Crude Oil Outlook – Crude Oil ready to head lower
It looks as if crude oil prices are ready to head lower, this time all the way down past 65 dollars per barrel of crude oil. From a momentum point of view the recent rally in oil has not been able to break past 80 and the rash of bad news about the US economy will certainly lead to downward revision in demand forecasts. The dismal economic data in July has replaced fears of rapid inflation in the near future (caused by excess liquidity in the system and low borrowing rates) with concern for disinflation or deflation.
Recent US Economic Data:
US Unemployment: 9.5%
Current US Trade Balance: -42.3B (Prior US Trade Balance: -40.3B)
Retail Sales Number: -0.5%
Actual Factory Orders: -1.4%
Prior Factory Orders: 1.2%
Producer Price Index: -0.5%
07/15 Industrial Production: 0.1% (Prior: 1.2%)
Then there is the Baltic Dry Index debate. Is it excess shipping capacity coming online, China storage or more bad news waiting across the curve that has pushed BDI prices to historic lows for the last 5 weeks. And that is just the US outlook. While the uptick in Euro has addressed currency concerns in Europe, the long term impact of Euro-zone austerity measures and the shrinkage in growth side by side by measure to reign in growth in China are all going to lead to a revision in global oil demand growth for 2010 as well as for 2011. After BAML, Goldman and many others, UBS is now also willing to tow the line by bringing its price forecast down from the loft 90 dollars per barrel of oil to the mere 80′s.
Lower oil prices anyone?
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Oil demand/prices over the next decade will to a large degree be driven by emerging economy demand at the margin. Here is a simple thought experiment using Chinese demand to generate some rough “back of the envelope” forecasts:
- China moves from 3 bbls/person/year to the South Korean per capita consumption level of 17 bbls/person/year over the next 30 years
- No peak in global production
Result: In next 10 years we must find 44 million BOPD – 26 million BOPD to maintain supply and 18 million BOPD to keep up with demand increases.
If you superimpose peak production on top of this demand profile using the following parameters oil prices would increase approximately 250% in real terms over next 10 years – most likely something would give far before that price level:
- Oil demand elasticity of -0.3
- Current production 84 million BOPD, current price US$ 80
- Peak production 100 million BOPD
- Post peak decline rate of 3-4%
If you want to try the china oil demand or the peak oil models for yourself using your own assumptions they can be found at Enquirica in the “Research” section: http://www.enquirica.com/index.php?option=com_content&view=article&id=11&Itemid=13