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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