Tuesday, July 5, 2016

Half of 2016 Gone - Where Are Oil Prices Going?

Humans are by nature optimists - all is going to be OK, but is it?
Look where we are in July 2016:

Oil production going strong while demand has slowed down. Why?

Iran has pushed the “pedal to the metal”, producing as much as it can trying to recapture its old customers. Saudi Arabia is not sitting still, lowering prices to counteract Iran. The hoped-for US production slowdown is wishful thinking (0.6MBPD out of 10MBPD is a drop in the bucket), and clever shale operators can still make a buck at $30/bbl.

Meanwhile, the US and EU economies are stagnant, hounded by corrupt politics, incompetent politicians, and revolt of the middle class. Hence BREXIT and Donald Trump and Bernie Sanders. The good thing about the US presidential race is that all this was exposed clearly due to efforts by the “outcast” unconventional candidates. Unfortunately, there is no clear-cut outcome, hence more uncertainty…

The other parts of the world aren’t in better shape: Venezuela, Libya, Nigeria, rest of Africa are mostly basket cases, and so are Irak, Syria, and Afghanistan. The Middle East is a “clash of civilizations” cauldron ready to erupt, China has been hit by the slowdown in the West and unsure of where it’s going, and so are the “Asian Tigers”. Russia is trying to assert itself, and Mr. Putin isn’t going to be scared by West’s “messages” (this how we go to war today: we send “messages”, very scary!). A former bright light, Brazil, is disintegrating. One of the truly bright lights is India, but one out of many hasn’t enough pull by itself.

The Crystal Ball

Is it dismal? In the short term  (2016-2017), yes. So what is this going to do to oil prices? They will oscillate around $50/bbl + 20%. So far, the first half of 2016 confirmed this.
People that hang on to market’s every nickel-and-dime up or down (and secretly praying that the prices will go up, up, up…) are just deluding themselves. So, plan accordingly for 2016-2017. Of course, all the bets are off if another war erupts in this highly combustible mix.

Any Miracles?

There is some reason for optimism: the world’s population is mostly young (under 30 years old), well versed in social media and communication and plugged-in the news – the great equalizer. The other truth: “nobody lives forever”. However, the impact of younger generation, time constant wise, is unknown: how long will it take until “I am mad as hell, and won’t take it anymore”? Most likely, decades…


  1. First, the goal of Market Share dominance as a business strategy works only if the seller is in a position to establish a near-total monopoly. No single country can do that. OPEC came close, but failed. Second, the demand for oil is inelastic in the short term - about +/- 1% over 1-3 years. It is only elastic over 5-10 years, and that too only with stable prices. With volatile prices, it will remain inelastic. So Iran, Iraq, and Saudi Arabia are only destroying their own economies with a pedal-to-the metal production strategy. They will end up creating chaos and anarchy in their own countries if they persist in this stupidity. But then autocrats are know for their short-sightedness.

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