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The story of oil over the last year June 18, 2015

Posted by shaferfinancial in Finance.
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Much bandspace in the internet world is given over to speculation on oil. It is assumed that the Saudi’s are trying to crush the shale oil production. And the paranoia gets worse from there. Here are my thoughts:

Saudi’s smartest men in the oil business
They know without the 5+M BPD from North American shale oil the world would be in a big hurt with demand outstripping supply by 4M
They were concerned with $100 oil dampening world wide demand, especially in developing economies
They were aware of supply overcoming demand starting in Jan. 2014

So they waited until the price of oil collapsed as was inevitable with the pace of increasing production from the shale oil cowboys. And then they did nothing as planned with their production, causing a price panic. Their thinking was simple. The shale oil cowboy’s were going full out with their production and caused the issue of over production, so needed to learn some market discipline. Cheap oil would increase demand more rapidly and change the growth rate significantly in developing countries making them more dependent on oil in the long run. And as a bonus, Americans would react by going back to their love affair with SUVs. Also the pace of alternative energy production would fall in Europe and America.

They were more than comfortable to bear the short term pain of low oil prices for long term gain of a world more dependent on oil. So far, IMO, they have been correct in their analysis. Americans are back to purchasing SUVs and driving more miles. Alternative energy projects have stalled. Developing countries [check out India] growth rates are increasing. Oil demand has ramped up. Shale oil production growth has stalled and started to drop.

In the last month or so, SA has increased their own production a little. This is probably to prepare for the summer where their internal energy use skyrockets. They are also developing a strong relationship with China and regained some market share. But, and this is my opinion based on geologists reports, they don’t have much spare capacity for production.

What this means? Sometime in the next year, demand will outstrip supply, causing oil to go back up. How far? Don’t know, but wouldn’t be surprised if we end up in the $80-$90 range. At that time what shale oil producers are still viable, will start to crank up again. But this time, I think, they will modulate their production more to current demand. So we will see shale oil production increasing above current levels long term, but a a more conservative pace.

And we will see the major oil companies and the nationals have a huge issue with depletion because they have pushed out needed projects a couple of years. There will be a scramble to get more oil on-line before 2020 and a resultant increase in price during this process.

So in short, this issue of over supply caused by the shale oil cowboys will create a worsening issue long term with the oil supply. We may look back at 2015 with nostalgia just as we look at the 1990s as a period of cheap oil that caused us to behave stupidly.

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