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MemberVenue Archive  of Barrel Meter charts:  2013  2012  2011  2010  2009  2008  2007

MemberVenue Archive  of Barrel Meter charts:  2013  2012  2011  2010  2009  2008  2007

 Oil's Stress Premium ticks up to $7/barrel

April 27 2013 delayed FreeVenue public release of Jan 27th MemberVenue guidance  ~ USA Refiner Acquisition Crude price averaged $92/barrel in December (up $0 from previous month) and is currently 3% ($3) below its $95 Fundamentals Fair Value.  The Barrel Meter model analysis reveals RACrude returned to equilibrium in July 2012 and after the present brief spiking episode, improving oil fundamentals should see the price retreat to $80 by 2015Q1  This will be followed by a resumption of the secular uptrend mainly forced by ever-rising Extraction Costs (0.4%/month).

Non-Fundamental price components

    Excess Margin   This factor is the ultimate beneficiary when price discovery deteriorates into irrational exuberance.  It became a meaningful component ($11/barrel) during the epic OPEC action to restrict member quota during 1999 & Y2k, then surged to record proportions ($20/barrel) in the July 2008 spike.  Increasingly, more business and news broadcasts feature daily crude prices and outages.  Much of the latter is disseminated by McPeaksters ... proponents of the "imminent" peak oil myth.  This media noise-du-jour often has no context and is not helpful in maintaining rational price discovery.  It is assessed Excess Margin adds $3/barrel to today's USA RAC price.

    Stress Premium   This component combines a plethora of factors which are perceived to threaten global supply, including geopolitical fear issues (the most controversial driver), weather events (eg hurricanes) and disaster.  As a sub-component of Stress Premium, geopolitical fear factor gained prominence when it added $12/barrel to RAC during the 2002 lead-up to Iraq2.  It surged to $27 during the disputed Iran election demonstrations and recently added a record $30/barrel influence during the 2011 Arab Spring in MENA (Libya).  After dissipating to $12, Iran's idle boasts of a Hormuz blockade sparked another surge to $26 late last year.  The most notable weather event to play an indirect role ($11) was the media attention focused on the 2005 Katrina/Rita outages.  From 2006-2012 we have witnessed irrational price discovery and anxiety premium related to presumed threatening hurricane paths.  Stress Premium ticked up to $7/barrel in December ... and is at a level not seen since the depths of the Great Recession.

    Speculation/Hedging Activity   Certainly the most despised and controversial forcing, this price component is also the most misunderstood.  It takes blame for the aforementioned factors which drive price discovery in highly publicized episodes.  Monitoring price action over many years, the Barrel Meter model has found oil prices do move to reflect net long (&  short) non-commercial futures and trading activity magnitude, but its influence has never exceeded $8/barrel (March 2011).  During the infamous 2008 spike, activity was actually dissipating and was attributed a mere $2 in July 2008 when short contracts volumes were setting new records.  Speculation/Hedging activity currently adds $6/barrel to RAC.

 Fundamental price components

    Inventory Draw/Build   Monthly All Liquids production rarely matches consumption, resulting in either a draw or build of international stocks.  This is the factor most affected when OPEC raises or restricts its member quotas, but it is little known it has the least importance in the past dozen years ... $4 in draws & -$3 in a build.  In percent terms, this component was more important back in '99 & Y2k.  In the present environment where major producing nations are dipping into idle capacity to counter sanction-inspired extraction declines in Iran, the current Inventory Draw is adding $1/barrel to today's RAC price.

    USDollar Debasement   This is strictly a made-in-the-USA component.  By far the most under-estimated forcing of crude price moves, it is little known devaluation of the USDollar was a $30/barrel component of the $129 (monthly avg) contract crude price in July 2008.  This factor recedes when the buck and treasuries are enjoying quests for safe havens and crests when the global investment community is reminded how lousy are the American sovereign financial fundamentals or the dysfunction of Congress.  USDollar Debasement was a mere one dollar on the day of Barack Hussein Obama's inauguration.  It rose to add $24 to the cost of oil upon his failed 2011 Spring Budget whilst the celebrity President was publicly blaming Libya.  USD Debasement added $17/barrel to December RAC.

    Lack of Surplus Capacity   The largest price moves occur during periods of extremely low Surplus Capacity.  As a price component, it comprised 32% of the Y2k OPEC-induced spike, 37% when Iraq went offline in 2003, 38% in the 3.5-Mbd production surge of 2004, 37% during the Katrina/Rita outages and 31% ($40) in July 2008.  When OPEC takes 1-Mbd offline, it faces a counter-intuitive paradox where this factor drops $4 for each $1 rise via the countervailing Inventory Draw.  That's 'cuz their intervention actually re-establish for traders the existence of real spare capacity at times most assumed it had exhausted.  Low Surplus Capacity added $15/barrel to last month's oil price.

    Extraction Cost   The most stable component is the upstream global production-weighted cost of oil exploration and lifting.  Rising by 1%/month, it reached $37/barrel by June 2008, suffered a $12 relapse in the Great Recession.  Many pundits are misguided in their pricing analysis by the elusive and mostly inconsequential marginal barrel.  Extraction Cost was a record $43/barrel in December.

 4 definitive Oil-Cost/GDP Ratios   The natural business-as-usual production scenario would normally unfold with an All Liquids GEOLOGIC PEAK of 100-Mbd in 2030.  But this course is threatened to be truncated by the very real prospect of PEAK DEMAND.  Starting in 2004, the long-term trend for the growth rate of global Consumption began to wane.  The onset of occasional triple-digit crude prices is causing demand destruction.  Consumers, commerce & institutions are substituting and conserving.  This led to an unexpected OECD consumption peak in 2005.  I have found rising petroleum prices have economic consequences which are indeed predictable at five definitive petroleum/GDP ratios.  These invisible lines-in-the-sand generally rise and fall in time with GDP.  Three have global implications and two are unique to the USA.

    Induced G-20 Recessions Threshold   TRENDLiners are quite familiar with this marker.  Annotations on the Barrel Meter chart since Jan/2010 have alerted the threshold above which higher petroleum prices would induce (or augment) a new round of economic Recessions among the most vulnerable within the G-20 community of nations.  Record oil costs no doubt assisted in pushing weakened G-20 economies past their tipping points in 1980 as central banks waged a war on inflation via high interest rate monetary policy.  But 2008 marked the first time a number of G-20 Recessions were induced by cumulative or "baked-in" high petroleum prices.

    PEAK DEMAND Barrier   This identifiable petroleum/GDP ratio is the RAC price threshold above which there is an absence of new global Consumption records.  It was surpassed for the first time in the 80's, then at $90/barrel in early 2008; and again @ $99 (monthly avg - USA contract crude) in early 2011.  During each of these temporary incursions, global Demand was held at bay.  Admittedly there have been some Production records during these transgressions and in those cases the balance surplus was applied to stock builds.

 Failed Thesis  ~ The McPeakster blogosphere was burning up once again last Winter in anticipation of Steven Kopits (Douglas-Westwood) forecast of an American and worldwide economic Recessions upon Crude Price exceeding $86/barrel.  Kopits subscribes to the myth propagated by associate economist James Hamilton (Univ of California) that high oil prices were the main cause ten of the last eleven Recessions.

If that wasn't enuf, James Hamilton's failure to recognize USDollar debasement as one of the largest forcings of price spikes spoke volumes to the ultimate demise of his prediction the rise in oil prices was linear.  In an Aug-2011 update to his own Peak Oil study, Chris Skrebowski has adopted the same linear price growth assumption and predicts Peak Demand will occur upon the Brent Crude Price exceeding $135/barrel in 2014.

 Price Discovery  ~ There are over three dozen grades of oil across the globe.  Long ago, most were sold on long-term contracts via fixed price lists.   Saudi Aramco maintains this method.  Today, oil is often sold at a discount/premium to several standard blends, facilitated by consulting assistance from Platts.  Unfortunately, a new crop of mostly neophyte buyers have been found to be quite vulnerable to media noise (fear factor).  This has led to an era of irrational exuberance with respect to Crude pricing over the last four years.

The Barrel Meter presents a visual depiction of Trendlines Research's analysis of the price components of the monthly avg for the three dozen weighted blends comprising USA contract crude oil as monitored by EIA.  The detailed study of the forcings affecting Crude Price from 1999 to 2007 allowed Trendlines Research to provide real-time guidance and dissection of the factors in play during the historic 2008 spike and subsequent price collapse.  The importing of future Surplus Capacity & Extraction Cost stats from my Peak Scenario-2500 production profile model into the Barrel Meter enabled development of an outlook module capable of forecasting component prices on a 23-year horizon.

The TRENDLines Price Targets are based on my projections of future extraction costs (production weighted), lack of global surplus capacity, inventory draws, USDollar debasement, speculation/hedging activity, geopolitical fear premium & effects of the media noise-du-jour on windfall profits.  These forcings change on a daily basis due to geologic, geopolitical & weather related factors that may cause significant revisions in future monthly updates.  The foundation for much of this data is derived from the Peak Scenario-2500 (oil depletion model), Gas Pump (commerce model) & the TRENDLines Recession Indicator (economic model).

Trendlines Research has assisted many stakeholders recognize that All Liquids will enjoy an ever increasing pace for approx two decades, to be followed by a very manageable Post Peak decline.  With a return to healthy Surplus Capacity, Marginal costs are irrelevant at this time and thus assures a reasonable pricing regime.  Knowledge of these two factors allows policy makers to conduct their research and due diligence and make long term decisions in a less hurried environment. If your firm/institution requires written validation of a future price forecast in the 60-day to 40-year time frame, feel free to contact our analyst, Freddy Hutter (867.660.5566 in the Pacific time zone)

the OPEC Conundrum  ~ This IMF chart reveals the Budgets of 5 OPEC nations require $100/barrel oil for them to breakeven.  Another three need an annual avg of $70 to pay the bills.  Qatar & Kuwait survive on $45 crude.

For comparative purposes, all projections are re-based to EIA's import-weighted USA Contract Price (nominal USDollars/barrel), approx 2% above WTI.  Its July 2008 peak of $129 was followed by a Jan/2009 bottom of $37/barrel.  WTI has been a playground for neophyte speculation for several years and as such WTI can be 11% higher to 27% less than the USA Contract Price and thus is useless as a research metric.  The USA Contract Price, comprising dozens of blends & grades, is slightly higher than OPEC's basket but somewhat less than Brent.

 Crude Oil Price Forecasts  -  2035 

Dec 24 2011 ~ Today's chart compares the Trendlines Barrel Meter monthly revision to updated annual price outlooks by Adam Sieminski of Deutsche Bank, EIA, IEA, OPEC, Boone Pickens & Chris Skrebowski.

A new annotation added to the chart today is Freddy Hutter's "Peak Demand Barrier".  In Oct/2011 it was proposed in his TrendLines Barrel Meter model that global oil consumption ceases to grow when the USA contract crude price exceeds this definitive Petroleum/GDP ratio.  The thesis further suggests the natural Geologic Peak of 103-Mbd in 2031 will be pre-empted by Peak Demand upon permanent breach of the PDB threshold in 2029 when oil surpasses $213/barrel hence holding consumption to the 100-Mbd at that juncture.

The Barrel Meter has been unique in its tracking of oil fundamentals as components of crude price since 1999.  The recent update calculates today's $103 price to be a 27% premium over crude's Fundamental Fair Value.  US$ Debasement since early 2009 remains a $15 price component.  This new revision proposes spiking activity in 2008 & 2011 is related to newborn cyclicity within oil fundamentals and additional spikes can be expected in 2015, 2018 & 2021.

The Barrel Meter currently forecasts that failing either any major geopolitical event or OPEC intervention at their June convention, much improving fundamentals should see oil decline to $63 by Sept/2012.  It maintains a price ceiling to any spiking activity of the monthly avg exists as represented by another definitive Petroleum/GDP ratio ... the Demand Destruction Barrier.  Between these two lines is the price point (currently $121) which can induce economic Recessions among the G-20 nations (as occurred in 2009).  The Trendlines Gas Pump reveals a similar critical price level - the USA Light Vehicle Sales Barrier - the price at which rising gasoline prices cause collapse in the auto manufacturing sector.  This occurred in 1980, 1990, 2007 & Spring 2011.  It is $3.37/gallon ($102/barrel oil) today.

The Barrel Meter imports data on projected extraction costs, spare production capacity & business cycles from the Peak Scenario 2500 depletion model.  A similar analysis for gasoline price is featured via the Gas Pump presentation.

recent revisions:

March 15 2011 ~ Today's chart updates price outlooks by Deutsche Bank, EIA, IEA & Trendlines.  Extraordinary consistency revealed in the updates by Adam Sieminski of Deutsche Bank ($192), EIA AEO 2011 ($200) & IEA WEO 2010 ($204).

Nov 4 2010 ~ Today's chart introduces OPEC's long-term price outlook. It forecasts crude will average $80 to 2020, then rise to $106/barrel by 2030.

Oct 4 2010 ~ Today's chart introduces a medium term forecast by Charles Maxwell.  His $287 per barrel in 2012Q2 target is in significant breach our Demand Destruction Barrier.

Disagreement that a constraint mechanism such as the Demand Destruction Barrier exists separates conventional price forecasting from those within the McPeakster fraternity.  For illustration purposes, we include their six showcase predictions to demonstrate the divergence.  Monthly updates by a "joker" over at theOilDrum (aka Ace) have been trimmed recently, but still warn the cult following of a spike to $188/barrel within 40 months!  From here, we deteriorate to contributions by two members of the Lunatic Fringe:  Jeff Rubin (ex-CIBC World Markets) foresees "sustained pricing" of $215 by 2012 & Matt Simmons (deceased investment banker) sports infamous speculation of $300 by 2014 & $573/barrel ($600 WTI) in "much less than 20 years".  Candidates for membership include Robert Hirsch & Boone Pickens with guestimates of $478 & $500 within only a couple of years.  A final significant breacher is Charles Maxwell.

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Not accidently, my Peak Scenario-2500 oil depletion model currently projects maximum production will occur upon a Demand Peak of 100 Mbd in 2029 ... not the 2037 Geologic Peak of 110 Mbd based on the current trend of converting proved reserves to new capacity.

In early 2009, Wall Street & the White House took glee in shining a light on Deficit & Sovereign Debt to GDP ratios of a plethora of jurisdictions.  The lamestream media were enablers in focusing on the ills of Iceland, Dubai, Ireland, Greece, Portugal, Hungary, Spain & Italy.  Inevitably when they ran out of nations, the same scrutiny was finally applied on the US Federal Gov't.  Just as savvy currency traders had lost faith in Congress ability to address its long-term Structural Deficits in 2002, now the international investment community is being clued in and taking stock of the USA's own fundamentals - and the secular decline of the USDollar has resumed...

seen in the (right pane) chart, the post-Recession rebound of New Car & Light Truck sales are in reversal from the 13.3 million unit pace.  New 2011 sales highs are improbable 'til Crude Price dips below $90 in Q4.

BACKGROUNDER excerpts  (2011/6/9) ~ As such, our renewed forecast of a record Crude Price spike this month assumes the present pause will extinguish upon bond and currency vigilantes dismissing genuine intent by Congress & the President to resolve the Entitlement issues which are foundation to the Federal Govt's Structural Deficits and future Debt Wall.

From October 2006 to July 2008, the McPeakster fraternity was successful in originating/disseminating web-based rumours that Saudi Arabia's Ghawar giant field was in terminal decline.  PeakOildotcom, theOilDrum, Matt Simmons & Jeff Rubin (CIBC WM) were the main players that wrongly translated a reversal of Saudi extraction to be a harbinger of overall global decline.

But, as the Kingdom increased production from 8.7-mbd to 9.5, the hoax by these perpetrators was exposed.  Prices plummeted as traders raced to eliminate their silly Depletion Fear Premium as a pricing component.  At the height of the July 2008 Price Bubble, the later invalidated FEAR factor had rose to $35 of the $131/barrel contract price.  Embarrassed Producers were the grateful beneficiary of this manipulated situation, as

witnessed by their burgeoning windfall profits.  Indeed, the 22 year old rumour of Peak Oil is the best damned thing that has ever happened to the crude producing sector.

The combination of the Russian incursion into Georgia and the record purchase of American Treasury securities/instruments during the 2008 Summer Credit Crisis led to a 20% jump in the USDollar.  With this, geopolitical events thus eliminated almost the entire $31/barrel Dollar Debasement component  that had built up in July 2008.

Another volatile forcing behind the 2008 Crude Spike was related to the perceived growing tightness in Surplus Capacity.  Albeit there was still 2-mbd apparently available, much was not useful as since mid-decade there had been an even greater tightness in spare refinery capacity - and what there was, could not handle the heavier crudes available.

Average Upstream costs (exploration & lift) also had accelerated growth of late.  On a production weighted basis, this was a $24 component that heady season.  Inventory tightness varies mostly on a seasonal basis, and sat at $9 per barrel at that crucial juncture.

The final remaining factor concerns the controversial speculation-hedging activity.  It prodded the spot price rise in two ways:  (a) by the sheer total futures contracts volume, and (b) via non-commercial long contracts vs the shorts.  Contrary to overwhelming popular opinion, our research attributes only $3/barrel to this activity at the peak of the bubble.

Futures contracts are mere side bets to the real action ... and can no more affect the Crude Price than sports betting can affect ball game scores.  It does not significantly impede the process of price discovery, but the glamour surrounding the activity evidenced by noise-du-jour most certainly can lead to excessive windfall profits for the producers.

A record of 307 thousand long futures contracts was set in early April, compared to 259k volume in March 2008.  A record non-commercial (long/short) contracts volume of 493k was set as well (in early June), much above the 453k level of May 2008.  The net volume (longs minus shorts) set a new record of 135k in January, substantially more than 2008's high mark of 100k.

Together, the above factors served to spike up the Price $94 from its level of $37/barrel at January 2005.  In five short months (by late December 2008), it had collapsed to that same $37 level.  To understand the mechanisms behind the topping action, it should be known that as the oil price approached a certain Fuel or Oil Cost/GDP ratio which I call the Demand Destruction Barrier, alternative & conservation measures kicked in to halt the Price inflation.  Until then, high prices played a part in enhancing (but not causing) the Recession in play.

The 2009 Recession was inspired by the real estate bubble and its derogatory effect on disposable income.  In a normal business cycle, even inflated fuel costs are too insignificant to cause economic Recessions.  Another McPeakster myth busted:  correlation does not prove causation.

Logic is absent from the present marketplace.  Price discovery is dysfunctional.  Intuition would infer neophytes have taken control of buyer desks of the globe's stakeholders.  Contrary to 2008, when the oil price was attributable to factors surrounding its fundamental components, crude price has been in a bubble since August 2009.  I repeat ... 2008 was not a bubble!

The most positive outcome of this last episode was the extinguishing of an overly generous Lack of Surplus Capacity premium along with the dispelling of Peak Oil rumours.

My guidance a year ago:

<<< Dec 13 2011 chart predicted USA contract crude would decline from $104 to $60 by Dec/2012.  It didn't happen!  As seen in today's chart above, Iran's boasts to block Hormuz spiked the price to $111.  It then promptly declined to $92 by next December.

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