Tuesday, December 30, 2014

5 Reasons Why World Oil Prices Will Rebound Strongly by 2Q2015

World oil prices will eventually rebound. The questions are when, how quickly, to what price point and what will be the drivers. I predict world oil prices will rebound to $100/bbl by 2Q2015 based on the following confluence of developing events that could take place during the next 6 months:

1. Vanishing Surplus: The world oil inventory surplus will vanish by early 1Q2015. China is taking advantage of the 5-year low oil prices and is using this opportunity to beef up their strategic reserves.

2. World Oil Demand: There will be a tepid, perhaps modest, increase in world oil demand by mid 1Q2015 as Asian and European moribund economic growth recover.

3. U.S Regulatory Rail Transport Constraints: According to the WSJ article “Railcar Bottleneck Looms Over Oil” on December 22 a report by the consulting firm Brattle Group indicates that the US DOT will require rail companies transporting oil to retrofit 75,000 older tank cars with crash-resistant components for safety purposes. The completion of these new standards and compliance deadlines are expected sometime 1Q2015.
In an earlier WSJ article “In Plain Sight: Shale Oil’s Rolling Pipelines” on December 4, U.S. rail companies transport 1.1 million bbl/day  today vs. only 21,000 bbl/day in 2009 as a result of shale oil production. Retrofitting railcars will significantly reduce the amount of oil transported which in turn will force lower oil production. Rail is significantly more cost-effective and can transport considerably more oil than trucks. Think of this as a self-imposed regulatory sanction.

4. Faltering Venezuelan Oil Production: Economically Venezuela is between a rock and a hard place with only $21 billion in reserves, an overwhelming reliance on oil exports for 96% of its revenues (the highest of any oil producing country), high debt ($40 billion in loans to China), and capital controls. Additionally, oil production has decreased dramatically since 2008 from 3.4 million bbl/day to 2.45 million bbl/day in 2013. This has been a result of the exodus of experienced oil workers and paltry investment in development due to restrictions on western energy firms’ participation. These factors create a highly volatile political situation which has put President Nicolas Maduro, with an approval rating of only 25%, in a corner with almost no room to maneuver.  Any regime change will result in a further reduction (albeit short-term) in oil production, enough to frighten the markets.

5. Winter Weather: The wild-card factor would be a change from the current mild winter weather to consistent seasonal or slightly below seasonal temperatures which will increase demand.

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