The Bear Case For Oil

By Matt Badiali, editor, S&A Resource Report

Wednesday, November 7, 2012

 
Oil prices aren't done falling… not by a long shot.

Seven months back, I told you "conditions are right for a drop in oil prices." Oil inventories were way above average. There was just too much supply.  

Since then, the benchmark U.S. crude price has fallen from over $100 a barrel to about $85. There's more to come… 

According to the latest Weekly Petroleum Status Report by the Energy Information Administration, U.S. crude oil inventories are still well above the norm. At this time of year, we usually have less than 340 million barrels. Right now, we have nearly 375 million barrels. Take a look… 

We're seeing this massive oversupply because we have far too much oil right now and not enough demand to absorb it all.

U.S. oil production is hitting levels we haven't seen in decades. Meanwhile, the world's largest oil consumers – the U.S., Europe, and China – are all struggling economically. Consumption is way down.  

The last time the U.S. produced this much oil was in 1998. Consumption levels are down around the 1998 levels as well. Adjusted for inflation, the crude oil price was about $20 a barrel… that's less than one-quarter of today's price.

I don't believe we'll see $20-per-barrel oil again. Global consumption of oil products is higher than it was then. And it costs more to produce oil from these new shale fields (about $30 to $40 a barrel) than it did to produce oil from traditional fields.

But I wouldn't be surprised to see oil back at its pre-boom, post-bust levels of about $60 to $70 a barrel.  

That's another 15%-30% down from here. It'll be a tough move for anyone long oil… and an even harder move for anyone who's long high-cost oil producers.


In the S&A Resource Report, we sold all our oil positions, anticipating this move. If you are still long oil companies, consider taking profits, or at least tightening your stops. Oil's already had a big correction. But there's more downside ahead.