In 2012 a report produced by the UK Ministry of Defence predicted that oil prices would rise significantly out to 2040, and by “significantly,” they meant to $500 per barrel. Today, after nearly two years of low oil prices and much talk about an oil glut this may seem farfetched. But we shouldn’t dismiss UKMOD’s warning. This could turn out to be the most important development facing humanity for decades to come.
In the second half of 2014 we experienced a dramatic collapse in oil prices which rippled through to 2016. The narrative accompanying this collapse involved much hype about the US fracking boom and slowing global demand due to recession. On top of this, it was understood that Saudi Arabia delivered the coup de grace to the oil price by flooding the market with excess oil or refusing to curb output amid an existing supply glut. As the bearish narrative became entrenched, many analysts thought that oil prices would drop to the $20/bbl range (as they briefly did this January) or even lower and stay low for many years. However, the prevalence of a bearish narrative does not mean that prices will remain low for long.
It is important to note that major price dislocations tend to generate their own narratives as information consistent with the price move gains prominence while opposing views get sidelined as unrealistic and wrong. For example, in 1997 hardly anybody expected the oil price to halve over the following two years, but it did, and by 1999 the bearish sentiment was almost universal, just before oil prices rallied again by 250% over the next 20 months from $10/bbl to $35/bbl and pushed on to above $140 by 2008. Therefore we must consider that today, in spite of the (recent) bearish consensus, another unexpected price dislocation may be brewing. We need to consider the elements that could shape up a new bullish narrative if prices start heading upward. I will present this report in five parts, published over the following days:
- Making sense of Saudi Arabia’s oil reserves and production capacity
- Oil production and the evolution of drilling technologies
- Revisiting the peak oil hypothesis
- Sources and quality of oil market information
- How should industry players cope with risk and uncertainty of the looming crisis
I will publish the first of the five parts tomorrow so please stay tuned.
Alex Krainer is an author and hedge fund manager based in Monaco. Recently he has published the book “Mastering Uncertainty in Commodities Trading“.
4 thoughts on “$500 per barrel: could oil price rise tenfold?”
I’ve been a long time reader of your blog. I find the things you write about to be interesting and diverse. My question for you relates to oil. There seems to be a lot of doom and gloom around owning oil stocks. Yet in my mind, I just can’t see all the negative stuff coming to pass. Consequently, I still have a great deal of faith in the black stuff. That all said, it is very difficult to find any current analysis that Promotes a buy and hold of oil and gas stocks. I definitely Would appreciate any thoughts/analysis you might have.
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Hi John, my opinions on the subject aren’t for polite society so take them more as food for thought than for definite answers. One thing is certain: we are heading for an energy crunch that could put our societies under severe stress. But at the same time I see the establishment mounting a concerted attack at hydrocarbons energy production. Hedge funds have been eviscerated and capital concentrated under relatively few behemoths like Black Rock and Vanguard who could now be in the position to direct that capital not where it will earn the best return but to accomplish a covert agenda. This could include eviscerating the energy industry as we know it in favor of ‘sustainable’ green solutions and wholesale social engineering. I see this just about everywhere at this point although the agenda itself is harder to discern. Be it as it may, great captains of the banking and investment management industry seem to obsess with climate change, not returns on investment. They now command enough capital that they could impair perfectly viable firms through naked short-selling and whatever others levers of manipulations they can wield. I’m with you that energy is one of the key resources going forward, that in a sane world this would be a no-brainer investment for the long term but at the same time I’d wait for market trends themselves to generate that signal for me. Hope that helps. Thank you for reading, and for your kind words, by the way.
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It is end of September 2022 and I am reading your analysis on oil pricing and peak oil theory. The last 2.5 years the World has gone through an unimagineable period to arrive at a Cuban crisis like world critical event. Just wanted to write that there was a lot predictive power in your article from 2016. Hope you can share your valuable insights in the coming uncertain times. Thank you.
That’s very kind Peter, thank you. Well, long-term predictions are one thing, but even so, in 2020 we saw a 70% collapse of oil prices, so trading/navigating these events is a different thing altogether. FYI, I publish about markets/investing a bit more frequently on Substack – https://alexkrainer.substack.com/publish?utm_source=menu