets, but that many investors are unaware.

If we ever should get there, which can’t be excluded at all, but isn’t neither for sure, I wouldn’t be surprised to see oil collapsing into in the $20 per barrel price zone, which, if that happens, should be one of those extremely rare occasions where a solid buy below “fair” price value, without knowing exactly what a fair price for oil really is, would be possible for all those investors, big and small, who would have followed closely enough the oil price markets.

Of course, at the same time, all oil related businesses could equally present interesting investing opportunities.

Never forget, long-term investments that are acquired below “fair” price value are usually real good investments.

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Never forget, long-term investments that are acquired below “fair” price value are usually real good investments.
oil, price, crude, invest
Tuesday, 13 January 2015 07:37 AM
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