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  [New!]monthly update of TRENDLines Barrel Meter - Price Components
[New!]  monthly update of TRENDLines Barrel Meter - Fundamentals Fair Value  (scroll down or click here)
[New!]  monthly update of TrendLines Barrel Meter 2040 - Demand Peak Target  (scroll down or click here)
 
  Barrel Meter compared to 13 Recognized Long-Term (2035) Crude Oil Price Forecasts  (scroll down - or - link)
 
see also:    TRENDLines Gas Pump ~ USA Gasoline Price Components & Crack Spread
 
~ 90-days too long to wait?  View our current guidance charts via:  (a) Annual-membership special of $25/month or (b) $35/month Quarterly-membership or (c) $50 project access-fee

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MemberVenue Archive  of all 3 Barrel Meter charts:  2013-2012-2011-2010-2009-2008-2007

scroll down or clik to compare to guidance a year ago:  "April 2012" chart

 Price premium over Fundamentals Fair Value  (chart inset)   The black dashed line in the above chart and its inset represent the Barrel Meter model's gauge of "fair value" for USA Refiner Acquisition Crude.  It is derived by quantifying RAC's four fundamentals:  worldwide Extraction Costs (production-weighted), lack of global Surplus Capacity, international Inventory Draws (vs build) & USDollar Debasement ... plus an allowance for historic margin.  This measure of Fundamentals Fair Value does not include RAC's three non-fundamental price components:  Speculation/Hedging Activity, Windfall Margin & Stress Premium (geopolitical issues, weather events & disaster).  The chart inset illustrates that except for recent geopolitical events in Iran & Libya, RAC price (blue line) had been tracking remarkably close to its FFV (black dashed line) ever since the Iraq2 episode (14% Apr/2003).  At $97 today, USA RAC is a mere 7% ($7) above its $90/barrel FFV.

Significant variance events since Y2k include:  (a) the 86% premium during the 1999/Y2k OPEC cutback;  (b) a 70% premium in the lead-up to the 2003 Iraq2 invasion; (c) a 33% premium during the period of record low spare capacity in May/2004;  & (d) the -8% deficiency in Dec/2008 at the depth of the Great Recession.  The chart inset reveals a relative calmness in price discovery since Dec/2004 ... with an avg variance of 15%.  Exceptions reflect political unrest in post-election Iran (40% Jan/2010), regime change in Libya (28%  Apr/2011) & Iran's boasts of its intention to blockade Hormuz (25%  Jan/2012).  The avg drift from FFV over the past twelve months has been 10%.

The Barrel Meter model has been attributing a value to each of seven RAC price components on a monthly basis since 2007 (retroactive to 1999).  This unique and comprehensive FFV analysis concludes the historic July 2008 price spike was "not a Bubble".  The inset graph clearly reveals the $129/barrel record USA Refiner Acquisition Cost of crude (monthly avg) was a tad above equilibrium (15%) during an otherwise volatile juncture for commodities.  This spike reflected a perfect storm of circumstance in which the controversial Speculation/Hedging Activity component was a mere $2/barrel at the same time China growth virtually exhausted Surplus Capacity.  The USDollar faced heavy Debasement as Congress failed to address its fiscal future.  Producers enjoyed unprecedented Excess Margin ($20) and windfall profits.  The accompanying price components table dissects the RACrude price forcings for both the 2008 spike and as of today.  Note RAC is comprised of three dozen domestic and imported blends and grades and is generally $6 higher than WTI at this time.

Price Components of USA Refiner Acquisition Crude Oil

Dissection of RACrude Price spikes ~ Using the TRENDLines Barrel Meter model, it is possible to dissect the $92 spike (from Dec/2004) to its $129/barrel PEAK (July 2008) & retreat to $37 (Jan/2009):

Price Components

$129 PEAK

$92 SPIKE

$37 TROUGH         $97     Apr/2013
Windfall Margin $20 $20 $ 0   $ 0
Stress Premium $ 9 $ 8 $ 1   $10
Speculation/Hedging Activity $ 2 $-1 $ 3   $ 7
US $ Debasement $30 $28 $ 2   $19
Inventory Draw $-2 $ -1 $-1   $ -1
Lack of Surplus Capacity $35 $28 $ 7   $17
Extraction Cost  (weighted) $35 $10 $25   $45

MemberVenue Archive  of Barrel Meter charts:  2013-2012-2011-2010-2009-2008-2007

 TRENDLines 1-Yr Price Target   USA Refiner Acquisition Crude ($97/barrel) has enjoyed improving oil fundamentals (and non-fundamentals) over the past twenty-four months and continuation of this trend will see the Price decline to $86/barrel ... the May 2014 target.

 5-Yr Target   Sector stability and continued improvement in fundamentals (and non-fundamentals) provides an environment for continued equilibrium despite a $14 rise in Extraction Cost (to $59/barrel).  After declining to $68 (1Q18), RAC Price will resume its secular uptrend and end the period at the May 2018 target of $71/barrel.

 10-Yr Target  (see chart below)  Extraction Costs continue to be the main driver, rising another $19 (to $78/barrel) and triple digit prices become permanent in 2021.  The Barrel Meter model assumes the oil sector will exercise best practices with respect to the traditional pace of development of Reserves (40-yr R/P ratio) and maintenance of 5-Mbd Surplus Capacity to moderate prices, forecasting a May 2023 target of $117/barrel.

 2040 Target  (see chart below)  The 2008 record monthly price of $129 should be smashed in 2025.  Rising petroleum prices will inspire many forms of demand destruction but not to the degree where the natural Geologic Peak (101-Mbd  2030) is truncated by PEAK DEMAND.  The model suggests RAC price will not permanently surpass its PEAK DEMAND Barrier 'til 2038 upon exceeding $291/barrel.  Ever-rising costs for the marginal barrel continue as the main forcing for the secular uptrend as Extraction Cost rises to $200/barrel.  One can expect mini-spikes to occur whenever Surplus Capacity falls below the critical level of 4-Mbd.  The model predicts short-term price softness associated with a potential 2024-2027 Severe Recession in the USA as presently being forecast by the Trendlines Recession Indicator.  Declining imports and share of global GDP should mean future American downturns will have decreasing effects on oil price.  That said, USA RAC price is projected to permanently exceed the Light Vehicle Sales Barrier in 2026 ($144/barrel), spawning a major collapse in the North American auto sector ... specifically the manufacturing of diesel and gasoline powered units.  The Barrel Meter projects nominal RAC price is en route to $327/barrel - the 2040 target.

(USA RAC price is a composite of three dozen blends and grades and is generally $6 higher than WTI at this time ~ these targets are subject to the usual caveats such as unforeseen geopolitical issues, weather events and disasters)

MemberVenue Archive  of long-term Barrel Meter charts:  2013-2012-2011-2010-2009-2008-2007

 Trendlines Research Price Targets 2013/5/27 Assumptions
Supply Surplus Capacity Avg Cost Extraction
May 2014   1-Yr Target: $86/barrel 91 Mbd 6 Mbd $48/barrel
May 2018   5-Yr Target: $71 93 Mbd 8 Mbd $60
May 2023   10-Yr Target: $117 100 Mbd 5 Mbd $78
2040 Target  $327 95 Mbd 5 Mbd $200
~

These targets for import-weighted USA Refiner Acquisition Crude are based on Trendlines Research projections of future Extraction Cost, USDollar Debasement, Speculation/Hedging Activity, Inventory Draw/Build, Lack of Surplus Capacity, Stress Premium & Excess Margin.  These forcings change on a daily basis due to disaster, geopolitical issues & weather events and may cause significant revisions to our projections in succeeding monthly updates.  The foundation for much of this data is derived from Peak Scenario-2500 - the peak oil depletion model.  (USA RAC is a composite of three dozen blends and grades and is generally $6 higher than WTI at this time)

 USA Crude en route to $68/barrel

Aug 27 2013 delayed FreeVenue public release of May 27th MemberVenue guidance ~ USA Refiner Acquisition Crude price averaged $97/barrel in April (down $4 from previous month) and is currently 7% ($7) above its $90 Fundamentals Fair Value as gauged by the Trendlines Barrel Meter model.  Both fundamental and non-fundamental price components have been improving since the $112 Libya crisis spike (Apr/2011) and as they continue to improve the result should be a retreat to $68 ($62 WTI) by 1Q18.  From that juncture, RAC price will resume its secular uptrend mainly forced by a 5% annual increase in Extraction Costs (down from 14% last decade).  Triple digit RAC prices will become permanent in 3Q20 & the $129 monthly record should be smashed in 1Q24.

The Barrel Meter model assumes the oil sector will exercise best practices with respect to the traditional pace of development of Reserves (40-yr R/P ratio) and one can expect mini-spikes to occur whenever Surplus Capacity falls below the critical level of 4-Mbd.  The model predicts short-term price softness associated with a potential austerity-induced 2024 Severe Recession in the US as presently being forecast by the Trendlines Recession Indicator.  This prognosis conflicts with the model's previous conclusion of the existence of a historic North American 8.5-yr business cycle and probable hard-landings in 2017, 2026 & 2034.  In any case with China expected to regain its role as world's largest economy in 2020, the USA's deteriorating share of global GDP means future American downturns will have a decreased effect on oil price.

In the "couldn't-happen-at-a-worse-time" dept, the Barrel Meter model projects USA RAC price will permanently exceed the (gasoline/diesel) Light Vehicle Sales Barrier in March 2026 upon surpassing $144/barrel, spawning a major collapse in the vulnerable North American auto sector ... specifically the manufacturing of diesel and gasoline engine units.  The Trendlines Gas Pump model suggests the (gasoline) LVSB will be transgressed as early as Nov/2024 ($4.11/gal).  Either way, the combination of the multi-year Recession and the LVSB episode could chop the forecast pace of new car & light truck sales (17 million units/yr) by 25%.

The Trendlines PS-2500 model today predicts Geologic Peak Oil (101-Mbd) will occur in 2030.  But back in 2005, the Trendlines Scenarios 7-model avg was indicating a 94-Mbd PEAK in 2020.  If this date keeps getting postponed, the Trendlines Peak Demand Barrier could come into play.  It suggests global oil consumption growth will come to a screeching halt upon RAC price permanently surpassing the critical threshold of $291/barrel in 2038.  The Induced G-20 Recessions Threshold spawned several contractions in 2008.  The Barrel Meter suggests vulnerable nations could be at risk once again in 2043 upon RAC exceeding $380/barrel.

(USA Refiner Acquisition Crude price is the volume-weighted avg of three dozen domestic and imported grades and blends which range from a 14% discount for Western Canada Select to a 16% premium for Malaysia Tapis Light.  At this time, RAC is generally $6 higher than WTI.)

~

 All Liquids Records   Global monthly production set yet another record (89.4-Mbd) in Nov/2012 and a new quarterly record of 89.3-Mbd in 1Q13.  The 2013 year-to-date extraction is on pace to shatter last year's annual record (89.0) with a new mark of 89.8-Mbd and monthly production is poised to break 90-Mbd this June, while cracking the 95 & 100 thresholds in 2017 & 2027 respectively.  At this time, it appears Peak Oil will occur upon production hitting 101-Mbd in 2030.  This will be a natural geologic event as price-induced PEAK DEMAND is not expected by the model 'til 2038.

Six of the seven major All Liquids streams are in growth mode.  Conventional Regular Oil (light sweet crude) peaked @ 67-Mbd in 2005 and will maintain its present 61-Mbd plateau 'til 2020.  International Inventories are presently just above their 5-yr avg and 5% of global capacity is presently idle and eagerly awaiting new Demand from non-OECD nations.  OECD consumption peaked in 2005.

~

 USA Refiner Acquisition Crude price components   When RAC price plunged $19 in Spring 2012 it was apparently a shocking development to media pundits ... but not to TRENDLiners!  Back in April 2010, the Barrel Meter was already projecting a short-term spike to triple digits with an accompanying collapse in the pace of USA Light Vehicle sales.  The episode was always illustrated as a spike ... not a new era of sustainable prices as wrongly predicted by celebrity analysts within the media & investment banks.  Again in July 2011, the model reaffirmed an imminent price plunge, substantially attributed to decreasing USDollar Debasement & Stress Premium.  Over the past two years, failed forecasters have offered up simplistic rationalizations ... but the universe was truly unfolding as indicated by its fundamental (and non-fundamental) price components.

Non-Fundamental price components

    Windfall Margin   This factor is the ultimate beneficiary when price discovery deteriorates into irrational exuberance.  It became a meaningful component ($11/barrel) during the epic OPEC action to restrict member quota during 1999 & Y2k, then surged to record proportions ($20/barrel) in the July 2008 spike.  Increasingly, more business and news broadcasts feature daily crude prices and outages.  Much of the latter is disseminated by McPeaksters ... proponents of the "imminent" peak oil myth.  This media noise-du-jour often has no context and is not helpful in maintaining rational price discovery.  Once again at equilibrium, it is assessed Excess Margin adds $0/barrel to today's USA Refiner Acquisition Crude price.

    Stress Premium   This component combines a plethora of factors which are perceived to threaten global supply, including geopolitical fear issues (the most controversial driver), weather events (eg hurricanes) and disaster.  As a sub-component of Stress Premium, geopolitical fear factor gained prominence when it added $12/barrel to RAC during the 2002 lead-up to Iraq2.  It surged to $30 during the aftermath to the disputed 2009 Iran election, then posted a record $33/barrel influence (April 2011) during Libya's regime change episode.  After dissipating thereafter to $14, Iran's idle boasts of a Hormuz blockade sparked a new surge to $28 (Jan/2012).  The most notable weather event to play an indirect role ($11) was the media attention focused on the 2005 Katrina/Rita outages.  Irrational price discovery and anxiety premium related to presumed threatening hurricane paths pervaded the 2006-2012 period.  Stress Premium was at a four-yr low of $13/barrel in March.

    Speculation/Hedging Activity   Certainly the most despised and controversial forcing, this price component is also the most misunderstood.  It takes blame for the aforementioned factors which drive price discovery in highly publicized episodes.  Monitoring price action over many years, the Barrel Meter model has found oil prices do move to reflect net long (&  short) non-commercial futures and trading activity magnitude, but its influence has never exceeded $8/barrel (March 2011).  During the infamous 2008 spike, activity was actually dissipating and was attributed a mere $2 in July 2008 when short contracts volumes were setting new records.  Speculation/Hedging activity currently adds $7/barrel to RAC.


 Fundamental price components

    Inventory Draw/Build   Monthly All Liquids production rarely matches consumption, resulting in either a draw or build of international stocks.  This is the factor most affected when OPEC raises or restricts its member quotas, but it is little known it has the least importance in the past dozen years ... $4 in draws & -$3 in a build.  In percent terms, this component was more important back in '99 & Y2k.  In the present environment where major producing nations are dipping into idle capacity to counter sanction-inspired extraction declines in Iran, the current Inventory Draw is adding $2/barrel to today's RAC price.

    USDollar Debasement   This is strictly a made-in-the-USA component.  By far the most under-estimated forcing of crude price moves, it is little known devaluation of the USDollar was a $30/barrel component of the $129 (monthly avg) contract crude price in July 2008.  This factor recedes when the buck and treasuries are enjoying quests for safe havens and crests when the global investment community is reminded how lousy are the American sovereign financial fundamentals or the dysfunction of Congress.  USDollar Debasement was a mere one dollar on the day of Barack Hussein Obama's inauguration.  It rose to add $24 to the cost of oil upon his failed 2011 Budget whilst the celebrity President was publicly blaming Libya.  USD Debasement added $19/barrel to March RAC.

    Lack of Surplus Capacity   The largest price moves occur during periods of extremely low Surplus Capacity.  As a price component, it comprised 32% of the Y2k OPEC-induced spike, 37% when Iraq went offline in 2003, 38% in the 3.5-Mbd production surge of 2004, 37% during the Katrina/Rita outages and 31% ($40) in July 2008.  When OPEC takes 1-Mbd offline, it faces a counter-intuitive paradox where this factor drops $4 for each $1 rise via the countervailing Inventory Draw.  That's 'cuz their intervention actually re-establishes for traders the existence of real spare capacity at times most assume it has been exhausted.

Global co2 atmospheric concentrations will surpass 400-ppm later this year, a tragedy induced by lunatic fringe elements of the American environmental fraternity who have virtually halted growth prospects of nuclear-powered electricity generation plants for almost half a century.  Many of these same zealots are behind the movement to derail bitumen production in Alberta Canada.  The Barrel Meter calculates absence of this stream (1.5-Mbd) from the current All Liquids marketplace would add $6/barrel.

Much of the globe' s idle capacity has been brought back online.  Some replaces Iran extraction affected by the international sanctions in place and the balance was used to increase global production to an all time record 90-Mbd today (from 87-mbd  2008).  Relatively low  Surplus Capacity added $17/barrel to last month's oil price.

    Extraction Cost   The most stable component is the upstream production-weighted cost of oil exploration and lifting.  Rising at an avg annual 17% pace last decade, it reached $37/barrel by June 2008 and suffered a $12 relapse in the Great Recession.  Many pundits are misguided in their pricing analysis by the elusive and mostly inconsequential (assuming ample Surplus Capacity) marginal barrel.  USA RAC Extraction Cost was a record $45/barrel in April and is rising at a much damped 6% annual pace this decade.

~

 four definitive Oil-Cost/GDP Ratios   The natural business-as-usual production scenario would normally unfold with an All Liquids GEOLOGIC PEAK of 101-Mbd in 2030.  But this course is threatened to be truncated by the very real prospect of PEAK DEMAND.  Starting in 2004, the long-term trend for the growth rate of global Consumption began to wane as petroleum prices hit new highs.  This culminated in an unexpected OECD consumption peak in 2005.  The onset of occasional ventures into triple-digit territory has spawned even more demand destruction.  Consumers, commerce & institutions are substituting and conserving.  Over the years I have discovered rising petroleum prices have economic consequences which are indeed predictable at five definitive petroleum/GDP ratios.  These invisible lines-in-the-sand generally rise (and fall) in time with GDP.  Three have global implications and two are USA specific.

    Price Spike Ceiling   Historic volatility suggests at any time the Stress Premium components (geopolitical issues, weather events or disaster) can produce severe but temporary price spikes.  The Gas Pump & Barrel Meter models both predict a black swan event would be constrained by the same Price Spike Ceiling which put a lid on frothy 1980 prices and firmly arrested the 2008 price run @ $129/barrel ($4.11/gal pump).  The PSC represents a definitive Petroleum/GDP ratio where certain demand destruction feedbacks attain critical mass.  As happened in the Summer of 2008, Demand and Price are reversed as alternative energies, substitution and conservation measures are pursued.  PSC was $157 ($4.59/gal pump) in April.  When USA RACrude price spikes, certain vulnerable sectors of the global economy find it necessary to exercise significant conservation measures such as scale backs, shuttering, switching to alternative energies or resorting to substitutions.  The Nov/2009 Barrel Meter chart (or view via MemberVenue archive) was the initial illustration of the discovered Price Spike Ceiling.

    Induced G-20 Recessions Threshold   TRENDLiners are quite familiar with this marker.  Annotations on the Barrel Meter chart since Jan/2010 have alerted the threshold above which higher USA RACrude price would induce (or augment) a new round of economic Recessions among the most vulnerable within the G-20 community of nations.  Record oil costs assisted in pushing weakened G-20 economies past their tipping points in 1980 as central banks waged a war on inflation via high interest rate monetary policy.  But 2008 marked the first time a number of G-20 Recessions were induced by cumulative or "baked-in" high petroleum prices.

Its definitive petroleum/GDP ratio was marked by $106/barrel in early 2008.  The Trendlines Recession Indicator gauges residual high petroleum prices pushed Canadian & USA GDP growth rates down by a further 1.55%, thereby making pre-existing Recessions much worse.  The factor was at the verge of claiming victims once again in early 2011 as RAC climbed to $113 during the Libya crisis ... just a whisker away from the $116 threshold at that juncture.  Several G-20 nations (Australia, Canada, France, Japan & UK) indeed experienced at least one monthly and/or quarterly Real GDP contraction during the brief spike.  In fact this offers up some explanation for the utter shock suffered by most economists when USA GDP had plunged to an unexpected 0.1% growth rate in 1Q11.  TRI gauges GDP was damped by a record 1.60% in April 2011.  There is little danger presently.  The Induced G-20 Recessions Threshold stood at $130/barrel last month.  As seen in chart#3 (left-pane), this G-20 metric is not expected to come into play again `til crude hits $380 in 2043.

    PEAK DEMAND Barrier   This identifiable petroleum/GDP ratio is the RAC price threshold (monthly avg) above which there's an absence of new global Consumption records.  It was surpassed for the first time in the 80's, then again at $92/barrel in early 2008; and again @ $101 in Spring 2011.  During each of these temporary incursions, global Demand was held at bay.  There have been scattered Production records during these transgressions and in those cases the balance surplus served to build global inventories.

These PDB incursion incidents are likely to re-occur in the future, particularly when global Surplus Capacity falls below 4-Mbd.  Eventually this line-in-the-sand will be encroached permanently.  The Trendlines PS-2500 model today predicts Geologic Peak Oil (101-Mbd) will occur in 2030.  But back in 2005, the Trendlines Scenarios 7-model avg was indicating a 94-Mbd PEAK in 2020.  If this date keeps getting postponed, the Trendlines Peak Demand Barrier could come into play.  It suggests global oil consumption growth would come to a screeching halt upon RAC price permanently surpassing the critical threshold of $291/barrel in 2038.

I discovered the PEAK DEMAND Barrier only recently.  The first reference to it was in the Oct/2011 Peak Scenario-2500 update, whilst the first annotation of it within the Barrel Meter chart was in the Nov/2011 version.  At $97 today, RAC is again far below the $112/barrel PEAK DEMAND Barrier and has paved the way for new Consumption records.

    USA Light Vehicle Sales Barrier   The American economy is much too diversified and per capita incomes far too high to be drawn into contraction by the early stages of the aforementioned Induced G-20 Recessions Threshold.  At most, successive quarters of higher pricing reduces the GDP growth rate pace by 1.6%.  That said, in April 2010 my Gas Pump model did detect similar but limited adverse effects do occur domestically.  Chart annotations illustrate a Gasoline/GDP ratio at which the auto sector noticeably breaks down.  When the Pump Price surged above $3.57/gallon in Feb/2013, it breached the model's Light Vehicle Sales Barrier for the sixth time since 1980 and as seen in the vehicle sales charts (left-pane), resulted in yet another predictable collapse or setback for sales.

Since Nov/2009 the Barrel Meter has warned of a definitive Gasoline/GDP ratio which when surpassed serves to strangle auto sector manufacturing and sales.  New Car Sales were decimated upon crossing this same threshold in 1980, 1990 & 2008.  During the Great Recession, volume declined from a 16 million unit annual rate to 9 mu/yr.  Sales had climbed back to 12.9 mu/yr by April 2011, but then slipped to an 11.7 mu/yr pace in only two months when consumers were once again confronted with excessive gasoline/diesel prices.  When Pump Price dipped back below the LVSB, it was no surprise at all to TRENDLiners to see sales surpass the 14.4 mu/yr pace.  Similar surges above the LVSB in Spring 2012 & 2013 resulted in 0.5 & 0.6 mu/yr setbacks.  The auto sector should be poised for a robust rebound now that RAC ($97) has retreated well below the $117 LVSB, except for the extraordinary fact pump prices have not fallen in tandem and only in recent weeks dipped below the present $3.58/gal gasoline LVSB threshold.  As such, pump prices had been exhibiting extremely high Crack Spread and Gross Margin.

The Gas Pump chart also annotates its own Price Spike Ceiling marking the barrier at which gasoline price spikes will reverse.  It marks the topping of the July 2008 event @ $4.11/gallon and stands @ $4.59 today.  Again, take note of this should Israeli fighters take flight or Hormuz be blockaded.

The Trendlines Recession Indicator gauges the effect of residual petroleum prices on the American economy.  This factor trimmed 1.60% off the Apr/2011 Real GDP growth rate, nudging out the previous record for this damping factor of 1.55% in June 2008.  With the cumulative decline of oil prices over the past two years now at $16/barrel, this factor expired as a headwind in Feb/2013 and actually provided a 0.4% tailwind to GDP in April.

 

Sales pace (million units/yr) either plunges or is handcuffed each time pump price breaches the TRENDLines Light Vehicle Sales Barrier:  March 2008, May 2011 & March 2012

 

 

~

Highlights

projected 2013 low:  $85/barrel in December  ($79 WTI)

next opportunity to surpass record $129/barrel in a "black swan" spike:  2020

PEAK DEMAND:  triggered by oil surpassing $291/barrel in Year 2038

potential oil-induced G-20 Recessions:  Year 2043 upon crude surpassing $380/barrel

ultimate record high within horizon:  $364/barrel 2042

~

 Failed Thesis  ~ The McPeakster blogosphere was burning up once again last Winter in anticipation of Steven Kopits (Douglas-Westwood) forecast of an American and worldwide economic Recessions upon Crude Price exceeding $86/barrel.  Kopits subscribes to the myth propagated by associate economist James Hamilton (Univ of California) that high oil prices were the main cause ten of the last eleven Recessions.

They both appear unaware correlation does not always imply causation.  To fully understand his present frame of mind, Kopits recently (2011/10/10) posted on Hamilton's blog:  "We will look back in maybe 10 to 15 years and see that we are/were in the midst of a second and Greater Depression."  Now just throw in David Rosenberg and I'm not sure if we have the three blind mice ... or three stooges.  Crude oil is a miniscule portion of the consumer price index in most nations and the breach of the $86/barrel threshold passed unceremoniously in Spring 2011.

The IMF has since reported Q2 GDP grew at a robust 3.7% pace.  As discussed above, the Barrel Meter model long ago addressed this forcing and found only when Crude Price breaches the definitive Petroleum/GDP ratio (represented currently by $125/barrel) would there be headwinds sufficient to result in a new round of oil cost induced G-20 Recessions.

As did Colin Campbell before him, Kopits appeared before the USA House of Representatives Energy Subcommittee (2011/2/18) to fear-monger the outcome of Crude Price surpassing his $86/barrel line-in-the-sand.  He could have avoided subsequent embarrassment of his impotent screaming and handwaving had he learned from many of the same analysis errors made three years prior by James Hamilton.

As a neophyte to the oil sector, Hamilton had adopted absurd assumptions relayed to him by the McPeakster fraternity with respect to alleged inadequate global surplus capacity, questionable annual new capacity build potential and over-the-top UDRO (underlying decline rate observed) assessments that were all terribly wrong.

If that wasn't enuf, James Hamilton's failure to recognize USDollar debasement as one of the largest forcings of price spikes spoke volumes to the ultimate demise of his prediction the rise in oil prices was linear.  In an Aug-2011 update to his own Peak Oil study, Chris Skrebowski has adopted the same linear price growth assumption and predicts Peak Demand will occur upon the Brent Crude Price exceeding $135/barrel in 2014.

 McDoomers  ~ There continues to be absolutely no merit to the cornucopia of pundit predictions (Feb/2011) for $200-$250 oil & $5-$7 gasoline by the Summer of 2011 disseminated by the lamestream media, McPeaksters & McDoomers.  We heard all the same rationalizations in the Summer of 2008 and our COPF chart (below) is testament to similarly hysterical musings.  Conversely, there was no hint of a MENA geopolitical event back in April-2010 when this year's spike episode with a founding on USDollar devaluation was initially foretold by TRENDLines!  Look for similar nonsense during the current spiking activity.
~ ~

 Price Discovery  ~ There are over three dozen grades of oil across the globe.  Long ago, most were sold on long-term contracts via fixed price lists.   Saudi Aramco maintains this method.  Today, oil is often sold at a discount/premium to several standard blends, facilitated by consulting assistance from Platts.  Unfortunately, a new crop of mostly neophyte buyers have been found to be quite vulnerable to media noise (fear factor).  This has led to an era of irrational exuberance with respect to Crude pricing over the last four years.

Less than 20% of crude is transacted on the WTI/Brent spot venues.  Most of the stakeholder activity there involves hedging.  An increasing trend is to contract some grades @ the front or second month of futures.  For the most part, futures contracts are side bets to guessing final outcomes ... akin to sports betting.  My research has consistently revealed that in periods of increased volumes (eg March 2011), these activities can add as much as $9/barrel to Crude Prices.

Similarly, the myth of "imminent Peak Oil" has been the oil sector's best friend since the first of many annual declarations in 1989.  Enabled by the WWWeb, the proponents of this hoax (McPeaksters) have provided the marketplace with dozens of outages and outright disinformation each week since 2003.  Their inferior forecasts have discredited them in the eyes of politicians, policymakers and the media, yet their influence in pushing up Crude Prices at every turn is evident.  Their ability to nuance fear factor goes straight to the bottom line in the form of Windfall Profits to Producers worldwide.

The Barrel Meter presents a visual depiction of Trendlines Research's analysis of the price components of the monthly avg for the three dozen weighted blends comprising USA contract crude oil as monitored by EIA.  The detailed study of the forcings affecting Crude Price from 1999 to 2007 allowed Trendlines Research to provide real-time guidance and dissection of the factors in play during the historic 2008 spike and subsequent price collapse.  The importing of future Surplus Capacity & Extraction Cost stats from my Peak Scenario-2500 production profile model into the Barrel Meter enabled development of an outlook module capable of forecasting component prices on a 23-year horizon.

The TRENDLines Price Targets are based on my projections of future extraction costs (production weighted), lack of global surplus capacity, inventory draws, USDollar debasement, speculation/hedging activity, geopolitical fear premium & effects of the media noise-du-jour on windfall profits.  These forcings change on a daily basis due to geologic, geopolitical & weather related factors that may cause significant revisions in future monthly updates.  The foundation for much of this data is derived from the Peak Scenario-2500 (oil depletion model), Gas Pump (commerce model) & the TRENDLines Recession Indicator (economic model).

Trendlines Research has assisted many stakeholders recognize that All Liquids will enjoy an ever increasing pace for approx two decades, to be followed by a very manageable Post Peak decline.  With a return to healthy Surplus Capacity, Marginal costs are irrelevant at this time and thus assures a reasonable pricing regime.  Knowledge of these two factors allows policy makers to conduct their research and due diligence and make long term decisions in a less hurried environment.

If your firm/institution requires written validation of a future price forecast in the 60-day to 40-year time frame, feel free to contact our analyst, Freddy Hutter (867.660.5566 in the Pacific time zone)

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the OPEC Conundrum  ~ This IMF chart reveals the Budgets of 5 OPEC nations require $100/barrel oil for them to breakeven.  Another three need an annual avg of $70 to pay the bills.  Qatar & Kuwait survive on $45 crude.

So should my above prediction of sub-$70 crude come to fruition, it is almost certain several OPEC members (incl Venezuela) will instantly campaign for harsh extraction restrictions.  It is my position they may discover such an action would be folly in the long-term for the consortium.  Since 2006 it has been increasingly noticeable that any price hikes hinged to OPEC quota cuts can be measured in mere days or weeks ... not months or years.  In fact my Barrel Meter analysis has prompted me to state on several occasions since 2010 that these scorned OPEC actions eventually result in lower global prices after the original surge.  There are two main reasons for this paradox.

While there are some responsible members of the block who abide to announced lower quotas, it has been common for the same noisy members who called for cuts to then defiantly shirk the guidelines.  The motive for the serial cheaters is clear.  They desperately seek revenues to buoy their failing economies.  And best of all, they are gleeful there is no compliance mechanism within OPEC to discipline such not-so-secret quota contraventions.  The leakage of extra supply to the marketplace is not helpful to the scenario objectives.

The other factor found by Trendlines Research will be found to be rather counter-intuitive.  Along with Extraction Costs and USDollar Debasement, crude price fundamentals include components for Inventory Draw & Surplus Capacity.  When OPEC requests its members to pare back on extraction, it immediately causes a draw on global stocks and Crude Price drifts upward as traditional traders subconsciously increase the Inventory price component.  In the meantime, there is another camp of traders who after a period of sober afterthought realize the sector has newfound idle facilities and albeit in a similar subconscious state they promptly decrease the Lack of Surplus Capacity premium and Crude Price drifts downward.

The root to the latter case can be traced to the successful disinformation campaign waged by the fringe movement promoting "imminent" Peak Oil:  the McPeaksters.  They have made declarations that global oil production has already peaked virtually every year since 1989.  The cult gained massive exposure via the WWWeb and their proactive activity became much more aggressive in 2002 with an apparent culmination in 2004.  Their rhetoric included themes of "running out of oil", "well running dry", "the growing gap" and always ends with a definitive statement that Saudi Arabia's giant Ghawar field is in terminal decline and there is no more spare capacity in the world.

With this, the Lack of Surplus Capacity price component rocketed, especially among neophyte traders and stakeholders.  As seen in the table above, the legacy of this faulty interpretation added (rightly or wrongly) $38 to a barrel of oil during the July 2008 spike event and is still applied today.  Albeit global Surplus Capacity was a healthy 6-Mbd at year-end 2010, many cable news pundits are seen to opine idle capacity has been exhausted.

In short, I argue that for every 1-Mbd of trimmed quota when crude is $100, Crude Price rather quickly rises $2/barrel.  But the OPEC cut inadvertently creates 1-Mbd (additional) Surplus Capacity into a marketplace where many buyers had assumed there was none (due to McPeakster alarmism) and over time Crude Price declines $6/barrel.  So unfortunately for OPEC, the Barrel Meter model has discovered that desired price increases are more than offset over extended time by the traders who rightly realize the collective action means the world now has (more) defined spare capacity and this factor becomes a net negative forcing on gross crude price:  approx $4/barrel for each 1-Mbd in cuts.

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For comparative purposes, all projections are re-based to EIA's import-weighted USA Contract Price (nominal USDollars/barrel), approx 2% above WTI.  Its July 2008 peak of $129 was followed by a Jan/2009 bottom of $37/barrel.  WTI has been a playground for neophyte speculation for several years and as such WTI can be 11% higher to 27% less than the USA Contract Price and thus is useless as a research metric.  The USA Contract Price, comprising dozens of blends & grades, is slightly higher than OPEC's basket but somewhat less than Brent.

 Crude Oil Price Forecasts  -  2035 

Dec 24 2011 ~ Today's chart compares the Trendlines Barrel Meter monthly revision to updated annual price outlooks by Adam Sieminski of Deutsche Bank, EIA, IEA, OPEC, Boone Pickens & Chris Skrebowski.

A new annotation added to the chart today is Freddy Hutter's "Peak Demand Barrier".  In Oct/2011 it was proposed in his TrendLines Barrel Meter model that global oil consumption ceases to grow when the USA contract crude price exceeds this definitive Petroleum/GDP ratio.  The thesis further suggests the natural Geologic Peak of 103-Mbd in 2031 will be pre-empted by Peak Demand upon permanent breach of the PDB threshold in 2029 when oil surpasses $213/barrel hence holding consumption to the 100-Mbd at that juncture.

The Barrel Meter has been unique in its tracking of oil fundamentals as components of crude price since 1999.  The recent update calculates today's $103 price to be a 27% premium over crude's Fundamental Fair Value.  US$ Debasement since early 2009 remains a $15 price component.  This new revision proposes spiking activity in 2008 & 2011 is related to newborn cyclicity within oil fundamentals and additional spikes can be expected in 2015, 2018 & 2021.

The Barrel Meter currently forecasts that failing either any major geopolitical event or OPEC intervention at their June convention, much improving fundamentals should see oil decline to $63 by Sept/2012.  It maintains a price ceiling to any spiking activity of the monthly avg exists as represented by another definitive Petroleum/GDP ratio ... the Demand Destruction Barrier.  Between these two lines is the price point (currently $121) which can induce economic Recessions among the G-20 nations (as occurred in 2009).  The Trendlines Gas Pump reveals a similar critical price level - the USA Light Vehicle Sales Barrier - the price at which rising gasoline prices cause collapse in the auto manufacturing sector.  This occurred in 1980, 1990, 2007 & Spring 2011.  It is $3.37/gallon ($102/barrel oil) today.

The Barrel Meter imports data on projected extraction costs, spare production capacity & business cycles from the Peak Scenario 2500 depletion model.  A similar analysis for gasoline price is featured via the Gas Pump presentation.



recent revisions:

March 15 2011 ~ Today's chart updates price outlooks by Deutsche Bank, EIA, IEA & Trendlines.  Extraordinary consistency revealed in the updates by Adam Sieminski of Deutsche Bank ($192), EIA AEO 2011 ($200) & IEA WEO 2010 ($204).

Nov 4 2010 ~ Today's chart introduces OPEC's long-term price outlook. It forecasts crude will average $80 to 2020, then rise to $106/barrel by 2030.

Oct 4 2010 ~ Today's chart introduces a medium term forecast by Charles Maxwell.  His $287 per barrel in 2012Q2 target is in significant breach our Demand Destruction Barrier.

Disagreement that a constraint mechanism such as the Demand Destruction Barrier exists separates conventional price forecasting from those within the McPeakster fraternity.  For illustration purposes, we include their six showcase predictions to demonstrate the divergence.  Monthly updates by a "joker" over at theOilDrum (aka Ace) have been trimmed recently, but still warn the cult following of a spike to $188/barrel within 40 months!  From here, we deteriorate to contributions by two members of the Lunatic Fringe Jeff Rubin (ex-CIBC World Markets) foresees "sustained pricing" of $215 by 2012 & Matt Simmons (deceased investment banker) sports infamous speculation of $300 by 2014 & $573/barrel ($600 WTI) in "much less than 20 years".  Candidates for membership include Robert Hirsch & Boone Pickens with guestimates of $478 & $500 within only a couple of years.  A final significant breacher is Charles Maxwell.

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My guidance a year ago:

<<< April 12 2012 chart predicted USA Refiner Acquisition crude would plunge from $112 to $90 in 12 months as the Iran blockading boast subsided.  As seen in today's chart above, the price did in fact decline to $92 but has since relapsed to $97 with Mideast tensions.

 

 

 

My guidance three years ago:

<<< Sept 1 2010 chart predicted USA contract crude would rocket from $74/barrel to $119 by Sept 2011.  As seen in the chart above, oil prices spiked to $113 by May.  The post spike collapse was prevented by Iran's boasts to blockade Hormuz...

 

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