Gary Shilling: Oil Prices Are About to Hit $10

Exxon Mobil CorporationOil prices may look dismal at the moment, but they are even worse when you consider that summer demand is supposed to be the highest of all year. Oil is in such dire straits that it may even sink to as low as $10.00 per barrel.

At least, that’s the oil price forecast of economist Gary Shilling, who says that current market fundamentals will not only fail to improve but will actually get worse, paving the way for an oil price collapse. (Source: Bloomberg, last accessed August 17, 2015.)

Crude oil on the futures market has declined by nearly a third since the beginning of June, and it looks like West Texas Intermediate (WTI) is on its way to its biggest drop since it started trading in 1983. The current downward spiral of oil prices is worse than the global glut in 1986, the Asian economic meltdown in 1998, and the global financial crisis in 2008.

This includes the catastrophic events of 2011, when oil prices dropped over 20% when large oil-producing nations flooded the market with 60 million barrels from emergency petroleum stockpiles in an effort to offset the disruption of Libyan exports.

WTI, the North American crude oil benchmark blend, fell to a shocking $41.35 per barrel in Friday’s trading. Such lows have not been seen since crude’s dark times in 2009. Analysts are predicting it’s likely to decline even further, perhaps to $20.00 or even $10.00 per barrel according to a Citigroup report. (Source: Bloomberg, last accessed August 17.)

Gasoline demand historically peaks during the summer with American vacation driving and Middle Eastern countries relying on increased air conditioning, which means that crude oil demand is the highest it will be all year.

The relief from overproduction pressures expected this year has not materialized either, as both OPEC members and other large oil exporters are extracting crude at ever-increasing rates in a battle for market share. U.S. drilling has shown a surprising resilience throughout the oil price collapse, as producers have chosen to operate at a loss rather than scale back extraction.

With refineries set to go into maintenance mode soon, market oversupply will become even more pronounced and add additional downward pressure on prices.

The price of crude oil crashed this year despite American demand for gasoline increasing, spurred on by a growing economy and lower fuel prices. Indeed, total gasoline supplied to the U.S. was at an eight-year record high of 9.7 million barrels per day in July. (Source: Bloomberg, last accessed August 17, 2015.)

Crude could fall to $10.00 a barrel as the Organization of Petroleum Exporting Countries (OPEC) engages in a price war with rival producers, testing who will cut output first, Gary Shilling, president of A. Gary Shilling Co., said in an interview on Bloomberg Television on Friday.

Last month, Wood Mackenzie, an energy research organization, found that of 2,222 oil fields surveyed worldwide, only 1.6% would have negative cash flow at $40 a barrel.” He wrote, “That suggests there won’t be a lot of chickening out at $40.”

“Keep in mind that the marginal cost for efficient U.S. shale-oil producers is about $10 to $20 a barrel in the Permian Basin in Texas and about the same for oil produced in the Persian Gulf.”

This is a game of brinksmanship, where crude oil producers are testing to see who will give up and scale back first. The problem is that this game has no winners, only losers.

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