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Why Crude Oil Should Be $50

11/07/2012 10:45 am EST


Daniel Gramza

President, Gramza Capital Management, Inc.

Commodity trader Dan Gramza explains why crude prices are too high, and sets a shockingly low target price for the commodity going forward.

$50 a barrel oil? It’s not as crazy as it sounds. I’m here with Dan Gramza, who is going to talk to us about this.

Yeah, I think personally, my belief that crude oil should be around $50 a barrel. Maybe, on the high end, $70 a barrel.

That would be nice.

Yeah, it would be nice, wouldn’t it? But I think it’s logical. Why are we at these price levels? Well, I think we’re at these price levels because the US dollar is weak.

You know, if I’m an importing oil country, I get paid in US dollars. I turn to my bank to take those US dollars and turn them into that currency, and if I’m not getting enough on my currency, I’ve got a problem. So, if I raise the price of crude oil, right, I can offset that weaker dollar. I think that’s part of what we’re seeing.

I mean, if we look at Saudi Arabia, Saudi Arabia needs about $85 a barrel to balance their budget. OPEC is between $80 to $100 a barrel, probably at around $100 a barrel to balance their budget, so there’s some motivation there in that respect. But the reality there is with the weak US dollar, that’s going to have that impact, and we’re probably going to have a weak US dollar for a while.

You know what fascinates me? It’s what’s happening in the United States. If we think about what’s going on in terms of oil production through the first six months of this year, 2012, the United States has produced 83% of its domestic needs for energy.

That’s amazing.

Isn’t it amazing?

I mean, five years ago, you would have never even thought that.

That’s right. So what has been this shift? It’s the new technology. The ability to do horizontal drilling is a primary factor. It’s the ability to tap into fields that we thought we couldn’t tap into before, like in North Dakota.

So we’re seeing new sources, we’re seeing new technologies...and the fact is if we continue this way, we could cut half of our trade deficit within the next five to ten years, just based upon our ability to produce oil in the United States.

What fascinates me also, is that we think about...OK, energy prices are high. Let’s look at consumption. Consumption in the United States is going down. And if you look at our refiners, they’re operating at about 89% capacity, so we could produce more if we need to produce more. We have plenty of supply, and we have lower demand.

One more thing, and that would be what’s happening in the Middle East. Some of that unrest, could that have an impact? Does it create uncertainty? Absolutely. But that typically would be about a $5 to maybe $15 maximum change in the price of crude oil.

So the risk premium isn’t really the reason that oil is as high as it is.

That’s exactly right. That’s how I feel.

Yeah. It’s fascinating, and some of the new technology...I guess the big thing is that if the refiners are running at 89% with that headroom that they have, that’s always the biggest challenge: you can produce as much oil as you want, but if you don’t have the refineries, it’s just going to sit in barrels.

Exactly right. So, we have this interesting dynamic that’s happening now in the United States, which I think is incredibly exciting. And I can’t wait for the next five to ten years to unfold, because I really think we’re going to see more changes than we can imagine right now.

Related Reading:

Russia: The New Energy Empire

New Fuel More Fantasy Than Reality

Sinking Ships on Troubled Waters

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