miércoles, 17 de febrero de 2016

The price of oil… as predicted by Cristian «Nash» Bøhnsdalen!!!




The price of oil… as predicted by Cristian «Nash» Bøhnsdalen!!!

With too much oversupply and the lowest barrel in nearly 20 years (around 30 USD a barrel), there is anxiety about an oil meltdown. The big oil companies such as the Saudi Aramco have not cut back on production. Some OPEC states such as Iran and Irak are looking to increase production. Some predictions now say the crash could go down to USD 10 a barrel of oil. But only 1 year ago, some newspapers where predicting 200 USD a barrel of oil!!!

Is it possible that nobody saw it coming? Oil is a commodity, and as such, cyclical. When prices go up, this gives incentive to oil companies to invest to develop more efficient technologies to lower the costs. A lower cost means more production, driving the price down (oversupply). A low price of oil is beneficial for business since it represents lower energy costs for companies. When the oil price is low though, investment drops and extraction methods do not improve, in the long-term the costs increasing and the price going up again (supply is cut to push the price up, otherwise many wells would go belly up). In the oil industry, investment cycles are long though. Meaning once an investment is done, it might take between 3 to 5 years to start seeing the profit. When the price of oil is high, the influx of money that flows into the country to invest in the industry strengthens the currency. As the price gets lower, that same influx of money stops flowing in, weakening the currency.
But why did the oil price take such a deep decline?
-       The Shale Oil Revolution mainly. The shale oil revolution means a new way of extracting “land oil”. When it is said that “the world is running out of oil”, what is really means is that oil is getting more and more difficult and expensive to extract. Shale oil introduced horizontal drilling, or “fracking”, which is a new way of drilling for “land oil”. In means that instead of drilling vertical and perforating the oil reservoir, the pipelines enter vertically but then go sideways drilling horizontly to extract oil at the sides of the main reserve in previously unaccessible spots. The existence of these wells has been known since the 1920s, but the technology to extract it was not there yet. Shale oil appears as more expensive than land oil, but cheaper than offshore oil. Break-even point varies, but averages today 55 USD x barrel. Meaning, if the price of oil goes under 55 USD x barrel the well would not be profitable. Operational costs though are much lower, so the well will continue functioning with a much lower price (but will not attract new investments). Offshore break-even point in Norway is currently 80 USD x barrel, so a price of oil under 80 USD x barrel would have economical impact on the currency.
-     Lifting of exporting ban in the US: since the 1970s, when the OPEC took control of the oil market, the US has been an oil importer. Even if the US has oil reserves, it preferred not to use them entirely relying heavily on imported oil. With the shale oil revolution, the US will has now oil reserves until 2062. This means that a major player will stop being an importer to start being an exporter. The US alone accounts for 20% of global oil imports. 20% of the demand then will vanish, while a major player returns to the export markets.
-     Lift on Iran sanctions: since 2006, sanctions were imposed in Iran’s exports. The lifting of these sanctions mean that Iran, one of the biggest players in the world, is back in business. More pressure on the supply side.
-      The OPEC lost control of the market: the OPEC, which could previously simply cut production to regulate the price, accounts today only for 30% of the oil market. If it cut down production (and the other players didn’t), if would lose market share. The OPEC will not take any measures unless these are coordinated with the other non-OPEC countries.
But how on Earth did Cristian “Nash” Bøhnsdalen, the guy next-door living in a crappy apartment, predict the downturn in the oil market? As I mentioned in a previous post, Argentina has today the 3rd largest reserves of shale oil in the world. My father is the specialist in the region, so I have had “insider information” regards to the technology development and dynamics of shale. The fact that oil is a commodity and that it is cyclical I knew from my own experience as an Accountant in the Oil Industry. The question was not IF, but WHEN this was going to happen, and how low it could go. I anticipated the downturn would come in 2016/2017, but I should keep my eyes and ears open, just in case. In October 2014, when the price crossed 80 USD x barrel and touched the break-even point, I sold all my NOK and bought USD. I bought them at an average of 6,50 – 6,80 NOK x USD, thus protecting my savings from the coming devaluation (I do have my bank receipt as EVIDENCE, as the good ex-auditor that I was). Notice the article from Bloomberg that predicts 20 USD x barrel for the next 20 years, but was published in September 2015. My prediction is a conversion of 9,50 NOK x USD, following the Big Mac Index. I was the only one in Norway to understand what was happening, and the impact this would have on the Norwegian economy.
Was I the only in the WORLD to predict the downturn in the oil markets? No. There was already talk about it since 2013. One of the Rich Dad (Robert Kiyosaki) Advisor’s Mike Maloney, predicted that the commodity supercycle was coming to an end and oil will go somewhere around 10  USD x barrel. This was already in 2010. He justified this on Technical reasons, whereas I found Fundamental reasons to justify my analysis. Technical analysis consists of charts, whereas fundamental analysis finds concrete reasons based on long-term economical factors. In October 2014, when the price started to go down, I took 30 USD a barrel considering that oil would follow gas, where the price went down to a ¼ due to the shale gas revolution.
I do not believe, like Mike Maloney that the price will go to 10 USD in the short term. I actually believe that it will bounce and go up and down, maybe hovering in the 30 – 60 USD range. To me, the floor has been found at 30 USD and it will be difficult to break that price line. Consider that less investment will go into shale with a low price, and that might push the price up. A higher price will however mean more investment in shale, which will in turn push the price down again. However, in the middle term, there is no way but down. More shale projects mean more efficiencies and lower costs, so what we are seeing is just the beginning. I expect that we will see many years of low oil prices. What will happen after that is unclear. If alternative energies take more presence, especially thinking about for example the electric car, it might be that “good times for oil are over”.

Please check the following videos:

Talk about Shale Oil in 2013.
https://www.youtube.com/watch?v=CxbzR-WZ8-Q                

Mike Maloney predicts the end of the commodity cycle and Oil at 10 USD x barrel in 2010 (and almost gets kicked out a conference room in Russia, haha). Great explanation from the technical side. For the fundamental explanation, you can check this post. J

NeXT chapter, the impact of lower prices in the Norwegian economy, and the crash of the century!!!

Sources:

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