I'm pleased to tell TRENDLiners this past Winter 86% of
visitors were International (a record 125 nations: most from USA,
France, Germany, Spain, Saudi Arabia, Palestine, Italy &
to follow @TrendlinesDotCa for new chart alerts
Members & Media
with query/comments are welcome to
skype me (freddyhutter)
FreeVenue charts are generally posted 90-days after the
guidance release @ the MemberVenue
premium over Fundamentals Fair Value
The black dashed
in the above chart and its inset represent
Trendlines Research's gauge of "fair value"
for USA Refiner Acquisition Crude. It is derived by
quantifying RAC's four
fundamentals: worldwide Extraction Costs
(production-weighted), lack of global Surplus Capacity,
international Inventory Draws (vs build) & USDollar Debasement ...
plus an allowance for historic margin. This measure of
Fundamentals Fair Value does not include RAC's three
non-fundamental price components: Speculation/Hedging
Activity, Excess Margin & Stress Premium (geopolitical issues,
weather events & disaster). The chart inset illustrates that
except for recent MENA geopolitical events, USA RACrude price (blue
tracked remarkably close to its FFV (black dashed line) since
March 2003. At $92 today, USA RAC is in fact 3% ($3) below its
events since Y2k include: (a) the 77% premium during the
1999/Y2k OPEC cutback; (b) an 84% premium in the lead-up to
the Iraq2 invasion; (c) a 20% premium during the period of record
low spare capacity in 2004; & (d) the -16% deficiency in
Dec/2008 at the depth of the Great Recession. The chart inset
reveals there was a lengthy period of calmness in price discovery
during the period Mar/2003 to Dec/2008 where the avg variance
was a mere 6%. Conversely, the 2009 to early 2012 timeframe
sported a sea change 19% avg drift from FFV, reflecting political
unrest in post-election Iran (40%), MENA's Arab Spring (24%) &
Iran's boasts of its intention to blockade Hormuz (16%). The
avg variance since Spring 2003 has been 10%.
Meter model has
been attributing a value to each of
seven RAC price components on a monthly basis since 2007
(retroactive to RAC's 1999 low). This unique and comprehensive
analysis concludes the historic July-2008 price spike was "not a
Bubble". The inset graph clearly reveals the $129/barrel
record USA Refiner Acquisition Cost of crude (monthly avg) was
indeed in equilibrium (0%) during an otherwise volatile juncture for
commodities. This spike reflected a perfect storm of
circumstance in which the controversial Speculation/Hedging Activity
component was a mere $2/barrel. The accompanying price
components table dissects the RACrude Price forcings for both the
2008 spike and as of today. Note RACrude is comprised of three
dozen domestic and imported blends and grades and is generally $5
higher than WTI.
Price Components of USA Refiner Acquisition Crude Oil
Dissection of RACrude
~ Using the
TRENDLines Barrel Meter
model, it is possible to dissect the $92 spike (from
Dec/2004) to its $129/barrel PEAK (July 2008) & retreat to
TRENDLines 1-Yr Price
Acquisition Crude ($92/barrel) finally re-achieved price
equilibrium in July 2012 and after the present brief spiking
episode, improving oil fundamentals should see the price
retreat to $86 by May before bouncing back to the 1-yr target
USDollar volatility surrounding uncertainty with respect
to America's resolve to finally address its
should be the main variable in crude prices. Improving
fundamentals will assist a decline in RACrude price to $80
by 2015Q2, at which juncture RAC price will resume its
secular uptrend. Extraction cost will rise $13 to
Triple-digit pricing will become permanent in 2015Q3 and RAC
price should end
the period at the 2017 target (Jan/2018) of $110/barrel.
(see chart below) Ever-rising
Extraction Costs will be the main driver. Over this five year
period Extraction cost will rise another $15 to $71/barrel
and the 2008 record price ($129) should be smashed in 2021.
The Barrel Meter
model assumes the oil sector will exercise best practices in the traditional pace
of development of Reserves (40-yr R/P ratio) and maintenance of 5-Mbd Surplus
Capacity to moderate prices,
2023 target (Jan/2023) of $140/barrel.
Target (see chart below)
will inspire many forms of demand destruction but not to the degree
where the natural Geologic Peak (100-Mbd 2030) is truncated by PEAK DEMAND.
The model suggests RAC price will not
permanently surpass the
Barrier 'til 2035.
Ever-rising costs for the marginal barrel
continue as the main forcing for the secular uptrend.
Extraction cost will rise to $172/barrel. One can
expect mini-spikes to occur
Surplus Capacity falls below the critical level of 4-Mbd.
Based on North America's historic 8.5-yr business cycle, the model
builds in price softness during potential USA economic Recessions
in 2019 & 2029 & 2034. Admittedly this conflicts with the
Trendlines Recession Indicator's 2035
horizon which does not presently detect contraction events. In any case, it appears deteriorating share of global
GDP means American downturns will have
decreasing adverse effects on
worldwide GDP and RAC prices.
The Barrel Meter
projects nominal RAC price is on
a journey to $340/barrel
- the 2040 target.
price is a composite of three dozen blends and grades and is generally $5 higher
than WTI ~ these targets are subject to the usual caveats
such as unforeseen geopolitical issues, weather events and
April 27 2013
delayed FreeVenue public release of Jan 27th MemberVenue guidance ~
USA Refiner Acquisition Crude price averaged $92/barrel in December (up $0
previous month) and is currently 3%
($3) below its $95 Fundamentals Fair Value.
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).
volatility suggests at any time the Stress Premium components (geopolitical
issues, weather events or disaster) could produce severe but temporary spikes.
Barrel Meter models
both predict any such black swan
would be constrained by the same Price Spike Ceiling which firmly arrested
the 2008 price run @ $129/barrel ($4.11/gal pump).
The PSC represents a definitive Petroleum/GDP ratio where certain demand destruction feedbacks attain critical mass. As
happened in the Summer of 2008, Demand and Price are reversed as alternative
energies, substitution and conservation measures are pursued.
This upper limit is
$154 ($4.52/gal pump) today.
Acquisition Crude price is the
volume-weighted avg of three dozen domestic and imported grades and blends
which range from a
14% discount for Canada Heavy to a 16% premium for Malaysia
Tapis Light. At this time, RAC is generally $5 higher than
Global production has increased dramatically from the Recession
low of 83.1 Mbd (Jan/2009), setting yet another monthly record (89.3-Mbd) in
Oct/2012 and a new quarterly record of 89.1-Mbd (2012Q4). The 2012 year-to-date extraction is on
pace to shatter last year's
annual record (87.1) with a new mark of 89.0-Mbd and monthly production
is poised to break 90 in Sept/2013, while cracking the 95-Mbd threshold in 2020.
At this time, it appears Peak Oil will occur when production hits
100-Mbd in 2030. This will be a natural geologic event as
price-induced PEAK DEMAND is not expected 'til 2035.
Six of the seven major All Liquids streams are in growth
mode. Conventional Regular Oil (light sweet crude) peaked @
2005 and will maintain its present 62-Mbd plateau (60-64) 'til 2023. International
Inventories are presently just under their 5-yr avg and 5% of global capacity is
presently idle and eagerly awaiting new Demand from non-OECD
nations. OECD consumption peaked in 2005.
Refiner Acquisition Crude price components
When RACrude price plunged $15 this past Spring it was apparently
a shocking development to media pundits
not to TRENDLiners!
in April 2010, the
a short-term spike to triple digits with an accompanying collapse in
the pace of USA Light Vehicle sales. The episode was always
illustrated as a spike ... not a new era of sustainable prices as wrongly
predicted by celebrity analysts within the media & investment banks.
2011, the model reaffirmed an imminent price plunge,
substantially attributed to decreasing USDollar Debasement & Stress
Premium. Over the past
two years, failed forecasters have offered up
simplistic rationalizations ... but the universe is truly
unfolding as it should.
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
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
Margin adds $3/barrel to today's
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
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
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.
activity currently adds $6/barrel to RAC.
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
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
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.
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
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
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
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
Price Spike Ceiling
When USA RACrude price spikes, certain
vulnerable sectors of the global economy find it necessary to
exercise significant conservation measures such as scale backs,
shuttering, switching to alternative energies
or resorting to substitutions.
was the initial effort to illustrate
discovery of a Price Spike Ceiling - a definitive
petroleum/GDP ratio where Crude Price can no longer rise due to a
virtual evapouration of bids. There have been two episodes:
1980 & 2008. The PSC
halted the July 2008 price run @ $129/barrel (monthly avg - USA
contract crude). The Price Spike Ceiling is currently $154 (see chart#1
left-pane). This barrier
would come into play for example in the event of an Iranian nuclear facility strike by Israel and/or
the blockading of
Induced G-20 Recessions Threshold
TRENDLiners are quite familiar with this marker. Annotations
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
2008 marked the first time a number of G-20 Recessions
were induced by
cumulative or "baked-in" high petroleum prices.
Its definitive petroleum/GDP
ratio was marked by $106/barrel in early 2008 and was at the verge
of claiming victims once again in early 2011 as Crude Price climbed
to $113 ... a whisker away from the $116 marker at that juncture.
Several G-20 nations (Australia, Canada, France, Japan & UK) indeed experienced at
least one monthly and/or quarterly Real GDP contraction during the brief spike.
In fact this offers up some explanation for the utter shock suffered
by most economists when USA GDP had plunged to an unexpected 0.1%
growth rate in 2011Q1. This Induced G-20 Recessions Threshold stood at $127
(RAC monthly avg) in
December. As seen in chart#3 (left-pane), this G-20 metric is not
expected to come into play again `til crude hits $351 in 2041.
petroleum/GDP ratio is
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.
These PDB incursion incidents are likely to re-occur in the future, particularly
when global Surplus Capacity falls below 4-Mbd. Eventually this line-in-the-sand will be encroached
permanently. The failure of Crude Price to retreat back below
this delineation will mark All Liquids PEAK DEMAND.
If PEAK OIL has not yet already occurred, Inventory builds will induce a coincident topping of global production. In today's update, the
model is projecting this historic event will occur in 2035 upon
Crude Price surpassing $257/barrel (see BM-2040 chart) ... five
years after GEOLOGIC PEAK. I discovered the
PEAK DEMAND Barrier only recently. The first reference to it was in the
Oct/2011 Peak Scenario-2500 update, whilst the first annotation
of it within the Barrel Meter
chart was in the Nov/2011 version.
At $92/barrel today,
RAC is again below the PEAK DEMAND
Barrier and paved the way for a resumption of new
Consumption records this past October.
USA Light Vehicle Sales Barrier
The American economy is much too diversified and per
capita incomes far too high to be drawn into contraction by the early stages
of the aforementioned Induced G-20 Recessions Threshold. That said, in
April 2010 my
model did detect similar but limited adverse
effects do occur domestically. Chart annotations illustrate a
Gasoline/GDP ratio at which the auto sector noticeably breaks down.
When the Pump Price surged above
$3.37/gallon in Jan/2012, it breached the
model's Light Vehicle Sales Barrier for the fifth time
since 1980 and as seen in the
vehicle sales charts (left-pane), resulted in yet another
predictable truncation of sales.
has warned of a definitive Gasoline/GDP ratio which when surpassed
strangle auto sector manufacturing and sales. New Car
Sales were decimated upon crossing this same threshold in 1980, 1990
& 2007. During the Great Recession, volume declined from a 16
million unit annual rate to 9 mu/yr. Sales had climbed back to
12.9 mu/yr by April 2011, but then slipped to an 11.7 mu/yr pace in
only two months when
consumers were once again confronted with high gasoline/diesel
prices. When Pump Price dipped back below the LVSB ($3.37/gal & $93/barrel crude)
it was no surprise at all to TRENDLiners to see sales surpass the 14.4 mu/yr
When Pump Price again significantly
exceeded the LVSB this past February, sales declined
a 13.9-mu/yr pace in May. The auto sector should be
poised for a robust
rebound now that RAC ($99) has retreated well below the
$109 LVSB, except for the extraordinary fact pump prices have not
fallen in tandem and have not yet dipped below the $3.49/gal gasoline
LVSB threshold. As such, pump prices
are exhibiting extremely high Crack Spread and Gross
chart also annotates its own Price Spike Ceiling marking the barrier
at which gasoline price spikes will reverse. It marks the
topping of the July 2008 event @ $4.11/gallon and stands @ $4.52 today. Again, take note of this should Israeli fighters take
flight or Hormuz be blockaded.
Trendlines Recession Indicator
calculates residual high petroleum prices over past
Quarters trimmed o.2% off the USA's GDP growth pace in
December. The -1.6% record for
this dampening factor was set in April 2011, thus
breaking the previous June 2008 high mark. With the forecast
decline in petroleum prices, this residual headwind should now be finally
Sales pace (million units/yr)
either plunges or is handcuffed each time pump price breaches the TRENDLines Light Vehicle
Sales Barrier: March 2008, March 2011 & January 2012
Trendlines Research Price Targets
Jan/2014 1-Yr Target:
Jan/2018 5-Yr Target:
Jan/2023 10-Yr Target:
targets for import-weighted USA Refiner Acquisition Crude are based on
projections of future Extraction Cost, USDollar Debasement,
Speculation/Hedging Activity, Inventory Draw/Build, Lack of Surplus
Capacity, Stress Premium & Excess Margin. These forcings change on a daily basis due to
disaster, geopolitical issues & weather events and may cause
significant revisions to our projections in succeeding monthly
updates. The foundation for much of this data is derived from
- the peak oil depletion model. (USA RAC is a
composite of three dozen blends and grades and is generally $5 higher than WTI)
projected 2013 low:
$80/barrel in May
opportunity to surpass record $129/barrel in a "black swan" spike:
PEAK DEMAND: triggered by
oil surpassing $257/barrel in Year 2035
potential oil-induced G-20
Year 2041 upon crude
projected ultimate record high: $376/barrel 2042
~ 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.
They both appear
unaware correlation does not always imply causation.
To fully understand his present frame of mind, Kopits recently
(2011/10/10) posted on Hamilton's blog: "We will look back in
maybe 10 to 15 years and see that we are/were in the midst of a
second and Greater Depression." Now just throw in David
Rosenberg and I'm not sure if we have the three blind mice ... or
three stooges. Crude oil is a miniscule portion of the
consumer price index in most nations and the breach of the
$86/barrel threshold passed unceremoniously in
IMF has since reported Q2 GDP grew at a robust 3.7% pace.
As discussed above, the
model long ago addressed this forcing and found
only when Crude Price breaches the definitive Petroleum/GDP ratio
(represented currently by $125/barrel) would there be headwinds
sufficient to result in a new round of oil cost induced G-20 Recessions.
As did Colin
Campbell before him, Kopits appeared before the USA House of
Representatives Energy Subcommittee (2011/2/18) to fear-monger the
outcome of Crude Price surpassing his $86/barrel line-in-the-sand.
He could have avoided subsequent embarrassment of his impotent
screaming and handwaving had he learned from many of the same
analysis errors made three years prior by James
As a neophyte to the oil
sector, Hamilton had adopted absurd assumptions relayed to him by
the McPeakster fraternity with respect to alleged inadequate global
surplus capacity, questionable annual new capacity build potential
and over-the-top UDRO (underlying decline rate observed) assessments
that were all terribly wrong.
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.
~ There continues to be absolutely no merit to the cornucopia of
pundit predictions (Feb/2011) for $200-$250 oil & $5-$7 gasoline by
the Summer of 2011 disseminated by the lamestream media,
McPeaksters & McDoomers. We heard all the same
rationalizations in the Summer of 2008 and our COPF
chart (below) is testament to similarly hysterical musings.
Conversely, there was
no hint of a MENA geopolitical event back in April-2010 when this
year's spike episode with a founding on USDollar devaluation was
foretold by TRENDLines!
Look for similar nonsense during the current spiking activity.
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.
Less than 20% of
crude is transacted on the WTI/Brent spot venues. Most of the
stakeholder activity there involves hedging. An increasing
trend is to contract some grades @ the front or second month of
futures. For the most part, futures contracts are side bets to
guessing final outcomes ... akin to sports betting. My
research has consistently revealed that in periods of increased
volumes (eg March 2011), these activities can add as much as
$9/barrel to Crude Prices.
myth of "imminent Peak Oil" has been the oil sector's best friend
since the first of many annual declarations in 1989. Enabled
by the WWWeb, the proponents of this hoax (McPeaksters) have provided the marketplace with dozens
of outages and outright disinformation each week since 2003.
Their inferior forecasts have discredited them in the eyes of
politicians, policymakers and the media, yet their influence in
pushing up Crude Prices at every turn is evident. Their
ability to nuance fear factor goes straight to the bottom line in
the form of Windfall Profits to Producers worldwide.
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
production profile model into the
enabled development of an outlook module capable of forecasting
component prices on a 23-year horizon.
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
(oil depletion model),
(commerce model) & the
TRENDLines Recession Indicator
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
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
(867.660.5566 in the Pacific time
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.
So should my above prediction of sub-$70 crude come to
fruition, it is almost certain several OPEC members (incl Venezuela) will instantly campaign for harsh extraction restrictions.
It is my position they may discover such an action would be folly in
the long-term for the consortium. Since 2006 it has been increasingly noticeable that any
price hikes hinged to OPEC quota cuts can be measured in mere days
or weeks ... not months or years. In fact my
analysis has prompted me to state on several occasions since 2010
that these scorned OPEC actions eventually result in lower global
prices after the original surge. There are two main reasons
for this paradox.
While there are some responsible members of the block who abide to
announced lower quotas, it has been common for the same noisy
members who called for cuts to then defiantly shirk the guidelines.
The motive for the serial cheaters is clear. They desperately seek revenues to buoy their failing
economies. And best of all, they are gleeful there is no
compliance mechanism within OPEC to discipline such not-so-secret
quota contraventions. The leakage of extra supply to the
marketplace is not helpful to the scenario objectives.
The other factor found by Trendlines Research will be found to be
rather counter-intuitive. Along with Extraction Costs
and USDollar Debasement, crude price fundamentals include components
for Inventory Draw & Surplus Capacity. When OPEC requests
its members to pare back on extraction, it immediately causes a draw on global
stocks and Crude Price drifts upward as traditional traders
subconsciously increase the Inventory price component. In the
meantime, there is another camp of traders who after a period of
sober afterthought realize the sector has newfound idle facilities
and albeit in a similar subconscious state they promptly decrease
the Lack of Surplus Capacity premium and Crude Price drifts
The root to the latter case
can be traced to the successful disinformation campaign waged by the
fringe movement promoting "imminent" Peak Oil: the
McPeaksters. They have made declarations that global oil
production has already peaked virtually every year since 1989.
The cult gained massive exposure via the WWWeb and their proactive
activity became much more aggressive in 2002 with an apparent
culmination in 2004. Their rhetoric included themes of
"running out of oil", "well running dry", "the growing gap" and
always ends with a definitive statement that Saudi Arabia's giant
Ghawar field is in terminal decline and there is no more spare
capacity in the world.
With this, the Lack of
Surplus Capacity price component rocketed, especially among neophyte
traders and stakeholders. As seen in the table above, the
legacy of this faulty interpretation added (rightly or wrongly) $38
to a barrel of oil during the July 2008 spike event and is still
applied today. Albeit global Surplus Capacity was a healthy
6-Mbd at year-end 2010, many cable news pundits are seen to opine
idle capacity has been exhausted.
In short, I argue that for
every 1-Mbd of trimmed quota when crude is $100, Crude Price rather
quickly rises $2/barrel. But the OPEC cut inadvertently
creates 1-Mbd (additional) Surplus Capacity into a marketplace where
many buyers had assumed there was none (due to McPeakster alarmism)
and over time Crude Price declines $6/barrel. So unfortunately
for OPEC, the
model has discovered that desired price increases are more than
offset over extended time by the traders who rightly realize the
collective action means the world now has (more) defined spare
capacity and this factor becomes a net negative forcing on gross
crude price: approx $4/barrel for each 1-Mbd in cuts.
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.
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.
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
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
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)
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
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
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
BACKGROUNDER excerpts (2012/6/26)
The USA continues to address the Iran nuclear proliferation issue on
two fronts: multilateral negotiations and multi-nation
co-operation with economic sanctions. Should these measures
fail to bring about a timely agreement, TRENDLines has been assuming
(for price projection purposes) American celebrity President Obama
has offered to conduct a joint strike against Iran upon Israel
assurance to postpone the mission 'til post-Election.
Upon breakdown of the talks or growing Israeli dissatisfaction with
Obama's apparent desire to cut a deficient agreement in a moment of
Electioneering zeal, trader anticipation of the fighter sorties
could lead to a short-lived spike within the July-Feb time frame as high
as $96/barrel. A significant albeit futile Iranian retaliation
(or any other black swan event) could take the monthly avg
for USA contract crude even higher but
Barrel Meter model reveals any
extraordinary price spike
would be constrained by the same Price Spike Ceiling which firmly arrested
the 2008 price run @ $4.11/gal ($129/barrel crude).
The negative effects of rising energy
costs on the disposable income of consumers and the profits and viability of
commerce and institutions inevitably takes a toll on the American economy.
The PSC represents a definitive Petroleum/GDP ratio (May = $150/barrel & $4.45/gal) where certain demand destruction feedbacks attain critical mass. As
happened in the Summer of 2008, Demand and Price are reversed as alternative
energies, substitution and conservation measures are pursued.
~ 2011 was also a hallmark year for Saudi
Arabian extraction ... setting its own new monthly, quarterly &
annual records. In so doing, Saudi claims of its massive
Surplus Capacity have been validated as bona fide ...
stunning and shocking the purveyors of imminent Peak Oil (whom I
fondly call McPeaksters) for the third time in five years
(2006/2008/2011). Geopolitical events in Libya & Iran have
returned the Kingdom to its reluctant role as swing producer.
And so yet again, traders were forced to acknowledge they were very wrong to adopt
false allegations of terminal decline disseminated by the
BACKGROUNDER excerpts (2011/10/13)
~ Crude Price will permanently encroach the Light Vehicle Sales
Collapse Threshold in 2028. It is at this juncture policy
makers and stakeholders must aim all their efforts to have
infrastructure in place for the transition away from all-dominating
gasoline/diesel transportation fleets.
2008 spike event, most demand destruction on Crude Price's
upward journey is quickly mopped up by eager emerging markets.
As Crude Price breaches the LVSCT ($192/barrel & $6.98/gal pump) for
the final time, Peak Demand will prevail and stymie forever the
increasing production of All Liquids.
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.
The benefit of a
Demand-inspired scenario is its positive influence on maintaining
global Surplus Capacity norms in Saudi Arabia, Russia, Brazil and
elsewhere. My analysis reveals approaching minimal spare
capacity levels is the most critical forcing is raising Crude Prices
today and over the next two decades. Peak Oil will only be a
problem if its unfolding results in drastic stock draws and waning
idle capacity to the extent it causes price shocks.
excerpts (2011/8/13) ~ The $131/barrel monthly record was
set in July 2008. The current price run is actually the
culmination of a secular trend commencing June-2004. At that
time the secular devaluation of the USDollar which had started
Jan-2002 finally began to be factored in as a price component of
Crude Price by frustrated stakeholders. By July 2008,
compensation for US$ Debasement comprised $31 of Crude Price (see
table - above right).
The bursting of
the USA's housing bubble led directly to the financial crisis by
exposing the subprime mortgage fiasco. The irony of the matter
is that by March 2009 (just weeks after the Recession trough), the
USDollar had regained virtually all its loss as the international
investment community ironically sought safe haven in American
treasury notes. Upon inauguration of Barack Hussein Obama, US$
Debasement was in remission: a mere $1 component of Crude
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
As a component
of Crude Price, USDollar Debasement was only $2/barrel in January
2009 after the USA's first celebrity President was inaugurated.
Growing unease with the socialist leanings of his Administration led
to the Debasement factor running up as high as $12 over several
quarters. A pause occurred in the Summer of 2010 when it
appeared the CBO had convinced the President & Congress to let the
Bush-era Tax Cuts expire in December. This sentiment was so
entrenched that our own Barrel Meter extinguished its forecast of a
$141 2011 spike in September 2010. And the Debasement factor
drifted back to $9.
the mid-term Elections intervened and irresponsible electioneering
reversed the momentum via promotion of an extension of the Bush-era
Tax Cuts as a means to maintain fiscal stimulus in the face of a
phantom double-dip. The Trendlines Recession Indicator
sported the earliest alerts of a potential downturn but had already
dismissed a renewed contraction by its Sept/2010 outlook. But,
facts were not allowed to ruin strategic campaign rhetoric.
The Tea Party won big in November.
Regardless of a newly
Republican-dominated House of Representatives, Congress severely
disappointed the international investment community by its
irresponsible disposition of the Bush-era Tax Cuts by extending them
fully intact ... even for the top 1%. The Obama Administration
then added to the disgust with its own proposal of a $1.5 trillion
Deficit 2011 Budget ... and the Debasement factor rocketed to
$24 by April.
There is an assumption in
today's update of the Barrel Meter that the USDollar will continue
to decline 'til the international investment community is satisfied
a sea change in legislative attitude towards the structural deficit
prevails. The November 2012 Elections should present itself as
that critical opportunity.
In a perfect storm of events
Crude Price would have a tendency to rocket to $163 in September,
but the model has high confidence a late Summer spike would be
blocked by the same Demand Destruction Barrier (DDB) that firmly
arrested the 2008 price run @ $131/barrel ($4.11/gal pump).
The negative effects of rising energy costs on the disposable income
of consumers and the profits and viability of businesses and
institutions eventually takes a toll against the economy. The
DDB represents a definitive Crude-Cost/GDP ratio ($138/bbl &
$4.34/gal) where certain feedbacks come to fruition. As
happened in the Summer of 2008, Demand will be reversed as
alternative energies, substitutes and conservation measures are
excerpts (2011/7/13) ~ The June short-term price outlook
projected an imminent $136 spike. Today that target is knocked
down by $20 and Americans can give thanx to the Tea Party for this
development. Their stalwart position on forcing fellow
Republicans to make expenditure cuts a condition to raising the Debt
Ceiling has at least temporarily
truncated the coming currency crisis.
The outcome of these negotiations will be clear by
August 2nd and the magnitude of the eventual agreement with Obama
will determine the course of the secular debasement of the USDollar
... and Crude Price. In our analysis, oil will fall $4/barrel
per each $1 trillion in spending cuts and/or new tax revenues within
the Debt Limit disposition. Unfortunately, stubborn positions
taken by the Obama-Democrats at this juncture are signalling a lost
opportunity to pare back the $23/barrel Debasement component.
marketplace injection of 60 million barrels over 90-days will be
found to be grossly underwhelming when the bulk of withdrawals
commence in early August. My analysis suggests 120 mb/month is
required to force a $10/barrel decline in Crude Price; a 150
mb/month injection to move Price by $20/barrel. Saudi Arabia
has already boosted production by almost 1-mbd and as such
TRENDLines projects the multi-month price run should terminate @
$116 in August and quickly dissipate.
Dec 2009, Trendlines
Research had warned Crude Price was re-approaching a definitive
Oil-Cost/GDP ratio which decimated Light Vehicle Sales in 1980, 1990
& 2007. Upon surpassing $90/barrel in early February 2010, oil
again breached this critical threshold and as
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
analysis of the current nine-month $32 spike
attributes $12 to USDollar Debasement, $6 due to lesser Surplus
Capacity, $2 for higher Extraction costs & $1/barrel for tighter
Inventories. The balance is associated with non-fundamentals:
$3 for increased Speculation/Hedging activity & $8 to Windfall
Profits that take advantage of subtle media-driven fear factors (of
which $7 is MENA-geopolitics related).
BACKGROUNDER excerpts (2011/6/9) ~ As such, our renewed
forecast of a record Crude Price spike this month assumes the
present pause will extinguish upon bond and currency vigilantes
dismissing genuine intent by Congress & the President to resolve the
Entitlement issues which are foundation to the Federal Govt's
Structural Deficits and future Debt Wall.
This currency crisis will be
opportune in inspiring a "Tea Party Intervention". Their input
conditions will result in successful disposition of the raising of
the Federal Debt Ceiling by addressing the long standing Budget &
Entitlement issues. At this time it appears they will insist
on demanding a dollar in future cuts for every dollar of increase to
the Debt Limit. If successful, the US$ will correct
precipitously on this welcome news. Unless the Debt Limit
negotiations lead to an unexpected short-term agreement, Crude Price
will fall to $63/barrel in 12 months.
excerpts (2011/4/9) ~ Logic was absent from the
marketplace. Price discovery was dysfunctional. It
appeared neophytes had taken control of buyer desks of the globe's
stakeholders. It was an era of irrational exuberance
with respect to Crude pricing.
excerpts (2011/2/8) ~ This resumption of the US$'s secular
decline (since 2002) is attributable to the failure of Congress to
address its structural deficits as shown once again by the decision
to extend all of the Bush tax cuts. The pace of the Debasement
may increase significantly in the coming weeks as international
investors and sovereigns digest the ramifications of the "Moment of
Truth Report" recommendations by the National Commission on Fiscal
Responsibility & Reform being shunned by President Obama.
2008 SPIKE BACKGROUNDER
(rev 2010/8/10) ~ 2.4mbd of new capacity was required
to offset 2009 global Underlying Decline Observed.
Fortunately, the energy sector has been bringing much more than that
on stream each year ... a record 4.7-mbd of new capacity last year,
as seen in
inset. The explosion in new facility development late this
decade is one of several factors responsible for the recent
$94/barrel collapse in the monthly average of the USA Contract Crude
Price. Regardless of OPEC quota antics in latter 2008, savvy
market traders ignored these quota cuts and instead reacted to the
more important revelation that "real" and abundant Surplus Capacity
was returning to the global system.
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.
was that the Surplus Capacity component of Price inflated to $29 in
the Summer of 2008. Today, traders understand that global
surplus capacity exceeds 6-mbd.
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
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
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.