Oil recovery by 2017? Not likely

Energy analysts are confidently predicting that oil prices will rebound by 2017, as global supply and demand come back into balance. "Buy for the long run" is once again Wall Street's over-used mantra.

Economists John Maynard Keynes once notably remarked, "in the long run, we are all dead."

This long-run thinking defies the logic of the oil markets. Not only has oil been among the most volatile commodities in modern economic history, it also has a tendency to spike, crash and then remain depressed for years on end.

Analysts have focused on the 18-month decline that has seen crude-oil prices drop from $107 in June 2013 to below $37 on Tuesday — a 65-percent decline. But crude oil is actually down a whopping 74 percent from its 2008 high of $147 per barrel. That decline has been in force for seven long years, since the dawn of the fracking age.

History tells us that, while price spikes tend to be sharp and somewhat short-lived, bear markets in oil, at least since the 1980s, tend to be quite long, drawn-out affairs.

When prices crashed in 1985, they went from $35 a barrel to $10 a barrel by the following year. And then they averaged just under $20 until 2003. The market flat-lined for 17 years, with an occasional bear-market rally.

With OPEC failing to rein in excess production; with U.S. frackers becoming more efficient, ringing more oil out of existing wells with fresh technology; and with other non-OPEC countries like Russia, Norway and the U.K. pumping flat out, the gap between supply and demand is yawning.

Energy analysts are confidently predicting that oil prices will rebound by 2017, as global supply and demand come back into balance. "Buy for the long run" is once again Wall Street's over-used mantra.

Economists John Maynard Keynes once notably remarked, "in the long run, we are all dead."


Oil fracking
David McNew | Getty Images
This long-run thinking defies the logic of the oil markets. Not only has oil been among the most volatile commodities in modern economic history, it also has a tendency to spike, crash and then remain depressed for years on end.

Analysts have focused on the 18-month decline that has seen crude-oil prices drop from $107 in June 2013 to below $37 on Tuesday — a 65-percent decline. But crude oil is actually down a whopping 74 percent from its 2008 high of $147 per barrel. That decline has been in force for seven long years, since the dawn of the fracking age.


An oil worker checking a pumpjack.
Here are the critical levels for crude oil now
History tells us that, while price spikes tend to be sharp and somewhat short-lived, bear markets in oil, at least since the 1980s, tend to be quite long, drawn-out affairs.

When prices crashed in 1985, they went from $35 a barrel to $10 a barrel by the following year. And then they averaged just under $20 until 2003. The market flat-lined for 17 years, with an occasional bear-market rally.

With OPEC failing to rein in excess production; with U.S. frackers becoming more efficient, ringing more oil out of existing wells with fresh technology; and with other non-OPEC countries like Russia, Norway and the U.K. pumping flat out, the gap between supply and demand is yawning.


Geologists studying graphical display of oil and gas bearing rock on screens.
The party is over for oil: Dan Yergin
There are 3 billion barrels of excess crude sloshing around the world, according to the International Energy Agency, with crude-oil supplies outstripping demand by about 1.6 million barrels per day.

The International Energy Agency and other industry watchdogs expect supply and demand to come into greater balance next year, but that remains to be seen, with every producing nation in the world pumping as much oil as they can.

They may be losing money on lower prices, but apparently they plan to make it up on volume!

This is somewhat reminiscent of how commodity producers acted during the Great Depression in the 1930s. Despite falling commodity prices, particularly for rubber, which was in great demand during the 1920s auto boom, Asian countries, stung by the plunge in demand for new cars, continued to produce rubber at a break-neck pace, driving prices ever lower and depleting their coffers at an equally fast pace.

We are seeing that among oil producers, as well. Russia may run out of surplus cash as early as next year. Saudi Arabia has tapped global bond markets to extend their excess currency reserves, apparently hunkering down for what could be a prolonged period of depressed energy prices.

The Federal Reserve has suggested that the decline in energy prices should prove transitory. If history is any guide, oil can easily go down and stay down for many years to come.

Oil briefly fell below its 2009 low of $37.75 a barrel. Below that level, long-term support for oil prices is somewhere around $20 per barrel. That would represent a nearly 50-percent additional decline in prices!

he impact on inflation would be far more long-lasting than is currently modeled by the Fed.

These are structural, not transitory, changes that have taken place in the energy markets that may have permanently altered how fossil fuels are produced and consumed. Certainly there will be bear-market rallies, but the path of least resistance still appears lower for longer.

The impact on inflation may also be structural as well — good news for consumers, but, once again, a confounding factor for the Fed. The Fed is committed to lifting inflation while raising rates to ensure inflation does not get out of control.

That is a dual mandate that may be simply unattainable in a world awash in crude and other commodities, all of which could mean the Fed is on course for a "one and done" policy of interest rate hikes.


Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. Follow him on Twitter @rinsana.

Hi

Congrats on your new baby!

BTW there are no 'professional' engineers in the O & G industry. Heck! they don't even bother to register with the Institutions and Board!
There is no O&G section in the Institution of engineers. They are just not bothered.
So essentially most so called engineers here are mercenaries, not professionals. Many are very poor at their so called profession.
But that's just the industry.

BEM is only a registration.

What about your professional progress with the Institution of Engineers?
In fact i do know of platform collapses and all. However, that's not the indication of good professional practices. You can overdesign and nothing happens.

Do you know there are 2 registration bodies for engineers/

The BEM and the IEM where the former is required to practice.
Here you are going on about workplace safety rather than engineering safety.

Perhaps the best way is to know: How many O & G engineers are registered Professional Engineers with IR ?

Registering as an engineer with BEM is nothing much to shout about.
Registering with BEM as a qualified Professional Engineer and maintaining the status takes some effort

i have been a PE longer than you matey! 38 years in total!
i have also worked with many consultants, including O n G. Signing the pieces of design drawings means squat. That's signed by the PE. Does he check? Nought.
Seen so many freaking problems with them engineering drawings, you wonder if the design engineers have been to site!

There may be an O n G section accomodated for such. It it active?
There are smart people very where, just not so many in O n G.

You should maybe also keep yer gob shut about DAP. Listen to yer own advice.

This post has been edited by prophetjul: Dec 22 2015, 05:14 PM

Yeah. Right. Can't discuss proper. So he has to stoop down to ad hominem.

Racist? Looks like you don't even know the meaning of the word! i could have sworn we were on O n G stuff!

You do sound Jurassic!

And i am not who ever supersound.

You do sound like one tho. . Matey...childish and ass

Okay..instead of shooting fire here, let's discuss how the low oil price environment is affecting labour and salaries?

Do you find that salaries offered in this region had suffered?

If so, by how much?

Generally, our labour supply vendors have tendered in about 40% lower rates from a year ago.

i have many Bumi engineers staying in my same apartment.

They are lead engineers. Back in mid year they told me they were instructed to cut staff irrespective of delivery.

What's their retrenchment compensations like?

Oil Prices Tumble Below $30 a Barrel
U.S. crude posts lowest settlement since 2003



Oil prices settled below $30 a barrel on Friday for the first time in 12 years as turmoil in Chinese markets and the expected increase in Iranian crude exports added to concerns that a global glut will linger.

Light, sweet crude for February delivery settled down $1.78, or 5.7%, at $29.42 a barrel on the New York Mercantile Exchange, the lowest settlement since November 2003.

Brent, the global benchmark, fell $1.94, or 6.3%, to $28.94 a barrel on ICE Futures Europe, marking the lowest settlement level since February 2004.

After more than a year of collapse, this week saw some of oil prices’ biggest losses since the financial crisis. A glut of oil hasn’t caused producers to slow down and traders are worried that demand won’t grow enough to soak it up. That has pushed oil into a bear market, with both U.S. and global prices down more than 20% since the start of the year.

Dour economic signs have inflamed fears about demand in China, the world’s second-biggest oil consumer. Also, Iranian oil is expected to hit the market soon after long-standing international sanctions are lifted.

“This is a culmination of all those things,” said Michael Tran, commodity strategist at RBC Capital Markets. “It’s all causing a panic in the market where sentiment was already poor to begin with.”

U.S. oil declined 11% this week, marking its 12th losing week of the last 14 and its worst one-week percentage losses in more than a year.

Brent’s weekly percentage losses were the worst since December 2008 and marked its sixth losing week in the past seven.

“With the global economy, we could be in a serious crisis…which translates into a lack of demand for energy,” said Gene McGillian, an analyst at Tradition Energy.

http://www.wsj.com/articles/oil-prices-fal...rrel-1452853918