Thursday, January 1, 2015

Oil Prices Collapse: Everyone Got This Wrong

Financial pundits routinely make howler forecasts, but the good news is that they forecast so often and the public has no memory. so it doesn't matter.  Industry executives are supposed to be closer to markets, smarter and more circumspect, and they often are.  But, just as often, they assume the trend is their friend.

Here's a quote from the CEO of Chevron,
"This past year was expected by many to bring stable, triple-digit oil prices. Chevron Corp. ’s chief executive declared in March that “the $100 barrel is the new $20,” and traders complained that several years of low volatility had made it difficult to make money buying and selling oil."

Boy, was this ever off the mark!  We've never been a participant in this game, except to say, 
"If there are intrepid forecasters out there who could explain $100 a barrel oil for me, I'd love to hear from you." (2011)

Short-term supply interruptions aside, it was impossible to justify prices above $100/bbl on economic fundamentals.

The one year price chart for crude oil is remarkable, showing a decline from $100 in July to $54 presently, with some industry forecasters projecting $60 in a year.

Longer-term sources of crude oil will be more expensive, technologically difficult to access, and fraught with political risk for multinationals in areas like the Arctic or deep ocean sources. Current prices have taken these off the table.

It is ironic that activists still talk about solar as the global savior, except that it is little more than a hobby farm for NGOs and their patrons.  Natural gas and nuclear which are better from a rational environmental calculus have been bullied off the table by sheer volume of propaganda.

The winners, of which there are many, and the losers, of which there are fewer big ones, are shaking out in predictable economic fashion.

The oil price consensus forecast was probably one of the biggest consensus market misses of 2014.

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