How low will prices go? North American crude production is being maintained but tanks are filling up rapidly

I am only too pleased to vocalize, and even writerize, on the foggy Bermuda Triangle of day-to-day language and how it may or may not apply to the mystifying scrambled egg logic of today’s ship-without-a-rudder energy industry.

Let’s start with proverbs. Now I am pro-verbs to be sure, but as far as I’m concerned there are phrases, which when spoken by the speaker are met with a glassy eyed, “huh?” by the speakee.

“Don’t look a gift horse in the mouth.” Wonderful! I’ve never seen or ridden one, much less received a present from one, but I guess it means if you get a gift, don’t appear as if you wanted more – I think “take it and run” would be shorter and more to the point.

The gift horses, in the persons of Saudi Arabia and OPEC, have provided consumers with low cost transportation and manufacturing costs due to a 50% drop in crude prices since June of last year. But this is a sleight of hand as it has forced the global oil industry to cut spending by $40-billion at the expense of 50,000 jobs. Much to my annoyance, I read that the Saudis have declared a victory in the battle for global oil markets as low prices will cut North American supply by 30%.

Well not just yet because we have a supply glut and it’s getting gluttier.

North American crude production is being maintained, but the tanks are filling up rapidly. Despite rock bottom prices, Russia and Brazil continue to flood the market to maintain their budgets under the stares of a restless population.

How low will prices go? I have no idea, but Citi Group, another member of “Banks with Blinkers” is calling for $20/bbl. Heck, why not 20¢ a barrel?

Come on Citi Group! Stick your neck out a bit.

How long can OPEC and Russia hold out?

Saudi Arabia has enough cash reserves to fund any oil budget deficit for 21 years with prices at $80/bbl and five years at $50/bbl. Russia is not so lucky and can only hold on at those prices for six-and-a-half and two-and-a-half years respectively. The real problems land in the laps of Iraq, Nigeria, Iran and Venezuela – countries that can all withstand $50/bbl for less than a year, then the cash reserves run out.

As mentioned earlier, U.S. inventories of crude and gasoline are nearing the brim even with the newly opened storage facilities. This has created what the oil industry calls a “containment” problem meaning there is nowhere to put the stuff so the only option is to go into “discretionary” (another cute industry term) refinery shutdowns. If this happens then the consumer will see crude prices dropping while at the same time pump and rack prices will increase.

I refuse to offer a floor or ceiling price for crude because this would be a shot at a shadow in a very dark room.

I can almost guarantee that the next 90 days will produce the most volatile price movements you have ever seen, but this should subside in late May with a stabilization of crude prices, but where I just don’t know.

It’s going to be a wild ride. Some horse. Keep the gift.

~ The Grouch

Roger McKnight

Roger McKnight is the Chief Petroleum Analyst with En-Pro International Inc.
Roger has over 25 years experience in the oil industry, and has held senior marketing management positions responsible for national and international accounts. He is the originator of the card lock concept of marketing on-road diesel that is now the predominant purchase method of diesel in Canada. Roger's knowledge of the oil industry in North America, and pricing structures has resulted in his expertise being sought as a commentator by local, national, and international media. Roger is a regular guest on radio and television programs, and he is quoted regularly in newspapers and magazines across Canada.

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