“Where’s the Bottom?”

by John Graves, January 20, 2015

Having survived three prior major downturns in the oil business, we’ve heard lots of people expound over the years on the future price of crude oil.  A great deal of time and effort is spent by analysts and economists in an effort to predict the commodity price at the end of the most complex supply chain in the world.  That complexity renders accurate predictions implausible.  The lesson we’ve learned: anyone who says they know what the price of oil will be in the future is either a liar or a lunatic.  That said, with the price of oil the topic of conversation in Houston at the moment, who are we to refrain from indulging in this ultimate game of speculation.  Where will the price be at year-end?  What will be the average price for 2015?  And the question we hear the most, “Where’s the bottom?”

Reuters reported last week that Bank of America Merrill Lynch (BOAML) cut its crude oil forecasts on Thursday saying Brent could go as low as $31 by the end of the first quarter of 2015.

Anatole Kaletsky, writing in The Guardian last week said economics and history suggest a future persistent price range for crude is a low of $20 and a high of $50.  His hypothesis rests upon an historical analysis of prices over the past four decades.  See his article in The Guardian at http://www.theguardian.com/business/2015/jan/15/what-is-the-future-direction-of-oil-prices-anatole-kaletsky.

Robert Peston, economics editor of BBC News, reports that BP expects the price of crude to “stay in the range of $50 to $60 for two to three years.” He says that BP is persuaded that the Saudis’ determination to recapture market share will “not simply require some US frackers to be bankrupted and put out of business, but also that enough banks and creditors are burned such that the supply of finance to the shale industry dries up.  Only in this way could Saudi be confident of reinvigorating its market power.” That’s a chilling thought.

On a mildly positive note, crude closed up on both Wednesday and Friday of last week, indicating that the marketplace is searching for a bottom.   The Wall Street Journal reported that oil rose 5.6% on Wednesday, “the largest one-day percentage gain” in two and a half years, when WTI rose $2.59 to $48.48 per barrel on NYMEX.   Following a price drop on Thursday, NYMEX West Texas Intermediate crude rose again on Friday, January 16th when the February contract closed up $2.44 at $48.69 per barrel.   John Kilduff, partner at Again Capital in NYC told the WSJ, “the low from (Tuesday) caught a lot of peoples’ attention.  A lot of people have been waiting in the wings to pick a bottom, to jump all over a bottom.  This is the first hint of one that we’ve seen.”  Andy Lebow, senior vice president for energy at Jefferies LLC, said “I’m not saying this is the bottom, but at some point, the bearish news can only press (prices) so much further.” We hope he’s right.

Ultimately, it seems everyone in Houston has an opinion about the price of crude.  Jim “Mattress Mack” MacIngvale, the Houston furniture impresario, is telling customers spending at least $7,000 in his stores now that if the price is $85 a barrel or higher on December 31, 2015, their furniture is free.  We know a banker who is planning to take him up on his bet.

Graves & Co. provides transaction support to the upstream, midstream and oilfield service sectors of the oil & gas industry in the form of due diligence, audits and a range of pre- and post-closing services.  Contact John Graves at jgraves@gravesconsulting.us, Phone 713-650-0811.