Perfect Storm for Oil Started on Schedule and Continues to Build

The perfect storm I predicted against the price of oil in the Ides of March has not fully developed, but all the forces I spoke of are continuing to build. The balmy days that prevailed for oil prices in early March have gone away, replaced by a downdraft that is once again suppressing prices more and more since their peak in mid-March. The storm’s breezes can now be felt in prices that have relinquished 40% of their earlier gains, and the clouds are becoming more apparent to all.

Prices had one of their worst days of the year on Friday of last week and drifted marginally lower again on Monday of this week, stabilizing some on Tuesday. Friday’s pounding came because Saudi Arabia announced it would not participate in the oil supply freeze that it negotiated with Russia since Iran is not going to join the freeze.

That is one of the major storm fronts that I said would come into prominence as part of the perfect storm against the price of oil. I pointed out a few times that market enthusiasm over talk of a deal (still not completed) between Saudi Arabia and Russia to merely freeze production was ludicrous because the Saudis always said the deal was contingent upon other producers joining and that “other producers” most certainly included Iran, and that Iran most certainly would not join the deal.

Don’t expect Saudi Arabia to flinch and start backing down now that Iran has made clear it will not join the deal by freezing its production. Deputy Crown Prince …


Bin Salman nevertheless said Saudi Arabia was ready to face a prolonged period of low oil prices that have dropped sharply since mid-2014 as a result of higher global production. “I don’t believe that the decline in oil prices poses a threat to us,” he said. (Arab Times Online)


Even if a production freeze is formalized, it’s a bad thing, not a good thing. That makes it all the more silly that talk of the deal pushed down prices for awhile. The deal, if it happens, promises to freeze production at January’s extremely high levels, which absolutely guarantees continued oversupply (unless there is a huge increase in demand, which so far has evaded the oil industry). A freeze is far from being a production cut, which is the only thing that can solve the oil industry’s problems on the supply side. Far too much as been made of the deal by a market full of unrealistic optimists for that reason.


Freezing production at January levels is “looking more and more pointless”, according to analysts…. What is becoming very clear is that Saudi Arabia is serious about moving away from the traditional play of adjusting prices by cutting or freezing supplies by itself. (The Week)


The dividing line between Saudi Arabia and Iran has hardened, and a deal would only freeze production at a level of continuous oversupply. All what I said a month ago. It’s a deal that is not likely to happen, and if it does, it is pointless anyway. I’ve just been waiting for this one part of the storm to organize into clear formation so that everyone can see it before writing more, and it now has. You can see those swirling storm clouds from that particular direction quite clearly now in the daily news, and you can see that they have started bringing down oil prices.

That was Friday’s big blow. Monday’s downdraft came in part because the National Iranian Oil Co. stated that it just authorized sales of crude to Dutch Royal Shell after the company settled a debt dispute with Iran. Iran repeated that it will continue to expand its oil production and sales until they reach the levels they were before Iran’s nuclear dispute with the West, hardening its stance against the Saudi-Russian deal.


Demand for oil products may be receding, not rising


Compounding matters, government data was released on Monday that showed the first small drop in gasoline demand in fourteen months. Until now, gasoline demand has remained a pillar that helped support the US oil industry through the supply glut. Drop in demand for products derived from oil is being noted in other parts of the world, too:


The oil price “can easily revisit the lows seen earlier this year,” French bank BNP Paribas said in a note to clients, as bearish demand data added to concern over a deal to freeze excess supply…. This comes ahead of a second quarter period that typically sees a dip in demand as refinery maintenance peaks. (The Week)


That’s right. The refinery shut-down period for maintenance that I said would be the second front that comes in to form the perfect storm has just begun. It’s a couple of weeks later than I expected, but wind from that direction is picking up velocity now. It will become an additional force against the price of oil so long as refineries stay in maintenance mode, which reduces their demand for crude.


The third front in the perfect storm — tanks starting to fill the brim


…This all coincides with figures showing buying of crude derivative products slipping in key Asian markets, “as onshore storage facilities in Singapore and Malaysia are filled to the rims”


The third front is just starting to happen. It will very slowly gain strength, but it certain to be the worst front of all over time. As tank farms around the world fill to capacity along with ships at sea, storage becomes more problematic. Oil has fewer and fewer places to go, and demand for crude will fall off a cliff.

As it stands right now, there is nothing that will prevent that from happening. A production freeze means we keep moving toward that end at the current rate of production. Lack of a freeze means production continues to expand so that the world has to make the necessary supply adjustments out sooner.

On Tuesday, Brent crude briefly touched down on a one-month low of $37.27 then floated back up slightly when Kuwait claimed that a production freeze is still possible without Iran.

Asked if anything is likely to come from the April 17th meeting of OPEC where the possible production freeze will be discussed, buy ambien from mexico Lord John Brown, executive chair of L1 Energy, told CNBC


I’d be very surprised at this time. Production is high. People are scrambling to maintain markets that they have and to gain markets from other people. So, it’s not a time for reconciliation yet.


I would be surprised, too, because Kuwait doesn’t have a lot to say about it and, in fact, is doing its part to make things worse, while Saudi Arabia has made its position clear, exactly where I said it would stand. In fact, Kuwait may just be trying to take pressure off its own announcement that it will be ramping up more production soon:


The Middle East sour crude complex is likely to come under bearish pressure on news of Kuwait and Saudi Arabia agreeing to restart production from the 300,000 b/d offshore Khafji oil field…. “Even the idea of a freeze [in oil production] may be tested by [the] announcement that Saudi Arabia and Kuwait are preparing to restart the 300,000 b/d Khafji oil field … Citi analyst Timothy Evans said in a note to clients. (Platts)


Iraq’s oil production also increased through the month of March.

The impact on the US oil industry, seen in broad terms, is that the US now has fewer oil rigs in production than at any time in the past sixty years following fifteen weeks of continual decline. Nevertheless, oversupply continues to rule the market. As many as sixty small and a couple of large oil companies have gone out of business or declared bankruptcy.

Numerous bonds and other forms of loans to the oil industry are in default but are being ignored by banks because the banks don’t wish to compound the problem for themselves by creating a situation where they have to write down the value of the securities on that debt and have to write of debts. So, everyone is trying to sit it out. The scale of the problem for banks is largely masked because the Dallas Fed has told banks to sit tight as much as possible.

It’s believed data later this week will show that crude stock in the US has continued to grow over the past week to a higher record high. That will be the eighth week of setting new records in total US oil storage. If that data turns out as expected, that will offset news of a drawdown in Oklahoma the week before, showing it that to be nothing more than a brief eddy in the winds.

We are relentlessly getting closer to a point of total market saturation, which happens when all tanks are full.


Conclusion: The perfect storm for oil is arriving onshore now


The winds and clouds that are bringing the perfect storm against oil prices from three fronts are all growing stronger. I can now easily find many conservative market analysts starting to agree with what I predicted a month ago:


Commodities including oil and copper are at risk of steep declines as recent advances aren’t fully grounded in improved fundamentals, according to Barclays Plc, which warned that prices may tumble as investors rush for the exits…. “Given that recent price appreciation does not seem to be very well founded in improving fundamentals, and that upward trends may prove difficult to sustain, the risk is growing that any setback will result in a rush for the exits that could again lead commodity prices to overshoot to the downside.“ (NewsMax)


“Overshooting” is just another way of saying “the perfect storm.”

Barclays also notes that positioning in the oil market has reached “bullish extremes” because the bullish rise in crude oil prices is not based on sound fundamentals. That’s right. It’s based on wishful thinking that is based on vague hopes that, if properly worded, would say Saudi Arabia will continue its production full speed ahead if Iran does cooperate and will otherwise increase production beyond its current levels. (That’s all a production freeze offers.)

Barclays says the rush for the exits could bring a price drop of 25%.

Even Goldman Sachs agrees with me now:


Energy needs lower prices to maintain financial stress to finish the rebalancing process; otherwise, an oil price rally will prove self-defeating as it did last spring. (Zero Hedge)


In other words, this problem is NOT going away until lower prices finish the job of flushing away the weakest competitors as a way of reducing supply to match current demand. So, if the energy production deal does finally go through in mid-April, we will still have to fill our waterbeds with oil to find places to store the overproduction. It will just take longer to get to the point. (The greater truth is that Saudi Arabia and Russia cannot really ramp up oil production much more anyway. So, talk of a deal not to increase production is really the most meaningless babble on the planet right now.)

Whether a deal happens or not, more oil companies, more related service businesses, and some of their bankers will be flushed away. The only thing that could change that is either a big increase in demand (not seen as likely by anyone that I’ve come across) or a big reduction in supply (not being talked about by anyone anywhere).

Barring a war or huge natural catastrophe that forcibly cuts off large amounts of production, the only reductions in supply that will happen are the hard ones that come from businesses closing shop. Those who continue to hope for an easier answer in the form of prices that stabilize the market at its present production levels are nothing but rosy-eyed dreamers, living in economic denial.


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  1. Ping from James King:

    Against all those odds, oil has risen to $42 as of April 15th.

    • Ping from Knave_Dave:

      It’s mind boggling that speculators can believe so much in the talk of the glut coming down. We should know by the end of this weekend. Maybe we’ll find out I was wrong. There are a large number of people, it would seem, betting against what I have said would happen. Hopefully, by the end of this week we are in a situation where we can talk about what DID happen, versus what is going to happen. They already cancelled one set of talks at the last minute. I wouldn’t be surprised this time if they extend the talks and say it is because there is an actual possibility of a deal and they just have to work out the details. Then they go back to producing more and more, hoping the price stays up as much as possible out of speculation that they are going to be producing less.

      The main thing to note is that, at no time, have any of them actually talked about producing less. That’s the mind boggling part — that speculators think talk of continuing production at current high volumes indefinitely is going to curb a glut in production.

      Perhaps we shall soon see. Sunday is supposed to be the big day.


      • Ping from Knave_Dave:

        And now, having just written the above, this comes in on a late Friday evening:

        “In what appears to be a Doha party-pooping statement, Saudi deputy crown prince Mohammed bin Salman stated UNEQUIVOCALLY that The Kingdom won’t restrain its oil production unless other producers, INCLUDING IRAN, agree to freeze output at a meeting this weekend in Doha. This a major problem because – if you remember – this week’s melt-up in oil (and thus stocks) was predicated on an anonymous diplomat cited by Interfax saying a deal will get done without Iran (which the Russians refused to confirm). All that hope crushed by a reality that has been painfully obvious … and now, as Citi warned “expect a sharp sell-off.” ( )

        Just as I have been stating all along about this ridiculous talk of a deal, and I agree with Tyler Durden at Zero Hedge that the vanity of these hopes should have been painfully obvious all along. It is mind boggling that many investors continued to believe in something, as you say, James, “against all those odds.”

        Usually, that kind of irrational or euphoric behavior gives way to a crash when it finds out its wrong. Monday could get interesting.


  2. Ping from Maurice Miner:

    Is the “Perfect Storm” evidence of Peak Oil?

    Peak Oil Production, that is!

    What is Venezuela likely to do with all of its nationalised oil-production industry? Is it going stop production in order to assist in shoring up market prices, or is it “Drill, Baby, Drill!” to help the Venezuelans out of their present monetary difficulties?

    We live in interesting times, indeed.

    • Ping from Knave_Dave:

      Welcome, Maurice, to the blog.

      I think the “peak oil” argument failed to see the widespread adoption of fracking; but fracking is relatively short-lived in the sense that wells taper off in production much faster in fracking situations. Peak oil arguments also assume that China and the other BRICS nations would keep growing at the rate they were growing and, therefore, keep demanding more and more oil. That has, since, come tumbling down.

      So, those factors are an unexpected boost in how long oil will last that may set the peak oil scenario back a couple of decades.

      The Venezuelans seem to be struggling a lot more than other OPEC members. I doesn’t appear they are making any money drilling or pumping at today’s prices. Most of their oil is offshore, so more expensive to produce than Saudi Arabia’s. I wonder if those major differences will pull OPEC apart.


  3. Ping from Zaphod Braden:

    What about Saudi debt?They are burning through their reserves and soon willbe needing money.

    • Ping from Knave_Dave:

      If they can hold out long enough and drive out enough of the weaker players so that the market overcorrects, then next year they can enjoy an undersupply with oil over $100 a barrel.

  4. Ping from GR:

    What could we be missing? Hmmmm…… How about Dollar devaluation?

    • Ping from Knave_Dave:

      Welcome to the blog, GR.

      • Ping from GR:

        Thanks, Dave. I was mulling over the long-term chart of oil when I happened upon your site. In fact, I had just sent a long-term chart of oil with comments to my stepson who works for an oil-related company in Houston. Printing up 4 times the number of Dollars since late 2008 to move to about 4 times the number of Dollars in existence in all of history? I was just wondering if you had an opinion of the effect that will have on the pricing of oil.

        Have a great week!


        • Ping from Knave_Dave:

          You would think it would have a lot of effect, but it hasn’t for a couple of reasons. Normally, creating 4x the dollar supply would reduce the value of the dollar compared to other currencies, but most other major economies have done the same thing with their currencies, so there has not been any reduction compared to other currencies. Instead, the dollars has strengthened.

          Secondly, you’d expect that multiplying the number of dollars would create general inflation, making the dollar worth less compared to goods and services; but that hasn’t happened either for two reasons. The main one being that those dollars have not gone into general circulation. To some extent they remained hoarded in bank vaults. If they don’t circulate, they have no effect at all. To a larger extent, they have been invested in the stock market. There result has been inflation of stock only, as the money has remained in that arena.

          Then, too, the Great Recession was by its nature as hugely Deflationary as the Great Depression was, so inflating the money supply was intended to stop deflation, which perhaps it has. One thing Bernanke might have been right about is that it would take that many dollars to neutralize the effects of deflation. However, the result has been a huge increase in debt, an absurd overpricing of stocks that can crash (erasing that money right back out of the economy as easily as it appeared) and a dulling of our pain to where we didn’t deal with anything that needed correction as well as the moral hazard of all the bad players increasing their greedy actions.

          Besides all of that complication, there is one other factor that makes the effect of dollar value on oil hard to determine. Since oil, as you know, used to be bought and sold in dollars only (petrodollars) a rise in the value of the dollar compared to other currencies meant oil would be more expensive in those currencies. That would naturally reduce demand and create a greater oversupply problem. Another way of looking at that, is that oil producers would have to reduce the price of oil in dollars in order to sell it to any nation other than the US in order to make it affordable to those buyers. So, the higher value of the dollar would tend to suppress the price of oil. That has certainly been a significant factor in the past year.

          Now, however, China, Russia, all Russian satellite nations, and Iran have moved away from buying and selling oil in dollars. So, the equation gets more complicated. Whether that is happening at a large enough level to reduce the strong dollar’s suppression of oil prices, I don’t know; but certainly not having to convert your currency at a loss to dollars should make it easier to sell oil to those nations without having to lower the price to offset the exchange loss.

          Right now, I think the ruler of the whole equation is oversupply. The world is simply producing a lot more than it consumes, and the slowing down of all economies is only likely to reduce demand. Thus, transportation industries are way down in volume. However, we’re approaching the travel season for the holiday/vacation crowd, which will help offset the slowing industrial demand.

          You can see with all of that that knowing which way the price of oil is going to go is really hard to predict right now; but I think oversupply and slowing industrial transportation are the larger forces in the immediate term and that overflowing oil tanks are about to create a freakish suppression of oil prices. Still, there is lots of room to be wrong on this one with so much going on. (I wouldn’t bet my blog on it.)

          If the situation gets stark enough to drive many oil producers out of business, then the market will have overcorrected, and we could see hideously high oil prices in a year or so after the oversupply is finally drained back down. That, of course, is the goal of Saudi Arabia and Russia — to drive enough out of business that they can both do volume sales and high-profit sales at the same time. It’s like an airline price war where they hope to be the last man standing so that they own the market by shutting down the competition.

          • Ping from GR:

            Dave, thank you for taking the time for such a methodical, three-dimensional, and complete response. In my opinion, we are discussing the vital issues going forward for years for practically all of the markets and for life in general. Much of what you wrote is the mainstream explanation. I’d love to hear your response to questions, challenges if you will, regarding some of those mainstream thoughts. Maybe a better term is to “bounce some things” off of you. In no way do I wish to alienate you. I have written public editorials on the net since 2005 on the precious metals sites, but have taken a couple of years off due to the major medical problems of my daughter. As I start to prepare to resume my writing and chart work in the near future, I happened upon a link to your article and site. For some reason, probably related to my first sentence above, you caught my attention.

            If you have no interest in what I am proposing- no big deal. My only interest and challenge is to get things right. These issues will have a profound impact on all of our lives. Also, I see that our discussion is going to the public comments section on your site. That is fine with me. If you would feel more comfortable with the conversation in private, that is fine with me too.

            Thanks again,


            • Ping from Knave_Dave:

              It’s rare someone says I write the mainstream view. So, maybe I’d better find out what I’m doing wrong if someone is starting to think I’m mainstream ; )

              Sure, let’s have the discussion here if it on the top of oil, and see what we learn. If it’s on other topics, lets save discussion of those topics for articles on those topics just so we don’t get off on a tangent.


            • Ping from GR:

              Wow, Dave, and thank you.. I really thought that you would decline the invitation, but I am looking forward to your thoughts. BTW, I never said that you were “mainstream”; just that you quoted the mainstream view in terms of how Dollars can be printed to the moon with no devaluation of the Dollar.
              Only about oil? How about we just say “how oil and all other markets” might be affected by the devaluation of Dollars and other currencies. We can simply use the well thought-out and three-dimensional reply you sent to me as a general guide.

              It’s rare someone says I write the mainstream view. So, maybe I’d better find out what I’m doing wrong if someone is starting to think I’m mainstream ; ) Sure, let’s have the discussion here if it on the top of oil, and see what we learn. If it’s on other topics, lets save discussion of those topics for articles on those topics just so we don’t get off on a tangent. –David

            • Ping from Knave_Dave:

              Oh, I don’t think dollars can be printed on and on without any devaluation to the dollar or, in other words, inflation of prices in dollars. But you have to look at where all the printed money has gone. We all knew that it was going solely to banks and that they were investing almost all of it, rather than loaning it … or just hanging on to it to strengthen their previously flimsy reserves.

              The proof of that was that all inflation happened in the stock market. We knew it was going there and that it would create a stock bubble, which the mainstream denied. It would create that bubble as an inflation of stock prices. So, follow the money: the inflation all happened where the money went.

              Only after that game was over did a couple of Fed FOMC members admit openly that the Fed was intentionally inflating the stock market to try to create a wealth effect.

              Since very little of the money was used to make loans against, very little went into mainstream circulation. So, prices for everything else didn’t show as much inflation. Really the stock market value is just inflation, only it is happening in stocks.

              Now, here is the interesting thing about that: The money that was created is all parked in stock and bonds. So, what happens to that fiat money if stocks crash or bond crash. The money that was just created on bank balance sheets and ones and zeros disappears as instantly as it was created. The banks have to write down their balance sheets because their investments are worth a fraction as much. Suddenly, they don’t have the wealth they thought they had.

              The money drains back out of the system … because it’s not gold and it’s not physical. It all exists only on paper. So, if the value of your stock paper goes down, the value of your bank balance paperwork (or computer spreadsheets) goes down. The money never does go into general circulation if that happens, so its not going to create the hyperinflation that many (including myself at one time) thought it would.

              That is an interesting thing about money created by decree, it goes away with a breath, too.


  5. Ping from Robert Soaft:

    A complete, thorough and well analyzed article. Bravo.

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