“If oil drops below $30 a barrel (now it’s around $44), a global recession is inevitable”, according to a recent survey of investment professionals, performed by ConvergEx Group. More than half those surveyed represented buy-side firms such as asset managers and hedge funds, and about a quarter of them were from sell-side firms such as banks or broker dealers.
ConvergeEx polled 306 investment professionals, asking what oil price would show that a global recession was inevitable. The most common answer was $30 a barrel, from 26% of respondents, with $35 a barrel being the second most common answer (16% of respondents). All told, 62% of respondents said $30 or lower crude was a global recession’s canary in a coal mine.
This is the bad news. The good news is that, according to a report of the World Bank release in mid-January, all of the major commodities may fall in price this year: “the steep decline in oil and related energy products is driving down the cost to extract other commodities”.
The risk that the scenario of a global recession may occur is real, according to the more careful analysts. Indeed, the current fall of oil price was surely triggered by the Lugano report on the E-Cat, as it has been well illustrated on this blog by a former oil trader in the post: “Why the E-Cat is responsible for the fall of oil price”.
As confirmed by some independent analysts, a sharp decline in the price of Brent oil was observed in the immediate aftermath of the report’s release, coinciding with a download of the report by the hedge fund Blackrock. Thus many financial little firms looked at this “strange” choice for their later moves and strategies, enhancing the drop.
Indeed, better known as a multiasset-class titan, with more than $4.6 trillion under management worldwide, New York-based BlackRock has been in the hedge fund management business since 1996, and is now the world’s largest money manager. Although hedge funds account for a minuscule 0.7% of the firm’s overall assets, BlackRock ranked sixth worldwide on Pensions & Investments’ most recent listing of hedge fund managers.
But LENR are suspected to be still hitting the oil market: take a look at the oil price and you can notice its behavior near the Parkhomov’s announcement of his really independent replication of the Rossi Effect, made on December 25, 2014: this event broke the consolidation phase in place and kicked off the possibility for an immediate rebound of the oil price.
Oil price after the announcement of a Hot-Cat replication by the Russian physicist Parkhomov.
The independent trader “Sifferkoll” explains, on his homonymous blog, that “the ‘Big Oil’ companies put their money from selling their oil fields in the bank and enabled the merchant banks to short oil, i.e. to bet on an its further drop”. So, the Big Oil avoided bankruptcies and fire sales, whereas the big merchant baks such as Goldman Sachs, JP Morgan among others have been extremely well positioned for this fall of the oil price since 2011.
Saudi Arabia wants to undercut oil production to allow the market to stabilize on its own, as already decided in December, even if non-OPEC nations did so or wanted to do so. In this way, Saudi Arabia can kill off as many of its competitors as it can now. So, when the oil drops to $30, the Saudis will be the sole suppliers and they will earn thanks to the large volumes.
Indeed, already an oil price below $50 means that U.S. shale oil and gas production, which has surged in recent years, causing a large build in global oil supplies, will be curtailed. Also investments in Brent crude oil – extracted through expensive offshore platforms in the North Sea – will be reduced, as profitability from these ageing fields has worsened. In both cases, the new projects of exploration and drilling will be cancelled or deferred.
This is already happening. In December, the US-based oil giant ConocoPhillips said they were cutting 230 out of 1,650 jobs in the UK. It announced a 20% reduction in its worldwide capital expenditure budget, in response to falling oil prices. Other big oil firms are expected to make soon similar cuts to their drilling and exploration budgets.
But what could happen if in the next months there will be new major announcements regarding the LENR? It’s reasonable to expect that, when LENR will become widely known by the general public, the oil crash could worsen, and oil stocks – i.e. the stocks of oil companies quoted in the stock exchange – will plunge as well, since their stock price reflects many years of potential growth and huge profits, which will evaporate within 10 years or so.
Sifferkoll’s prediction for the oil price is “30 Dollar Oil within a year and 10 Dollar on the long term”. This could mean a global recession and, apparently, the end of the fossil fuel age. However, oil is used for producing fuels, lubricants and as a precursor chemical for the chemical industries such as plastics, therefore that market will probably still exist for a long time, until these material will be replaced in some way by others.
Therefore, oil prices can go lower for a relatively long time, and the new “normal” could be far lower than we thought. Perhaps, at the end of this year we will look at the relatively high prices of the oil reached in 2014 such as a bubble, that LENR has now popped.
But also the opposite – a new surge in oil price in the next years – is possible, for a simple reason. There is a natural decline of 5% a year from existing fields around the world. That means by 2030 more than half of the existing global oil production will disappear. If now there are not investments in new oil fields, soon or later there will be a production shortage, and low availability of a commodity results in higher prices.
There is an enormous amount of money that needs to be invested now to get another 50 million barrels per day of new production. In absence of such investments, the cycle will come back and higher prices will come back. And by that time hardly the LENR may already have reduced the need for oil of our energy-consuming society.
Therefore, big up and down in the oil price are likely to happen in this decade, perhaps a new world recession could be triggered by these events, and one thing is sure: the E-Cat is not yet on the mass market, but its effect are for real and already quite heavy.
This article has been written in collaboration with Simone P., an Italian trader that I want to thank.