John Rubino anticipates falling oil prices

John Rubino anticipates falling oil prices


What are the main reasons for the plunge of oil prices below the symbolic $50 per barrel? What changes should we anticipate in the oil industry? And what will be the driving forces behind the price of the black gold? John Rubino, editor of, talks to Gita Evele, EXANTE’s PR manager, to address these questions.

Brent crude oil has been on a continuous rise since 2009. Last year in 2014 its price was around $115 per barrel, however, it had plummeted below the symbolic $50 per barrel this January. Considering that the demand for oil did not experience any dramatic changes, what do you see as the key reasons behind the drop?

There are several reasons and it is hard to say which one is the most important one, but I think they have all played a role. First of all, oil was overpriced to begin with, it was way above its historical averages, so you would normally expect a correction from the $110-level.

However, there were a lot of geopolitical issues going on at the same time and most of it centers on Russia. Saudi Arabia, for instance, is the key competitor of Syria, and Russia supports Syria. Thus, Saudi Arabia increased its own production in order to “penalize” Russia and raise the cost of supporting Syria. That is one part of the puzzle.

The second part is that the Western leaders were beginning to see Vladimir Putin as a formidable rival. The consensus in global politics was that Putin is this decisive as well as tough leader and compared to him the western leaders were not as strong. They were not really at his level in terms of the great game. Thus, they wanted to take him down a peg and they probably participated in the planning with Saudi Arabia in increasing the oil supply, which has had the desired effect as we see that Russia’s economy is in turmoil right now due to its heavy dependence on oil exports. At the same time there are demand and supply issues because the USA has suddenly ramped up production of oil in these new exotic kinds of extractions like shale oil and tar sands in Canada. Therefore, the supply is up and demand is beginning to slow down. This is a result of China that has been a huge importer of oil over the previous decade and it had a massive infrastructure build out, which required a lot of raw materials across the board and, consequently, pushed up the prices. However, now that its build out is slowing down, this is leading to a slight decline in the Chinese demand for oil and, certainly, it has decelerated in it is rate of growth.

Hence, you combine all of these factors and you understand that oil has fallen back to its long term average price. Even though the price has crashed from where it was before, it is not at an unrealistic levels now in terms of where it has been historically. Thus, all the geopolitics and the demand-supply issues this year have basically accelerated what would have been a correction in any case. I think it is reasonable to expect this to be more or less the new normal for oil going forward just because if you look at the price for oil for the past 20 years, this appears to be more of an acceptable level than the $110 that it was a year ago.

You have mentioned China, which is the world’s second largest oil consumer after the USA. Taken into account that the country has experienced the slowest growth rate of 7.4% in 24 years, what kind of impact if any do you see this having an impact on oil prices?

First of all, I should mention that I do not believe that the Chinese official figures paint a real picture of its economy. However, China’s story is fascinating due to the fact that they had an amazing infrastructure build out in the last 5 years. China has borrowed around 15 trillion USD, which in relation to the size of their economy is vastly more than the US has borrowed in that same time, and the US has borrowed a lot. Thus, they now have debt issues and the potential for, at least, a dramatic slowdown and, perhaps, a big crisis related to the all the ghost cities and the empty airports and malls.

Will this happen an effect on oil prices? That is very possibly especially if China has not just a gentle slowdown but an actual crisis that lasts a couple of years as the country works out a lot of the bad debt. In that case China’s consumption of raw materials across the board will slow down dramatically and that will have a huge impact on the global market place. At the same time Europe is slowing down, Japan really is not growing much at all and the USD has spiked, which is going to slow us down in the year ahead. Thus, it could be that a year from now we will be consuming less oil globally than we are right now.

Moreover, as Saudi Arabia’s and the rest of OPEC is still supplying a significant amount of oil to the market, we could have a serious supply imbalance a year from now which could push the price further from here. Needless to say, there is a limit in terms of how far down it can go, I would not expect to see much less than $30-$40 per barrel, but we could see that in the year ahead.

With the dropping oil price, how do you see oil companies cutting production costs in order to lower their breakeven point and remain competitive?

In the extraction industry you have a spectrum of companies, some of them are very low cost and well run, while others are not.

Especially the US has got these shale oil producers that require $70-$80-$90-$100 a barrel to be profitable. They finance themselves with junk bonds, which means that they have really high interest costs while the revenues are plunging. Therefore, we will see a lot of them will cease to exist or, at least, scale way back. As a result, the supply from that sector will drop over the next few years and then the bigger and the less threatened oil companies will scale back on their marginal projects.

It is not the case that they cut back production today, it is that they will not give the green light to many projects going forward. Thus, you see decelerating growth in production, and to the extent of one field it plays out it might not be replaced the way it would have under the plans that were in place a year or two ago. Moreover, normal supply-demand and oil are very responsive industry to price, consequently, over time you will see a lot of cut backs especially in the weakest players and that will moderate the amount of oil being produced.

However, you also need to consider the geopolitics. The supply from Saudi Arabia and a few other OPEC players will fall when they think they have made their political point rather than when the prices are at a certain level. Therefore, a lot depends on the relationship between the USA, Europe, Russia, Syria and Saudi Arabia and that is less predictable than anything as we cannot know for sure what these leaders will work out when they walk into the room together and finally have a talk.

Oil price are known to be notoriously hard to predict, however, what do you expect for the commodity until the end of the year as well as until 2020?

There is really no way of knowing what will happen in the next 6 months or the following year as there are so many moving parts to this story. In addition, we have a strike going on in the oil industry in the US, which has some impact, and we have natural disasters that can occur at any given time. So you cannot know for sure what is going to happen in the short run, but the pieces seem to be in place just as they are today without any big changes.

In case the supply stays fairly strong from Saudi Arabia and demand moderates further from China and Europe, Japan and the US, it would be a surprise to see oil spike from here and would be less of a surprise to see it drop a bit more from here as right now. The supply-demand are out of balance by a couple of million barrels a day apparently, and there little more supply coming into the market in the current configuration of production than is needed, so that could push prices a little further down from here.

John Rubino runs the popular financial website He is co-author, with GoldMoney's James Turk, of The Money Bubble: What to Do Before It Pops and The Collapse of the Dollar and How to Profit From It, and author of Clean Money: Picking Winners in the Green Tech Boom and How to Profit from the Coming Real Estate Bust. After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He now writes regularly for CFA Magazine. 

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