There are very few people I will drop everything to listen to.
One of the handful is Daniel Yergin, the bookish founder and CEO of Cambridge Energy Research Associates, the must-go-to source for all things energy.
Daniel received a Pulitzer Prize for The Prize: The Epic Quest for Oil, Money, and Power, a rare feat for a non-fiction book (I’ve never been able to get one).
Suffice it to say that every professional in the oil industry, and not a few hedge fund traders, have devoured this riveting book and based their investment decisions upon it.
Yergin thinks that the fracking and horizontal drilling revolutions have made the United States the new swing producer of oil. There is so much money in the investment pipeline that American oil production will continue to increase for the next six months, by some 500,000 barrels a day.
Much of this oil is coming from heavily leveraged, thinly capitalized producers whose bankers won’t let them cut back a drop on production so they can maintain interest payments on their debt.
This new supply will run head on into the seasonal drop in demand for energy, when spring ritually reduces heating bills, but the need for air-conditioning has not yet kicked in.
The net net could be a further drop in the price for Texas tea from the present $31 a barrel, possibly a dramatic one into the teens.
Yergin isn’t predicting any specific oil price as a potential floor, as it is an impossible task. While OPEC was a monolithic cartel, the US fracking industry is made up of thousands of mom and pop operators, and no one knows what anyone else is doing.
However, he is willing to bet that the price of oil will be higher in a year.
Currently, the 96 million barrel global market for oil is oversupplied with 2 million barrels a day.
If the International Monetary Fund is right, and the world adds 3.0% in economic growth this year, we will soak up 1 million b/d of that with new demand.
In the end, the oil price collapse is a self-solving problem. The new economic growth engendered by ultra low fuel prices eventually drives prices higher.
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