Crude Oil Death Cross Points To Deflation

Oil Falls From Eight-Month Low Before OPEC Meets on Production
Oil fell from the lowest close in eight months in New York before OPEC meets to discuss production quotas amid speculation the group won’t cut output as the global economy weakens.

Futures declined as much as 0.4 percent today, dropping for the fifth time in six days. The Organization of Petroleum Exporting Countries, which meets in Vienna today, will probably maintain its output ceiling as concern that global growth is shrinking outweighs calls for supply cuts to stem sliding crude prices, three of the cartel’s oil ministers said. U.S. retail sales fell and Spain’s debt rating was cut by Moody’s Investors Service.
“OPEC is the top news at the moment and that’s going to be the driver,” Michael McCarthy, a chief market strategist at CMC Markets Asia Pacific Pty in Sydney, said in a telephone interview. “OPEC is opaque at times and one of the issues that they grapple with, given that they are such a large and global organization, is compliance with quotas.”
Oil for July delivery slid as much as 35 cents to $82.27 a barrel in electronic trading on the New York Mercantile Exchange. It was at $82.37 a barrel, down 25 cents, at 11:55 a.m. Sydney time. The contract fell 0.8 percent yesterday to $82.62, the lowest close since Oct. 6. Prices are down 17 percent this year.

Brent oil for July settlement, which expires today, slipped 23 cents to $96.90 a barrel on the London-based ICE Futures Europe exchange. The more-actively traded August future slid 37 cents to $96.31. The European benchmark contract’s premium to West Texas Intermediate was at $14.52, from $14.51 yesterday.

OPEC Output

Ministers from Ecuador, Kuwait and Nigeria said yesterday that OPEC is set to keep its 30 million barrel-a-day limit. Venezuela, Iran, Iraq, Angola, Ecuador and Libya have argued that crude supplies are excessive.

While an increase of as much as 1 million barrels a day suggested by some Gulf Arab countries would help Europe weather its slowdown, the 12-member group will probably settle on the status quo, according to two Middle Eastern delegates who declined to be identified because a decision hasn’t been made.

My view:

The deflationary scenario continues to slowly play out.

The charts are now showing death crosses for both West Texas Intermediate Crude and Brent Crude.
Note that despite all the hype behind Peak Oil, the price of crude has fallen substantially in the past two months.

As the European crisis plays out, we can expect a large amount of deleveraging within the oil futures market resulting in lower prices.  It is quite conceivable that my 2012 forecast price target of $70 or less ($80 for Brent Crude) will be achieved by mid summer.

As pointed out in the past on this blog, we have two major factors weighing down the price of crude:

1 - Iraq is a major OPEC producer that has no quota restrictions and has been ramping up production enormously.

2 - A slowing global economy means lower demand for oil just as the supply is increasing.

The Peak Oil catastrophists will need to wait for some years before their doomsday price spikes play out.


  1. Well PW it will be little consolation to anyone, let alone 'peak oilists', when the inevitable decline in global production commences in earnest, given the world is woefully unprepared for this event.



  2. What makes you think that the threatening oil peak will cause the price to surge? It could happen the other way around, a lack of interest in an oil-addicted economy will decrease the interest and demand of oil.

  3. Merlin, regarding a surge in oil prices - I am not convinced that "peak oil" will cause a surge. Yes there can be supply disruptions due to Persian Gulf conflicts, but any surge in oil prices is probably going to be caused by further rounds of QE by central banks in Europe and America. Another factor may come from underinvestment in oil infrastructure as prices decline may cause a pinch point a few years down the road. As for total supply, we are decades away from any shortages due to lack of reserves. There is probably a century's worth of crude in my backyard (oil sands). Then there is the probability of new energy sources being developed in the next decade.
    Just as whale oil powered the lamps of Europe for years and then was abandoned, I suspect petroleum will suffer the same fate eventually as you imply.

  4. PW, peak oil is about "production flows", not reserves. It's not about running out. What benefit having trillions of barrels in so called oil, but actually mostly tarry sludge and greasy gas, if you can't extract it fast enough to make up for declines in existing conventional, easily worked, oil fields and the cost of this increasingly marginal production keeps ratcheting up - at a ruinous cost to the economy? Eventually production peaks and begins the long yawning decline that brings and end to economic growth as we've enjoyed it.


  5. John, you are quite correct to say that peak oil is about production flows. My assertion is that, for the most part, production flows will remain relatively strong for at least the next few years or even a decade. Iraq is adding production so fast that it may equal or even eclipse Saudi Arabia by 2017. Canadian Bitumen production is set to double in the next 2 decades and will be equal to the present production of Iraq. The USA is approaching petroleum independence as oil shales are rapidly producing a large portion of annual requirements. It is projected that today's largest importer of crude will be independent by 2019 or 2020.
    So while supply interruptions present a danger in the event of a Persian Gulf disruption, my contention is that prices will be range-bound in the $60 to $80 range for the foreseeable future.

  6. Perhaps PW, we'll see. :)

    However, as you mention, the fact remains that decline cannot be forestalled forever and that the longer it is delayed, the worse it will be for the world as there will be more to lose than ever before.

    This is because no tangible steps have been, or are being taken to prepare for this epochal event/process. Once we are in the storm it will be far too late to doing anything meaningful about it, as the expert consensus is that 10 to 20 years of stringent mitigation is required to deal with its worst consequences.

    Then the peak oil prophets will be vindicated, but no one in the know will be pleased about it, least of all the peak oilist's.

    Best Regards,



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