When Oil Drops Below $70

It Is When, Not If, Oil Breaks $70

Since mid 2010 the oil industry was getting used to Brent averaging around $110. From then to mid 2014 share prices of Halliburton (HAL) Schlumberger (SLB), Hercules (HERO), Transocean (RIG) etc, went up by average 250%. By way of a benchmark for the collective enthusiasm in the idea of the irreversibility of Peak Oil, MODU (jack-up drilling rigs) utilization and day rates climbed into the champagne-all-round arena. According to IHS, a consultancy, there are 118 new ones being built so as to complement the current worldwide fleet of 550.

About 40% of those are in China thanks in part to the 5% you used to be able to put down grace of the beneficence of the Bank of Chairman Mao...which incidentally has the smell of the dry bulk carrier enthusiasm seven years ago, also largely financed by the Bank of Chairman Mao.

Then the darn "market" threw a wobbly.

Thankfully there are some excellent explanations for why that happened:

  • A cunning terrorist plot to undermine America, Freedom and World Peace
  • Sunshine in Moscow and rain in Riyadh
  • Electric cars
  • Ebola
  • ISIS

Here's one more. There was a bubble...and it popped.

This isn't the first time since 2010 that there was a "scare". In mid 2012 Brent dipped to $90 before bouncing back just after I pronounced it would go under $70 and stay under $90 for a couple of years: Here.

Then in March 2013, same story... Here

That was my third wrong-call on oil. I'd said pretty much the same thing in 2011. Be that as it may, calling the timing of the collapse of a bubble is almost impossible; it's all about when the collective consciousness does an about-turn and/or the soon-to-be losers and their banks have irrevocably over-committed, like perhaps the beneficial owners of those 118 MODU's. George Soros gets a pain in his back when a bubble is about to pop, and I put my back out in July.  Perhaps that was a sign, just I didn't join up the dots?

So at risk of getting nominated for the Nouriel Roubini Broken Clock Award, I'm still saying that since mid 2011 oil has been in a bubble and one day Brent will go down below $70 and stay under $90 for as long as it was over $90.

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