Panicky Headlines

Everybody knows that there is a never-ending glut in crude oil, right? Who knew about it a year ago? Not everybody, that much is certain. The problem with what everybody knows is of course that it is often not worth knowing.


oil_3136994bPhoto credit: Alamy


Today a friend pointed two articles out to us that have been published yesterday and today. Their headlines say it all. The Wall Street Journal writes “No End in Sight for Oil Glut” – and proceeds to inform us about things everybody is presumably aware of by now, such as the fact that many oil producers keep producing all out in spite of the collapse in crude prices, because they have to service their debts. It supplies this helpful chart:


1-crude supply-demand, WSJ

 A scary crude oil supply-demand chart – click to enlarge.


Reuters meanwhile writes: “Oil ends down more than 2 percent as U.S. drilling points to glut” – it’s basically the same story, with one expert supplying the following remark:


“The market is stuck in a relentless downtrend,” said Robin Bieber, a director at London brokerage PVM Oil Associates.


(emphasis added)

If you didn’t get it so far, you should get it by now at the latest.

However, crude oil is at a technically very interesting level: $40 was the high made in 1980, 35 years ago. The market has an elephantine memory when it comes to such chart points – they often turn into support – for no good reason as far as we can tell, except that they exist. In the 1970s, $10 was an equivalent chart point, which was reached again almost on the dot in 1998. At the time, the Economist published a cover story: “Drowning in Oil”. It marked a low in crude oil prices that hasn’t been seen again since.


Covers of the EconomistThe Economist cover story that appeared at the 1998/1999 low in crude oil prices


Why did the Economist believe that crude oil prices would fall by another 50% at the time? Because of what everybody knew – there was a huge glut. No-one could imagine that it might actually not matter.


Fundamental Data Are Not Enough

Having said all that, here are two interesting factoids: for one thing, the contango in crude oil futures is beginning to contract a bit of late. In fact, spot trades slightly above the front month future and the next two delivery months, which remain however in contango relative to each other:


2-Crude curveCrude oil futures – the contango is beginning to shrink a little – click to enlarge.


For another thing, there is a double non-confirmation between crude oil prices and the Russian ruble. It could easily disappear – all it would take would be a little more ruble weakness – but in the past, such divergences have often proved to be a useful heads-up:


3-Ruble and crudeCrude oil and the Russian ruble – the lines show two non-confirmations between lows in the ruble and lows in crude – click to enlarge.


The thing is, commodities never make highs or lows based on the fundamental data everybody is aware of. What people are usually forgetting is this: the news may be very bad, and may indeed be about to get even worse. However, the question is always this: what does the current price discount? Is it perhaps already reflecting the even worse backdrop that is yet to come? If so, then prices can bottom many months before the fundamental backdrop actually improves.

This is why we look at technical data and the market structure – they can at least provide us with the occasional hints about market perceptions and psychology.



Given that WTIC crude briefly fell below the $40 mark in the 2008 panic, we cannot rule out that it will do so again. Perhaps it will be Brent crude that will hold $40, as our friend inter alia suggested. However, given the increasingly hysterical press crude oil is getting and the fact that there are a few tentative signs that it may be close to at least a short to medium term low on technical grounds, one should begin to keep a close eye on it. Maybe it will surprise everybody again.


Charts and tables by: WSJ, BarChart




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9 Responses to “Is Crude Oil Close to a Low?”

  • Hans:

    Not only are goo prices down but so are the anointing and annoying
    Peak Oil Heads..

    The cry far and wide should be Peak Pricing..Look for crude’s next stop
    at $35.oo p/b.

    As the chart indicated, supply is now outstripping demand by a margin
    of over 3 million barrels p/b..

    Yourself, is correct that the Red China miracle is all but over..World
    economic growth is on a decline; with America’s business cycle coming to
    and end..A recession is now more probable within the next eight quarters.

    Oil and malaise do not mix…Look for new and improved FRB recipes, to
    rescue the economy as ordained by the people’s CONgress.

    Perhaps, the People’s Republic of North Korea can save the oil bulls..Dennis Rodman
    is long on crude and short on brains.

  • Kafka:

    Oil, for a purported scarce commodity seems to be layered throughout the earth. And the cost per barrel various all over the board.
    Oil sands are facing a WCS price of around $24USD right now. Ergo no new mines, or SAGD projects, but there are still massive new projects so far towards completion that they all likely will come on stream. Twenty years ago marginal operating costs varied from $10-20 USD per barrel.
    Today,some horizontal fracking drillers face similar costs. So no clear crystal ball.

  • HonestlyExpressingYourself:

    There is something different about this time vs the 2009 V shape recovery. China’s going down, EMs are going down, and for the first time in a long time we have a ‘swing producer ‘ (the U.S.) that is not a cartel and for this reason also a possible price war with the cartel. None of this is ‘news’ of course, and oil may be oversold short term or even medium to long term – and if not today it will surely be sometime soon.

    The big question is how would you play it if you wanted to?
    – Energy equities: great for taking long term position (given no expiry date or ‘cost’ of using them) but would seem a bad choice now given the desire to avoid equity market beta at this stage, no matter how ‘oversold’ they look.
    – futures: if we are heading into a recession as looks increasingly possible, then it could take a year or two before oil really recovers. So a 2018 or 2019 future to be safe in case things don’t work out quite as well as expected and you run out of time. They are trading at 54 and 56 dollars respectively for WTI. That’s not that attractive, not a ‘crisis’ level it would appear yet.

    But any better ideas would be welcome…!

  • Kafka:

    Pater, Ham-bone
    While I can agree that future population growth in high consumption vs. low consumption nations will inhibit overall growth in demand (including oil) I fundamentally believe oil supply and ultimately oil demand are currently more a function of bad central bank policy.
    With keeping borrowing rates at unsound low levels, capacity in the supply chain has grown far greater than it otherwise would be. In parallel, by making capital costs absurdly low relative to labor, working class employment is far lower than it otherwise would be, since capital crowds out labor using technology; applied technology is cheaper relative to labor when central banks keep their thumb on interest rates.
    In keeping a large portion of middle class consumers out of work, demand is less than it otherwise would be.

    For oil in particular, to Pater’s point, a little discussed issue in the oil (and gas) business is the high capital costs of many new oil projects where the marginal operating costs are relatively low making the energy possible or necessary to flow into the market even if sunk costs cannot be recovered in the early years or even if all capital costs can be recovered at all.
    Lower cost drilling is the new norm since the technological advancements are already in place and as I write there still are new oil sand projects and LNG projects coming to completion over the next few years. The investments are hard to abandon mid-project so companies are damned if they do and damned if they don’t.
    An honest intermediation value in the price of money would help balance supply and demand but in our new era of monetary politburos I see many more years of feast and famine.

    • Hey Kafka,

      don’t disagree with a thing you say…so much interconnectivity to it all. My only point is CB’s policy has been reacting to declining population growth (consumer demand) for 40+yrs now…with lower rates to incent higher consumption from an aging, slowing rate of growth group. But at the same time cheap money incents more capacity creation…and the spiral is on and the Fed and CB’s were all caught in a self destructive lie.

  • trojan1:

    Ham and bone, can u elaborate where India fits into your stats.. India alone has 600m people under the age of 25.. If you add in Bangladesh, Sri Lanka and the ‘southern half’ of Pakistan, these nations make up 24% of the global population and import 90% of their energy! I admit India has been the bridesmaid re growth for a long time but I think we will look back in a few years and realise this time is different.

    • Hey Trojan,

      You are right that India’s annual population increase is (as of 2015) growing double that of China’s 7 million annual growth (China’s total population will peak by 2030, at the latest)…India will grow by about 15 million annually or about 19% of total population growth…but note of that 15 million increase, only about 100k will be in 14 or younger segment?!? India’s birthrates have fallen 60% from 1960 til now (6 to about 2.4 now…2.1 children per female considered neutral) and this slowing trend continues. Data confirms that the <15yr/old Indian population peaked in 2014 and began declining. Absent a growing world to export to (EU, US, Japan, China???) there is no engine for growth or a state owned credit creation machine as there was in China. BTW – Indonesia's <15 population peaked in 2013 and is now declining…sorry, I don't have info on Pakistan, Bangladesh, or Sri Lanka but guessing it's similar.

      In a world where flow seems to matter more than stock, I'll take the way under on energy consumption because the ongoing imbalance of overcapacity vs. declining global population gains and declining consumption (population gains predominantly in places with low wages, little savings, and little to no credit and slowing export economic activity) is ez to see…but no idea on price, too many variables to know!

  • Crysangle:

    Your WSJ notes crude oil has dropped 60% since 2014 , notes olive oil has risen 60% since 2014 .

  • Hi Pater –

    thought I’d offer my two cents, focusing on the demand side…sorry to include a link to my site but helpful for folks to see the chart (still, if anyone has comments on this, please make them here on AM).


    Given the complete collapse of high consumer population growth and slight slowdown of low consumer nation population gains…the current 10yr period we enter represents about an est. 45% decline in new consumption from the previous 10yr period. By the time we get to ’25-’34 net new est. consumption drops by 90%+ due to significant declines among high consumer populations not adequately offset by low consumer growth.

    However, this really underestimates the rate of consumption slowdown due to the lack of population growth…as the marginal population growth sparks so much activity. It requires new infrastructure (highways, water & electricity grid buildups, hospitals)…it requires new homes and all the stuff to fill them…etc. etc. Without the high consumer population growth, overall activity tends to fall significantly more than anticipated and the knock on effects to low consumer nations (intent on moving to high consumption via exports to high consumption nations) crashes and burns.

    This is a once in a millennia paradigm shift…time to re-examine and rethink everything we think we know.

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