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IEA: Price Spike Coming In 2020

IEA: Price Spike Coming In 2020

Oil

The oil market has been awash in crude for more than three years, and OPEC has struggled to accelerate the rebalancing effort, but the world could be heading for a supply crunch in a few years due to the sharp fall in industry spending.

The halving of oil prices from $100 per barrel before 2014 down to just $50 today has led to a corresponding plunge in upstream investment. But even as benchmark prices seem to have stabilized over the past year, with most analysts predicting gradual and modest gains in the year ahead (depending on OPEC’s actions), there’s still no sign of a serious rebound in spending levels.

The problem of a shortage of supply seems very far off today, given the swift turnaround in U.S. shale and persistently high levels of crude storage.

But demand continues to rise—the IEA just upgraded its demand growth estimate for 2017 to 1.6 million barrels per day (mb/d). If that level of demand growth continues for a few years, it will more than devour the excess supply on the market. Even a more tempered growth rate would strain supplies toward the end of the decade, absent a corresponding uptick in production.

“There are still not enough signs of investment beginning to return, and that raises the risk of tightening of the market in the next five years and a risk to the stability of oil prices,” Neil Atkinson, head of the IEA’s oil markets and industry division, said at a conference in Bahrain. “There is at least a possibility of going back to the situation we had 10 years ago where oil prices were very, very high at a time when demand was growing.”

…click on the above link to read the rest of the article…

Why The Shale Oil “Miracle” Is Becoming A “Debacle”

klublu/Shutterstock

Why The Shale Oil “Miracle” Is Becoming A “Debacle”

Dispelling the magical thinking behind the hype

Energy is everything. 

This is an amazingly important concept. Yet it’s almost universally overlooked.

Sometimes it’s hard to appreciate the magical role energy plays in our daily lives because most of what we experience is a derivative of it. The connection is hidden from direct view.  Because of this, most people utterly fail to detect or appreciate the priceless and irreplaceable role of high net-energy fuel sources (such as oil and gas) to our modern lifestyle.

With high net-energy, society enjoys increasing complexity and technological advances. It’s what enables us to pursue massive goals like desalinating billions of gallons of seawater, or going to Mars.  But without high net-energy fuel sources, our capabilities quickly regress to those of decades — or even centuries — past.

Which is why understanding where we truly are in the ‘net-energy story’ is so incredibly important. Is the US on the cusp of being “energy independent” from here on out? Is the “shale miracle” ushering in a glorious new ‘boom’ era that will vault America to unprecedented prosperity?

No. The central point of this report is that the US is deluding itself when it comes to energy abundance (generally) and oil (specifically).

Yet that’s not what we hear from the cheerleaders in the industry or in our media. From them, we hear a silver-tongued narrative of coming riches — a narrative that contains some truth, some myth, and a lot of fantasy.

It’s those last two parts — the myths and fantasies — that are going to seriously hurt many investors, as well cause a lot of extremely poor policy and investment decisions.

The bottom line is this: The US shale industry resembles a fraudulent Ponzi scheme much more so than it does any kind of “miracle”.

…click on the above link to read the rest of the article…

Forget OPEC, China Controls Oil Prices

Forget OPEC, China Controls Oil Prices

China

U.S. shale has taken a lot of headline space recently as the biggest headwind for oil prices and the highest stumbling block for OPEC’s efforts to prop them up by cutting production. Yet, there may be another factor that could bring down oil prices as soon as next year…

China.

China has been building a strategic crude oil reserve for the last decade, but the size of that reserve remains undisclosed, with analysts making estimates based on China-bound cargoes and satellite imaging.

Last year, a Silicone Valley tech company, Orbital Insight, suggested that China may have stored as much as 600 million barrels of crude by May. This was the highest reserve estimate at the time. Since then, the reserve has in all likelihood grown, possibly exceeding the U.S. SPR, which stood at 678.9 million barrels as of August 18th this year.

This year, Chinese crude imports have run at record-breaking rates, with the average daily on par with what the U.S. imports, at about 8 million barrels, the Financial Times notes in an analysis. A lot of these, however, are going into storage tanks, analysts believe, and they warn that soon the tanks may fill up, wreaking havoc on prices and–more notably–on OPEC.

The cartel, Russia and 11 other producers agreed last year to remove 1.8 million bpd from global oil supply in an attempt to raise prices above US$50, with hopes for at least $60. This May, they agreed to extend the cuts to March 2018. Nevertheless, prices have remained largely stable around the $50 mark because of rising U.S. output, which last week jumped above 9.5 million bpd, according to the EIA. Related: Qatar Aims To Ease Its Reliance On LNG Exports

…click on the above link to read the rest of the article…

Today’s Stunted Oil Prices Could Cause Oil Price Shock In 2020

Today’s Stunted Oil Prices Could Cause Oil Price Shock In 2020

Refinery

As oil prices remain unsteady and OPEC continues to make headlines every hour, the world is focused on oil’s immediate future. As Saudi Arabia announces plans to slash production and move their economy away from oil dependency, many industry insiders are predicting that the now over-saturated market will reach an equilibrium with higher commodity prices by 2018 and U.S. shale production will continue to grow along with global demand.

Robert Johnston, the CEO of one of the world’s biggest political risk consultancies, is unconvinced. In a speech made at the Association of International Petroleum Negotiators’ 2017 International Petroleum Summit, Johnston laid out his concerns for the future of oil.

What I don’t hear people asking is, ‘then what?’ Are the Saudis going to maintain these production cuts forever, or at some point do they have to start reversing that? I think in 2018 they will be reversing those production cuts,” he said. These important questions aren’t getting enough attention according to Johnston, whose firm Eurasia Group foresees a fast-approaching supply gap that Saudi Arabia and U.S. oil may not be able to fill.

Eurasia Group forecasts about 7 million barrels per day (MMbbl/d) of new crude supply by 2022. This includes about 5 MMbbl/d of U.S. shale growth and about 2 MMbbl/d from oil sands and deepwater extraction. But by the year 2022, another 15 MMbbl/d of new supply may be needed, as demand trends predict an annual growth rate of about 1 MMbbl/d. With this kind of impending discrepancy between supply and demand, the industry needs to start looking for new sources of oil, and quickly.

…click on the above link to read the rest of the article…

Does the Price of Oil Determine General Increases in the Prices of Goods and Services?

A very good visual correlation between the yearly percentage change in the consumer price index (CPI) and the yearly percentage change in the price of oil seems to provide support to the popular thinking that future changes in price inflation in the US are likely to be set by the yearly growth rate in the price of oil (see chart).

Shostak1

But is it valid to suggest that a price of an important input such as oil is a key determinant of the prices of goods and services?

Now producers of goods and services set asking prices. It is also true that producers whilst setting prices take into account various production costs including the cost of energy.

Whether the asking price set by producers is going to be realised in the market place hinges on consumers’ acceptance of the price set. Consumers dictate whether the price set by producers is “right”.

On this Mises wrote,

The consumers patronize those shops in which they can buy what they want at the cheapest price. Their buying and their abstention from buying decides who should own and run the plants and the farms. They determine precisely what should be produced, in what quality, and in what quantities.[1]

If consumers don’t have the money to support the prices asked by producers then the prices asked cannot be realised.

What is a price? It is the rate of exchange between goods established in a transaction.  The price, or the rate of exchange of one good in terms of another, is the amount of the other good divided by the amount of the first good.

In a money economy, price will be the amount of money divided by the first good.  A price is the sum of money paid for a unit of a good.

…click on the above link to read the rest of the article…

Do Saudi Arabia And Russia Really Want Higher Oil Prices?

Do Saudi Arabia And Russia Really Want Higher Oil Prices?

Russia and Saudi Arabia

The jawboning of oil prices by the Saudi Arabian/Russian tag team should be wearing off after more than a year of actions that don’t measure up to the words. Oil prices slumped recently, dropping from around $54 per barrel to just below $50 as of Friday’s close.

As if on cue, the Russian energy minister announced Friday that Russia has now met its target of reducing oil production by 300,000 barrels per day. It took four months to do something that should have taken just weeks. (The agreement came into force on January 1.) And, of course, we’ll have to see if the Russians have actually done what they say they’ve done.

Only a week earlier, the Saudi energy minister indicated that there is momentum growing in OPEC for extending production cuts beyond June for another six months. This announcement comes only six weeks after the same minister said that OPEC would NOT be considering extending the cuts. This is reminiscent of last year’s run-up to the production agreement in which Russia and Saudi Arabia kept alternating in making often contradictory announcements to sow confusion about the possibility of a production agreement and keep markets on edge without actually having to do anything.

I continue to question the sincerity of Saudi Arabia and Russia who I believe remain committed to undermining the production of tight oil (shale oil) in the United States. Despite the cuts agreed to for this year through June, the March numbers suggest substantial non-compliance among non-OPEC signers of the production agreement and a reminder that major producers Libya, Nigeria and Iran have been exempted from cuts. Do Saudi Arabia and Russia really want prices to rise enough to make tight oil profitable all across the United States (and not just sweet spots in the Permian Basin)? I’m not convinced. Related: Saudis To Boost Oil Export Capacity To 15 Million Bpd In 2018

…click on the above link to read the rest of the article…

Why We Should Be Concerned About Low Oil Prices

Why We Should Be Concerned About Low Oil Prices

I recently tried to explain how the energy-economy system works, including the strange way prices fall, rather than rise, as we reach limits, at a recent workshop in Brussels called “New Narratives of Energy and Sustainability.” The talk was part of an “Inspirational Workshop Series” sponsored by the Joint Research Centre of the European Commission.

Figure 1. Empty Schuman room of the Berlaymont European Commission building, shortly after we arrived. Photo shows Mario Giampietro and Vaclav Smil, who were the other speakers at the Inspirational Workshop. Attendees started arriving a few minutes later.

My talk was titled, “Elephants in the Room Regarding Energy and the Economy.” (PDF) In this post, I show my slides and give a bit of commentary.

Slide 2

The question, of course, is how this growth comes to an end.

Slide 3

I have been aided in my approach by the internet and by the insights of many commenters to my blog posts.

Slide 4

We all recognize that our way of visualizing distances must change, when we are dealing with a finite world.

Slide 5

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Shale Hotspot Draws In Another Big Oil Player

Shale Hotspot Draws In Another Big Oil Player

Oil rig

The oil price crash that destroyed a lot of smaller oil producers has not spared the finances of even the oldest and largest oil companies. Trying to keep the precious dividends intact and growing, Big Oil is focusing on cost control and cash preservation, and has effectively deferred investments in new ultra-expensive drilling ventures.

One of the biggest companies, U.S. Chevron, is now planning to capitalize on its vast acreage holdings in the Permian. Investments in new mega projects, at least over the next few years, are not currently on the table, chief executive John Watson told Reutersin an interview published this week.

Chevron is now betting big on the Permian; the star shale play straddling West Texas and New Mexico that has seen most of the resurgence since oil prices started steadily recovering in the fourth quarter last year.

Unlike some other (and smaller) producers who have just recently rushed to secure holdings in the shale play, Chevron is not a newcomer to the Permian – the group and its legacy companies have held acreage in the area since the early 1920s.

Now the new oil order is causing the company to shift strategies away from mega drilling projects to secure steady returns in more conservative projects in order to protect dividends and keep them growing.

Chevron reported earnings of $0.22 per share for the fourth quarter of 2016, compared with a loss of $0.31 per share for the fourth quarter of 2015, in line with analyst expectations that it would return to profit, but still missing the EPS estimates by a wide margin. Full-year 2016 results showed a loss of $497 million compared with earnings of $4.6 billion in 2015, which was the first annual loss Chevron has booked since 1980.

…click on the above link to read the rest of the article…

Oil Rigs Rise For 12 Straight Weeks; Threaten Oil Price Recovery

Oil Rigs Rise For 12 Straight Weeks; Threaten Oil Price Recovery

For the 12th week in a row, the number of US oil rigs rose (up another 10 to 672 – the highest since September 2015). US Crude production continues to track the lagged rig count, pouring more cold water on OPEC’s production cut party.

The rig count grows, tracking the lagged oil price in a self-defeating cycle.

And crude production appears to have plenty more room to run.

Fitch Predicts Drop In Oil Prices By 2017 As U.S. Shale Output Soars

Fitch Predicts Drop In Oil Prices By 2017 As U.S. Shale Output Soars

Oil Rig

Oil bigwigs should take a step back before becoming too comfortable with the new oil price range according to Fitch Ratings’ newest market analysis.

“The recovery in US drilling activity will drive up shale oil production in the second half of 2017, offsetting a portion of recent oil price gains,” the credit rating agency’s report released on Monday says. “We therefore expect average oil prices for the year to be below those in January and February.”

In a stable market scenario, Fitch estimates that by the end of this year, oil prices will fall to $52.50, but then rebound to $55 and then $60 in 2018 and 2019, respectively. Long-term prospects for Brent barrels sit at $65 in this model.

A stressed, oversupplied market will mean a $40 barrel through 2019, however.

Since January, a 1.8 million-barrel global production cut led by the Organization of Petroleum Exporting Countries (OPEC) and joined by several other nations has kept prices between the $55-$60 range.

Compliance to the terms of the November deal by members of the bloc has been strong. Last week, new data showed that OPEC’s compliance stood at 94 percent.

Fitch cited the continuous increase of active oil rigs in the United States since May 2016 as key evidence for an impending price collapse. American production is set to top nine million barrels over the course of 2017, the analysts estimate, due to rejuvenated capital expenditure budgets and higher output capacity.

The total number of active oil and gas rigs in the United States is now 756, according to oilfield services provider Baker Hughes, which is 267 rigs above the rig count a year ago.

 

Venezuela Is Down To Its Last $10B As Debt Payments Loom

Venezuela Is Down To Its Last $10B As Debt Payments Loom

Maduro PDVSA

Venezuela’s central bank is down to its last $10.5 billion in foreign reserves, according to the institution’s most recent report on the country’s financials.

Over the remainder of 2017, Caracas needs to fund $7.2 billion in debt payments – an amount that it can only meet if oil prices spike far higher than the ongoing boosts caused by OPEC’s output reduction agreement.

Current reserves stand 66 percent lower than levels in 2011, when the government held $30 billion in foreign currencies to spend on loan repayments and other official business.

“The question is: Where is the floor?” Siobhan Morden, head of Latin America fixed income strategy at Nomura Holdings, told CNN Money. “If oil prices stagnate and foreign reserves reach zero, then the clock is going to start on a default.”

Venezuela’s financial report for 2016 stated that roughly $7.7 billion of the remaining $10.5 billion in foreign reserves had been preserved in gold. Last year, in order to fulfill debt obligations, Caracas began shipping gold to Switzerland.

The drastic fall in oil prices in 2014 and widespread corruption have both caused an economic meltdown in the South American country, where citizens had become accustomed to imported goods paid for by fossil fuel revenues.

President Nicolas Maduro has resorted to opening the country’s border with Colombia to allow Venezuelans to purchase necessary medical and day-to-day supplies.

Venezuelan state-run oil company PDVSA’s default is probable, according to the ratings agency Fitch, which cited the oil giant’s weak liquidity position and high amortization scheduled for 2017 as the causes of the default problem last month.

“Should oil prices remain around current levels, average recovery may lead to additional future defaults to further reduce obligations and allow for necessary transfers to the government,” said Fitch’s senior director Lucas Aristizabal.

The company has projected that its oil production will maintain its 23-year-low in 2017.

The Oil War Is Only Just Getting Started

The Oil War Is Only Just Getting Started

Oil infrastructure

It’s been a month now that investors and analysts have been closely watching two main drivers for oil prices: how OPEC is doing with the supply-cut deal, and how U.S. shale is responding to fifty-plus-dollar oil with rebounding drilling activity. Those two main factors are largely neutralizing each other, and are putting a floor and a cap to a price range of between $50 and $60.

The U.S. rig count has been rising, while OPEC seems unfazed by the resurgence in North American shale activity and is trying to convince the market (and itself) and prove that it would be mostly adhering to the promise to curtail supply in an effort to boost prices and bring markets back to balance. In the next couple of months, official production figures will point to who’s winning this round of the oil wars.

This would be the short-term game between low-cost producers and higher-cost producers.

In the longer run, the latest energy outlook by supermajor BP points to another looming battle for market share, where low-cost producers may try to boost market shares before oil demand peaks.

BP’s Energy Outlook 2017 estimates that there is an abundance of oil resources, and “known resources today dwarf the world’s likely consumption of oil out to 2050 and beyond”.

“In a world where there’s an abundance of potential oil reserves and supply, what we may see is low-cost producers producing ever-increasing amounts of that oil and higher-cost producers getting gradually crowded out,” Spencer Dale, BP group chief economist said.

In BP’s definition of low-cost producers, the majority of the lowest-cost resources sit in large, conventional onshore oilfields, particularly in the Middle East and Russia.

…click on the above link to read the rest of the article…

Oil Production Vital Statistics December 2016

Oil Production Vital Statistics December 2016

Global total liquids production hit yet another record high of 98.24 Mbpd in November led by OPEC and Russia! Libya’s drive to restore production is a significant factor with production up 280,000 bpd from recent lows. The US oil rig count has risen for 32 consecutive weeks and US oil production has stopped falling. Production from the North Sea and Asia are in decline as the past low price and drive to restore profitability works through the system.

The oil price has significantly broken above the $51 / bbl resistance and Brent is currently at $57. With OPEC + Russia due to decrease production from January first and to maintain lower plateau levels, combined with the relentless rise in demand, the oil price should rally from here, but not by much. The ceiling is set by the cost of new supply that currently resides with the N American LTO frackers. US production has halted its decline which is perhaps a sign of what is coming.

The following totals compare November 2016 with November 2015:

  • World Total Liquids +780,000 bpd
  • OPEC +950,000
  • Russia + FSU +440,000
  • Europe -170,000 bpd
  • Asia -640,000
  • North America -640,000

The net figures from the above are +1.39 Mbpd and -1.45 Mbpd leaving a net -0.06 Mbpd increase compared with the + 0.78 Mbpd global total liquids figure.

Year on Year, OPEC and Russia are the big winners. North America, Asia and Europe the big losers. And on the drilling front:

  • US total rig count up 261 to 665 from the low of 27 May
  • International rigs up 15 in November

This article first appeared on Energy Matters.

EIA oil price and Baker Hughes rig count charts are updated to the end of October 2016, the remaining oil production charts are updated to September 2016 using the IEA OMRdata.

…click on the above link to read the rest of the article…

Can U.S. Shale Add 1 Million Bpd In 2017?

Can U.S. Shale Add 1 Million Bpd In 2017?

Rigs

Oil prices are up on expectations that OPEC will contribute to a faster balancing in 2017, with up to 1.8 million barrels per day in cuts along with some non-OPEC countries. That has put a floor beneath prices, with fears of another downturn largely dissolved after OPEC’s announcement.

But what if U.S. shale comes roaring back and ruins the price rally? Estimates run the gamut on how quickly U.S. shale production can rebound and by what magnitude. Citigroup sees output rebounding by 500,000 barrels per day if oil prices average $60 per barrel. A December 12 report from Macquarie said that oil prices above $60 could spark a 1 million barrel-per-day revival.

U.S. shale is already up about 300,000 barrels per day from a low point in the summer of 2016, at least according to preliminary data. The gains are expected to continue. The industry is producing about as much oil as it was two years ago, with only one-third of the more than 1,700 rigs in 2014. Drillers are producing just as much oil with a lot less effort.

If U.S. shale surges back by 1 mb/d as Macquarie suggests, it would offset most of the cuts from OPEC and non-OPEC countries. Additionally, one would have to assume some degree of non-compliance and/or “cheating” on the cuts from participating countries, plus an expected increase in supply from Libya and Nigeria. Altogether, a rise in oil prices could be self-defeating, leading to prices falling once again later in the year. Related: Oil Price Roulette: Investors Bet On $100 Oil

Then there are also the implications on oil demand to consider. Higher prices might cut into demand growth, leading to an expansion in consumption at a much slower rate. The IEA already thinks oil demand will grow by 1.3 million barrels per day in 2017, one of the weakest in years.

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Trump’s Oil Price Dilemma

Trump’s Oil Price Dilemma

Trump Victory speech

President-elect Donald Trump has started naming his picks for key administration offices, and it looks like he is beginning to assemble a team to deliver on at least part of his campaign promises of An America First Energy Plan.

Trump’s agenda includes lifting restrictions and opening onshore and offshore leasing on federal lands, eliminating the moratorium on coal leasing, and opening shale energy deposits. The President-elect’s key arguments for these policies are creating high-paying jobs, lessening and even eliminating America’s energy dependence, increasing tax revenues, and adding billions of dollars in economic activity.

Even if Trump were to deliver on all his pledges – as far as federal law and federal regulations are concerned – the U.S. oil production would be driven by the market—the economics of the supply and demand that determine the prices of oil.

At the time of Trump’s inauguration on January 20, OPEC and a dozen non-OPEC nations are set to begin to reduce crude oil supply with the purpose of killing the global glut and lifting oil prices. Ideally, OPEC/NOPEC taking 1.8 million bpd off the market would speed up the drawdown in global stockpiles and prop up prices.

In reality, few expect OPEC to stick to its commitments and cut as much as promised.

Still, oil prices are now north of US$50, and OPEC (even if some members cheat) may be able to talk prices up a month or so more. American production has been suffering the consequences of the two-year oil price rout, but if oil stays over US$50 for longer, it would entice more U.S. producers to return to work. Oil prices at US$60 or more would lead to even more confidence among U.S. producers—producers who are now ‘leaner and meaner’ and carefully choosing how to invest.

…click on the above link to read the rest of the article…

Olduvai II: Exodus
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Olduvai
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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