Bridgewater Calls $62 Oil for 2019

[TraderTate + 186]

Bridgewater (biggest hedge fund in the world) is calling $62 oil (along with a very painful market overall next year). ... Sounds like they are in line with the community's very own @Tom Kirkman

[JunoTen + 118]

I hope they're right and know what they're saying... Why are they betting on 62 ?

[Jan van Eck + 7,558]

1 minute ago, JunoTen said:

I hope they're right and know what they're saying... Why are they betting on 62 ?

Those guys read the discussion section on Oilprice.com

[Tom Kirkman + 8,860]

2 hours ago, TraderTate said:

Bridgewater (biggest hedge fund in the world) is calling $62 oil (along with a very painful market overall next year). ... Sounds like they are in line with the community's very own @Tom Kirkman

Happy Dance for Confirmation Bias !

And no, I don't see $62 oil as "painful".

I've actually been hoping for $70 oil for 2019, but that is only because I see the value of the U.S. PetroDollar declining a bit next year, due to a slowly growing influence of the new PetroYuan.

As I've mentioned before, my hope for $70 oil in 2019 would actually only be worth around $65 using today's value of the USD.

[TraderTate + 186]

18 hours ago, JunoTen said:

I hope they're right and know what they're saying... Why are they betting on 62 ?

I can't access their full Daily Observations, so we have to rely on media regurgitations unfortunately. Don't have a full explanation for their $62 oil call. 

[TraderTate + 186]

18 hours ago, Jan van Eck said:

Those guys read the discussion section on Oilprice.com

Indeed, maybe they got the idea from Tom, in which case they should hire him permanently. I'm sure everyone who ready the Daily Observations with Tom's input would benefit. 

[Claude + 7]

From a day trader point of view, the reason why they are calling for $62 oil is if you look at the charts you will see oil hit $62.06 on April 6 before going up again. In early to Mid March, there was a lot of activity around $60.71-62 before going up again. Therefore they are concluding there is resistance from going much lower than $62. 

[Dennis Coyne + 82]

Can someone explain why OPEC/Russia would want oil at $62/b in 2018 US$?

Have you guys heard about Venezuela?  About a 900 kb/d decline recently and they cannot meet their crude commitments.

https://oilprice.com/Energy/Crude-Oil/Venezuelas-PDVSA-Fails-To-Meet-Oil-Supply-Obligations.html

It is doubtful that declines in Venezuala and Iran, increased World demand of 800 kb/d to 1000 kb/d, for a total of nearly 2 Mb/d can be made up with OPEC, Russian, and US LTO increases, so it would seem prices will remain about where they are even if OPEC/Russia choose to increase output in search of lower prices.

Why is it that they want lower oil prices, this seems counter-intuitive?

 

[Jan van Eck + 7,558]

12 minutes ago, Dennis Coyne said:

Can someone explain why OPEC/Russia would want oil at $62/b in 2018 US$?

Why is it that they want lower oil prices, this seems counter-intuitive?

 

The answer lies in whether or not oil is an elastic or an inelastic product. 

If you want to maximize revenue, and crude oil is elastic, then you pump more.  

If you want to maximize revenue and crude is inelastic, you pump less. 

And then you have to figure out how to gore the other guy's ox without bleeding yourself!   So what it comes down to is: greed and fear. 

[Dennis Coyne + 82]

1 hour ago, Jan van Eck said:

The answer lies in whether or not oil is an elastic or an inelastic product. 

If you want to maximize revenue, and crude oil is elastic, then you pump more.  

If you want to maximize revenue and crude is inelastic, you pump less. 

And then you have to figure out how to gore the other guy's ox without bleeding yourself!   So what it comes down to is: greed and fear. 

Jan,

It's pretty clear that the demand for oil is inelastic, especially in the medium term (3 to 5 years).

It's doubtful revenue will be maximized by an increase in output by OPEC/Russia, in my view.

What happened the last time OPEC and Russia increased output markedly and drove down the oil price?  There was a substantial decline in revenue, that's why they reversed course and decided to cut back on output.  I imagine if they decide to increase output, their aim will be to try to stabilize oil prices at $70 to $80/b in 2018$.

[Jan van Eck + 7,558]

50 minutes ago, Dennis Coyne said:

 

It's pretty clear that the demand for oil is inelastic, especially in the medium term (3 to 5 years).

 

And I would concur.  Further, on the retail level, gasoline is quite inelastic for folks who need to drive to work.  Until hybrids start to make a serious dent in the auto fleet mix, I suspect oil will remain inelastic.  Once the major portion of fuels demand at retail is gone or largely reduced, then I suspect gasoline will become an elastic good, as you will see substitution of auto travel for air and rail travel for discretionary trips.  Drop the price of gasoline, and watch as holiday-makers start to do weekend trips, that sort of thing. With the price up there, those trips are foregone, mostly because these days the great masses are drowning in debt and impoverished by tax loads. 

Cheers,  Jan

Edited June 6, 2018 by Jan van Eck
scrivener error

[Tom Kirkman + 8,860]

5 hours ago, Dennis Coyne said:

Can someone explain why OPEC/Russia would want oil at $62/b in 2018 US$?

Easy to explain about Russia being ok with $62 oil.

Even the Halliburton CEO is comfortable with oil in the $60 range.

OPEC is a totally different situation, and they seem to want at least $80.  Chearleading toward triple digits prices, instigated my Saudi Arabia.

Back to Russia, though....

In 2016, the Russian government budgeted for $50 oil (but Russia's head of budget and taxes said $50 was overly optimistic and said $48).

Then in 2017, the Russian government budgeted for oil at $40 for 3 years, from 2017 to 2020.  So anything above $40 is a bonus.

With the oil bulls going hog wild lately, seems that most everyone has forgotten a few years ago about the "lower for longer" and the "lower forever" oil price predictions that were solemnly proclaimed by highly paid talking heads.

So predictions have swung from the $40 forever a couple years ago to the current push toward $80 and triple digits.

Anyone recall similar scaremongering?  Like this below?

[Dennis Coyne + 82]

Hi Tom,

Russia is ok with lower prices, but if they can sell the same amount of oil at a higher price, or less oil, but higher total revenue.  Halliburton doesn't sell oil they sell oil field services.

I imagine if oil producers could choose a price, they would choose $75/b over $62/b, but I don't produce oil, so maybe I am incorrect.  I do know that if I am selling my labor and have a choice between two jobs that are otherwise equal, I will choose the higher paying job, but I may be unique in this regard.

So I ask again, why would Russia choose a lower price over a higher price? Just because they can live with lower prices does not make it rational to increase output from 10 Mb/d to 11 Mb/d so that they can sell their oil for $62/b instead of $75/b, just do the math.  $750 million per day vs $682 million per day, which would you choose?

Also Art Berman expects oil prices to go up due to lack of supply as of May 29, 2018.

http://www.artberman.com/art-berman-think-oil-is-getting-expensive/

The lower for longer was about OPEC increasing output in the face of high inventory levels.  I don't think since inventory levels have started to decrease that we have been hearing a lot about lower for longer.

On top of that we have sanctions on Iran, Venezuelan output dropping like a rock, pipeline bottlenecks in the Permian basin, lower output than forecast or Brazil, Canadian pipeline issues, output continuing to drop in Mexico and China and World consumption of crude plus condensate increasing by at least 800 kb/d and possibly as much as 1000 kb/d.

So the question is simply where is the oil production going to come from to make up for declining output in Mexico and China (300 kb/d), Venezuela and Iran (about 1000 kb/d), plus increased consumption of 900 kb/d, for a total of 2200 kb/d.  Maybe OPEC/Russia increase output by 1000 kb/d, that leaves another 1200 kb/d, can US and Canada increase by that much in 2018, in 2017 Canada and the US saw combined increases in C+C output of 815 kb/d (EIA data).  Canada increased output by 300 kb/d in 2017 over 2016 and Texas and New Mexico have a 12 month annual rate of increase of about 1100 kb/d (with most of this from the Permian Basin), if pipeline problems don't reduce the rate of increase more than 200 kb/d total for the Permian basin and Canada combined, then production will match consumption.  That is based on the assumption that OPEC and Russia have 1000 kb/d of spare capacity.  Note that there was a 1800 kb/d cut in Jan 2017, but we expect Venezuela and Iran combined to already be cut by 1000 kb/d combined from the Dec 2016 level.  This implies only about 800 kb/d of spare capacity, if that's correct we will need all of the 1400 Kb/d of combined Canadian and US annual increases in 2018 and we will need to hope that pipeline constraints are not a problem to keep oil prices at $75/b.

A last thought.  If Russia and Saudi Arabia cannot agree on output levels and they choose to fight for market share with each other and the other oil producers in a race to the bottom with the lowest oil prices, then perhaps oil goes to $40/b.  This seems unlikely, but oil producers sometimes are more interested in bragging rights than revenue and fail to act rationally (in an economics sense).  I was surprised in 2014 when OPEC failed to cut in response to growing inventory, and I no doubt will be surprised in the future as well.

Edited June 7, 2018 by Dennis Coyne

[Tom Kirkman + 8,860]

10 minutes ago, Dennis Coyne said:

So I ask again, why would Russia choose a lower price over a higher price?

You seem to be looking at only the oil seller's side, and not taking into account the oil consumer's side.

Too high of oil prices can crash the global economy.

Let me pose a similar question to yours, but outside of the context of oil...

Why would Apple choose to sell their iphone X for $1,000 when they could sell it for $2,000 instead?

If prices go too high, demand drops, consumers can't afford it.

Russia was pragmatic enough that it learned lessons in 2016, so for the next 3 years (2017 to 2020) it budgeted for $40 oil.  Fiscal restraint.

If OPEC wants to chearlead for higher oil prices (similar to an overpriced iphone X) they can knock themselves out.  There will be a bad reaction from global economies.

Currently, it is estimated that Saudi Arabia needs $88 oil to balance its budget this year, due to MbS grand and expensive Vision 2030 starting up this year.

Looks like Russia was smarter by budgeting to living more within its means, rather than by tryinh to jack up oil & gas prices.  Tip of the hat to Russia's Energy Minister Novak for actually learning lessons in 2016, and properly preparing fiscally for 2017 - 2020.

Oh, and my comments here may infuriate the ZOMG RUSSIA IS PURE EVIL crowd.  Please feel free to amuse me with rabid anti-Russia replies, I could use some whine with my coffee this morning.

[Dennis Coyne + 82]

2 hours ago, Tom Kirkman said:

You seem to be looking at only the oil seller's side, and not taking into account the oil consumer's side.

Too high of oil prices can crash the global economy.

Let me pose a similar question to yours, but outside of the context of oil...

Why would Apple choose to sell their iphone X for $1,000 when they could sell it for $2,000 instead?

If prices go too high, demand drops, consumers can't afford it.

Russia was pragmatic enough that it learned lessons in 2016, so for the next 3 years (2017 to 2020) it budgeted for $40 oil.  Fiscal restraint.

If OPEC wants to chearlead for higher oil prices (similar to an overpriced iphone X) they can knock themselves out.  There will be a bad reaction from global economies.

Currently, it is estimated that Saudi Arabia needs $88 oil to balance its budget this year, due to MbS grand and expensive Vision 2030 starting up this year.

Looks like Russia was smarter by budgeting to living more within its means, rather than by tryinh to jack up oil & gas prices.  Tip of the hat to Russia's Energy Minister Novak for actually learning lessons in 2016, and properly preparing fiscally for 2017 - 2020.

Oh, and my comments here may infuriate the ZOMG RUSSIA IS PURE EVIL crowd.  Please feel free to amuse me with rabid anti-Russia replies, I could use some whine with my coffee this morning.

No I don't really care about Russian politics.  The iphone example is perfect. They choose price, in the case of Russia, they control output rather than price so a subtle difference.  In any case it matters little as there is some World demand schedule for both oil and iphones.  I do not know the shape of the demand curve for iphones, but in this case we are talking about a decrease in price of oil from $75/b to $62/b.  So to make your example more comparable let's say Apple drops the price of the iphone from $1000 to $800.  They already know they sell 200,000 units per day on average at the $1000/unit price, so revenue is $200 million per day, if they drop the price to $800/unit, they will sell more units, if the number of units sold per day increases to more than 250,000 units per day, then the price reduction makes sense. 

I fully understand that consumers may buy more oil at a lower price,  the question is how much more oil can Russia produce (probably about 500 kb/d) and will the increased oil sales actually increase revenue.  So let's try the math another way.  Prices are currently $75/b and Russian output is about 10.5 Mb/d at that price revenue is $787.5 million per day. If output is increased to 11 Mb/d and the price of oil falls to under $71.59/b, then revenue will be less than before output was increased. At $62/b Russia would need to produce 12.7 Mb/d to earn $787.5 million per day of revenue.

Do you believe Russia can increase output to 12.7 Mb/d?  I don't, not in the near term and probably not ever regardless of the price of oil.  So a rational producer that wants to maximize revenue, would leave either leave output levels where they are and let prices rise or raise production by a small amount to keep prices from rising too high.  The best choice depends on the slope of the World demand curve.  If its relatively steep, so that a large change in price causes a smaller change in oil consumption (say a $5/b increase in price reduces World demand by 500 kb/d) then a rational producer will let oil prices rise in that case as revenue increases.

Oil prices averaged $110/b from 2011 to mid 2014, no crash of World economy.  My guess is that Oil prices over $130/b for a year in 2019 might crash the World economy, but I am not arguing for triple digit oil prices.

The World economy will be fine with oil prices at $80 to $90/b, economic crash is not likely at that price level.

Edited June 7, 2018 by Dennis Coyne

[Tom Kirkman + 8,860]

Dennis, I still prefer the range of around $65.  That is strictly my opinion.  That's my personal guestimate of the best overall balance between oil producers and oil consumers.

You prefer an average of $80 to $90, which seems to be the preference lately of OPEC.  I'm outnumbered in my opinion. While I tend to think that $80 to $90 is too high for the current global economy to sustain, many others disagree.  No problem, apparently I'm the dissenting voice here, and not OPEC or you.

[Dennis Coyne + 82]

Hi Tom,

Part of that is based on US tight oil producers needing at least $80/b to be profitable and pay down their debt.  Much of this is based on the work of Rune Likvern and Mike Shellman.

Rune Likvern's analysis can be found at his blog Fractional Flow

https://fractionalflow.com/2017/10/08/a-little-on-the-profitability-of-the-bakkennd/

[wsor + 2]

On ‎6‎/‎5‎/‎2018 at 2:19 PM, JunoTen said:

I hope they're right and know what they're saying... Why are they betting on 62 ?

Hello Tom,

Hoping that they will think it right that can benefit many .

 

[Tom Kirkman + 8,860]

On 6/6/2018 at 5:19 AM, JunoTen said:

I hope they're right and know what they're saying... Why are they betting on 62 ?

 

11 minutes ago, wsor said:

Hello Tom,

Hoping that they will think it right that can benefit many .

For both of you, here is some background for Bridgewater's reasoning.

World's Biggest Hedge Fund: "We Are Bearish On Almost All Financial Assets"

My opinion is unrelated to Bridgewater's reasoning.  My hope for $65 oil this year is based on my best guestimate of a Goldilocks price which has a relative balance between oil consumers and oil producers.  The relative cener balance on a price See Saw.

In my personal view, $65 oil is not too high to kill off global economic growth, and not too low to hurt oil producers.  That's not a price prediction, that's a hope for the oil price See Saw to relatively balance out, without the extremes of too high or too low.

Somewhere, @William Edwards posted recently a graph of oil prices over the last 100+ years or so, graphed in the equivalent of 2016 U.S. Dollars.  I can't download the graph on my mobile phone, so perhaps William would be kind enough to repost it here.  Then the concept of a relative balance on the price See Saw might make a bit more sense.  Relative stability is much better than violent price extremes.  Just my opinion; as always, you are free to disagree.

[wsor + 2]

Hi Tom,

It cater my senses the Equation of Equilibrium matters between oil consumers and oil producers, Tom I do agree in your opinion that relative stability is better than violent price extremes.

[Glenn Ellis + 57]

We all need to remember that our business is cyclical, and always will be.

That graph of prices, contains information posted, before the rise of the traders and speculators, not to mention the new wrinkle of the "day trader".

Sadly, "Supply & Demand" no longer drives prices.

Scaremongoring, geopolitical events we have no direct control over, as well as simply the "GREED FACTOR" enter into the mix.

The only time the prices were stable was during the period 1942-1945 when the president called for full production. The expanded facility to 1200 acres in Texas City Texas, and the refineries in New Jersey were a direct result of wartime demand.

IMHO we need to be like the little creamery in Texas, "eat all we can and sell the rest."

LNG is first, we are now exporting more product than we import.

Shale producers are ramping up. Prices falling to $20. a barrel?

Then the the world situation will be on the brink of a new disaster.

I don't think that likely to happen.

[Top Oil Trader + 469]

Claude very good. Thanks for bringing up the point from BridgeWater, I think that is Ray Dalios group. One of the top traders right now.

[Eric Staib + 21]

On 6/5/2018 at 7:08 PM, Tom Kirkman said:

 

And no, I don't see $62 oil as "painful".

Tom, I *think* their comment about the market refers to the overall economy-not the oil market at that price.

[Tom Kirkman + 8,860]

6 minutes ago, Eric Staib said:

Tom, I *think* their comment about the market refers to the overall economy-not the oil market at that price.

Eric, that would make sense.