Oil prices are hovering near $30.00 per barrel, down 50% from last summer and down 80% from the summer of 2008. How low can oil go? No lower apparently. In fact, energy entrepreneur and perma-oil bull T. Boone Pickens, has called a bottom to oil. But is the man who called for $70.00 oil by the end of 2015 right? Or is he just trying to calm nervous investors?
T. Boone Pickens Call for $70 Oil by End of 2016
Oil is trading near $30.00 per barrel and is a third of the cost of the $100.00 purchase price of the barrel used to transport the black gold. Oil prices are being weighed down by weak global economic conditions and a supply gut. If there was ever a perfect example for the mechanics of supply/demand, this has to be it.
But just how low can oil prices fall? Will the global bear market and correction drive oil prices down even further? Or will there be a bullish reversal that sends oil prices significantly higher? Or will oil find support in the infinite number of scenarios in between?
A year ago, we were calling for $30.00 oil and almost everyone thought the idea preposterous. But that’s where the economic data pointed and it continues to point to further downside.
Oddly enough, the idea was not embraced by Wall Street. A December 31, 2015 article in Forbes noted that oil was in a range of $52.00—and the writer didn’t believe there was much more downside threat. Well, there was—and there continues to be. Oil prices have tumbled an additional 42%. (Source: “Boone Pickens to Cramer: Oil is close to bottoming,” CNBC, January 6, 2016.)
That hasn’t stopped oil magnate and friend of Jed Clampett to say he was just a year off in picking a bottom in oil prices. A year is a long time when it comes to stocks and commodities. An hour can be a long time. To say you were just a year off is a little rich.
Still, Pickens believes oil prices will be back to $70.00 to $75.00 by the end of 2016. That also means it could be in that range by 2017 and Pickens would declare “Mission Accomplished.”
Back in April 2015, the 88-year-old prognosticator said natural gas prices would hit $3.00 this winter and oil prices will rise to $70.00 per barrel by the end of 2015. Admirably, Pickens sticks to his guns and doesn’t change his opinion like most commission-centric talking heads on Wall Street. (Source: “Boone Pickens stands by his call that oil goes up,” CNBC, April 27, 2015.)
Oil Just Needs One Good Reason…
But oil needs a reason to rebound. Fewer rigs operating in the U.S. is not enough of an impetus to get oil prices going again. And most importantly, it’s not enough to sustain oil prices. Neither is the schism developing between Saudi Arabia and Iran.
They might not like each other right now, but that doesn’t mean Iran isn’t going to pump out 500,000 barrels of oil and eventually increase it to one million. And our dear, dear friends in Saudi Arabia are not going to let the U.S. or anyone else get the upper hand when it comes to oil.
There isn’t a real reason for oil to rebound right now. Nothing magical has happened since the beginning of the year. The U.S. hasn’t surprised with spectacular economic data. Neither has Japan, Europe, China, Russia, Canada, or virtually anyone else. Saudi Arabia hasn’t decided to let bygones be bygones.
And so, the future continues to look bleak. The World Bank reduced its global economic forecast to just 2.9% this year, down 0.4% from an earlier economic forecast. Global gross domestic product (GDP) will rise slightly to 3.1% in 2017 and 2018. But again, the World Bank has a history of revising guidance lower, so don’t hold your breath. (Source: “Global Economic Prospects,” World Bank, January 6, 2016.)
The eurozone is only expected to advance 1.7% in 2016 and 2017 and 1.6% in 2018. GDP in the United Kingdom will grow just 2.4% this year, 2.2% in 2017, and 2.1% in 2018. In Japan, GDP will be an anemic 1.3% this year, slide to 0.9% in 2017, and lilt back up to 1.3% in 2018.
Normally, we like to see those numbers increase.
You Can’t Time a Bottom
There is nothing nefarious at play with oil prices. It’s a vital commodity used for gas, heating oil, jet fuel, asphalt, lubricants, and other less well-known products, including chewing gum, toothpaste, and cosmetics.
It’s simply supply and demand. China (and much of the rest of the world) doesn’t need oil, so they consume less. Meanwhile, oil-rich countries need to make money…so they continue to pump.
I don’t know when oil prices are going to bottom, but the economic conditions necessary for higher oil prices just aren’t there. As Forbes and T. Boone Pickens found out, you cannot time a bottom. Just because oil has dropped 50%, that doesn’t mean it can’t drop another 50%.
Oil, like the stock market, goes in cycles. Oil has broken $30.00, but it will rebound. Maybe not in the timeframe chosen by T. Boone Pickens—but it will.