The Coming “Oil Shock” [ConocoPhillips, Linn Energy LLC, BreitBurn Energy Partners L.P., BP plc (ADR)]

oil etfsKent Moors: The pundits continue to hawk the same reasons for the fall in crude oil prices today.

These are always “spearheaded” by comments about surging global supply led by the onslaught of unconventional (tight and shale) oil production in the United States.

Invariably, what’s missed by these “TV sages” are the pricing dynamics kicking in that virtually guarantee an increase in oil prices as we move into 2015.

They’re based on the actual condition of the oil market, not some knee-jerk emotional commentary delivered by the talking heads on TV (some of whom are actually short the market).

crude oil prices today

The good news is more of the guys who really understand what’s going on have begun to mirror what I have been saying for some time – including some well-known economists.

One of them is Steve Kopits, the high-profile managing director of Princeton Energy Advisors, who recently came out with a particularly bullish projection…

According to Kopits, “In permitting low oil prices, the Saudis seek to bring the market back into equilibrium. At present, our calculation of break-even system-wide is in the $85 to $100 a barrel range on a Brent basis.”

But Kopits isn’t the only one who’s optimistic about oil. The legendary Mark Mobius, the emerging market guru, chimed in this week that he expects Brent to rebound to $90.

Crude Oil Prices: A Significant Squeeze Ahead

This move higher in oil prices won’t happen overnight. Instead, it will happen gradually.

Absent any move by OPEC to cut production – an unlikely short-term prospect given the current Saudi position – it will be driven by traditional supply and demand factors. In fact, the current low price environment is actually setting the scene for a major uplift in prices.

A recent article by Dan Steffens illuminates this point.

Dan Steffens is one of the best (and most readable) analysts you can find. He and I have had a like mind for some time on what the real impact is going to be from the current “oil glut.”

According to Dan, the current low crude oil price could be overkill and result in the next “Energy Crisis” by early 2016.

Here’s how Dan put it:

“The upstream U.S. oil companies we follow closely are all announcing 20% to 50% cuts in capital spending for 2015. We will start seeing the impact on supply at the same time the annual increase in demand kicks in. Our model portfolio companies are all expected to report year-over-year increases in production, but at a much slower pace than the last few years.

“A study released by Credit Suisse two weeks ago shows that U.S. independents expect capital-expenditure (Capex) cuts of one-third against production gains of 10 per cent next year. This would imply production growth of 600,000 bpd of shale liquids, and perhaps another 200,000 bpd from Gulf of Mexico deepwater projects. At the same time, U.S. conventional onshore production continues to fall. I have seen estimates of 500,000 to 700,000 bpd declines within twelve months. If these forecasts are accurate, U.S. oil production growth would be barely positive next year and headed for a material downturn in 2016.

“North American unconventionals (oil sands, shale and other tight formations) have been almost all of net global supply growth since 2005. If unconventional growth grinds to zero and conventional growth is falling outright, the supply side heading into 2016 looks highly compromised. At today’s oil price, only the “Sweet Spots” in the North American Shale Plays and the Canadian Oil Sands generate decent financial returns to justify the massive capital requirements needed to continue development. Global deepwater exploration is rapidly coming to a halt.

“Were demand growth muted, this might not matter. Demand for liquid fuels goes up year after year. It even increased in 2008 during the “Great Recession” and ramped up sharply during 2009 and 2010 despite a sluggish global economy. Low fuel prices are increasing demand today and my guess is that, with U.S. GDP growth now forecast at 5% in 2015, we could see demand for fuels increase by close to 1.5 million barrels per day this year. The current IEA forecast is for oil demand to increase by 900,000 bpd in 2015.”

And here’s the kicker…

“Low fuel prices are increasing in demand today and with U.S. Gross Domestic Product (GDP) likely to come in higher (about 5% is the current consensus) in 2015, demand would increase by almost 1.5 million bpd this year. The current International Energy agency (IEA) forecast is for oil demand to increase by 900,000 bpd in 2015.”

As a result, more analysts are beginning to conclude that the oil markets will be heading into a significant squeeze.

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