For the US economy, this would be a ‘Black Swan’ of a totally different variety.
In Bank of America/Merrill Lynch’s 2013 Energy Outlook, analyst Sabine Schels and colleagues make a shocking prediction about the possible path of West Texas Intermediate oil.
Surging US shale oil output creates risk of $50 WTI North America’s energy supplies are surging while the rest of the world continues to fight for scarce molecules of oil and gas. On our estimates, onshore US crude oil output now vastly exceeds previous growth rates in liquids and nat gas, particularly in Lower 48 states. With profitability for US domestic oil producers very high and no change in sight to US rules preventing crude oil exports, we expect WTI prices to continue to lag international prices. Indeed, we see a risk of WTI temporarily falling to $50/bbl over the next 24 months to force a slowdown in supply growth or a change in crude oil export rules.
A key point that Schels & Co. make is that the crude oil market could come to resemble the Natural Gas market. In the natural gas market, the US has natural gas coming out of its ears, as it just has way more supply coming out of the ground than it could possibly use or export. So while prices remain decent throughout much of the world, domestic natural gas prices have collapsed.
The basic story is that shale production is growing like crazy — faster than anyone has expected — and the infrastructure can barely keep up.
Oil production growth in the US has put other non-OPEC nations to shame (their words!).
The pipeline capacity doesn’t exist, so producers are sending as much as possible by rail.
If you don’t understand how 2012 was unlike any other year for oil being shipped by rail, check out this chart from the American Association of Railroads showing monthly shipments of petroleum in North America via rail compared to others years. 2012 was just a total beast.
[credit provider=”AAR.org” url=”http://www.aar.org/NewsAndEvents/~/media/aar/railtimeindicators/2012-11-rti.ashx”]
Meanwhile, the shale producers have no reason to stop pumping. Their borrowing costs are at record lows, and their breakeven profitability levels are well below current prices.
The story goes on. Refining capacity is also very tight right now. So the bottom line is: Massive production, low breakeven costs, low financing costs, and tight capacity across the entire petroleum infrastructure. The ingredients are there for a price collapse.