Year-End Outlook for Crude Oil

01/15/2014 6:00 am EST

Focus: COMMODITIES

Daniel Gramza

President, Gramza Capital Management, Inc.

Is crude oil too high or too low? Dan Gramza shares his assessment as we go into the end of the year.

SPEAKER 1:  My guest today is Dan Gramza and we’re talking about crude oil and coming into the end of 2013 and into 2014 what are his prospects here, so Dan you’ve got a lot to look at here with crude.  What are your thoughts?

DAN:  Well first I think crude oil should be about $20 lower.  That’s my first thought.  If we look at crude oil in terms of where it’s been this past year, you know this $100 to $105 down to $95 that range, first there are a couple dynamics behind it, Tim, I think that you and I should look at.  It’s comfortable for OPEC in a sense to have crude oil around $100 a barrel.  It balances Saudi Arabia’s budget, it takes care of Iran in terms of their budget, Venezuela they have some issues down there, so they need that crude at the price.  The second thing I think that’s been the motivator behind crude oil at these prices is the U.S. dollar.  It’s dollar-based, as we all know, right, so if I produce crude oil I get paid in dollars.  I go to my bank, I say I’d like to exchange dollars for my currency and they say well I’m not going to be able to give you as much because the dollar’s weaker, so the way I offset that is I have higher crude oil prices.  I think that’s also what’s holding it up here.  You know, Tim, let’s take a look at the fundamentals as you and I go into the end of the year like you’ve said.  Let’s talk about supply and demand.  Supply is not the issue and in fact if we look at the supply that we have in the United States some of it’s at record levels.  Oklahoma has over 39 million barrels of crude right now, so we know that as we look at the supply side there’s not a shortage.

SPEAKER 1:  I know it’s not a direct correlation, but gas prices have been really low too and they’ve been coming down.

DAN:  They came off _____ at some point.  We’re seeing some of that feedback a little bit.  There’s always a lag between that pricing of the gasoline depending on when it was refined and when it’s going into our system to where crude oil prices are, but that’s a good observation and if we look at the relationship of demand we’re down 10% in demand.  Our imports are down over 11%.  United States truly is becoming an independent energy company.  Not tomorrow, but what I do find interesting, Tim, that I think you and I should be aware of longer term, is that the estimates for us to become independent was 2020 just a few months ago actually.  If you look at the IEA report that was around there, but right now they’re talking about 2015 that we’re going to see some improvement in our ability to produce crude that we’ve never seen in the past.  To summarize, I’m bearish on crude oil.  I’m not bullish on it, but would I buy it and the answer is yes because price dictates what I do.  My opinion, I’m looking for side ways to lower as we go into this year-end.

SPEAKER 1:  What are your thoughts about the idea that OPEC will lower prices because they want to keep America using gasoline?  The higher the prices the faster they’re going to accelerate that push to go away from fossil fuels.

DAN:  I think the one issue with that, and that’s a very good possibility, I mean it’s a valid point to raise, but we’re not the only buyer of their product.  People say we become energy independent, what does that do to OPEC.  We have friends in China that also need some crude oil, right, so that absorption of that price differential can happen in other parts of the world as their energy demands go up.  If you look at India and you look at China their energy consumption is going logarithmic, so even though we’re taking less there are people that still need a lot more.

SPEAKER 1:  Dan thanks for your time.

DAN:  My pleasure.

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