Why the $20 Oil Predictions are Wrong
Deja Vu
As the price of West Texas Intermediate (WTI) retests the $40 per barrel (bbl) mark, some pundits are again calling for WTI to fall to $15 or $20/bbl. The same thing happened earlier in the year when crude prices tested $40. Lots of people predicted $20, the price went to $60, and the $20 crowd went quiet for a while. Well, they are back:
Why oil prices could sink to $15 a barrel
“There is no evidence whatsoever to suggest we have bottomed. You could have $15 or $20 oil — easily,” influential money manager David Kotok told CNNMoney. “I’m an old goat. I remember when oil was $3 a barrel,” said Kotok, whose clients include former New Jersey Governor Thomas Kean.
Yes, and you could get a candy bar and soda for a nickel. But I will bet him $10,000 we don’t see WTI at $15/bbl unless he has access to a time machine. Today I want to address this argument. I got into a debate on this topic with a person yesterday, and I am seeing enough of these predictions that I thought it warranted addressing. Again. The $20/bbl argument goes something like this: Crude oil inventories are extremely high. U.S. oil production keeps rising. Demand is falling. Something has to give.
Crude Inventories Did Rise
The problem is that this conventional wisdom argument is wrong on 2 counts. It is true that crude oil inventories are high. Last week there was a surprise build in U.S. crude oil inventories. Analysts were expecting inventories to fall — which they have been doing since April — but instead crude inventories rose by 2.6 million barrels. Following this week’s release of the Weekly Petroleum Status Report announcing the surprise build in inventories, I saw more than one person claim “We are definitely going below $40/bbl today.”
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