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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.

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

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…

What has gone wrong with oil prices, debt, and GDP growth?

What has gone wrong with oil prices, debt, and GDP growth?

(1) The big thing that pulls the economy forward is the time-shifting nature of debt and debt-like instruments.

If we want any kind of specialization, we need some sort of long-term obligation that will make that specialization worthwhile. If one hunter-gatherer specializes in finding flints that will start fires, that hunter-gatherer needs some sort of guarantee that others, who are finding food, will share some of their food with him, so that the group, as a whole, can prosper. Others, who specialize in gathering firewood, or in childcare, also need some kind of guarantee that their efforts will be rewarded.

At first, these obligations were enforced by social norms such as, “If you don’t follow the rules of the group, we will throw you out.” Gradually, reciprocal obligations became more formalized, and included more time shifting, “If you will work for me, I will pay you at the end of the month.” Or, “If you will pay my transportation costs to a land of more opportunity, I will repay you with 10% of my wages for the first five years.” Or, “I will sell you this piece of land, if you will pay me x amount per month for y years.”

In some cases, the loan (or loan-like agreements) takes the form of stock ownership of an enterprise. In this case, the promise is for future dividends, and the possibility of growth in the value of the stock, in return for the use of funds. Even though we generally refer to one type of loan-like agreement as “equity ownership” and the other as “debt,” they have a great deal of similarity. Funds are being provided to the enterprise, with the expectation of greater return in the future.

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Why We Can Expect Cripplingly Higher Oil Prices In The Near Future

Why We Can Expect Cripplingly Higher Oil Prices In The Near Future

Oil Rig

The break-even price for Permian basin tight oil plays is about $61 per barrel (Table 1). That puts Permian plays among the lowest cost significant supply sources in the world. Although that is good news for U.S. tight oil plays, there is a dark side to the story.

Just because tight oil is low-cost compared to other expensive sources of oil doesn’t mean that it is cheap. Nor is it commercial at current oil prices.

The disturbing truth is that the real cost of oil production has doubled since the 1990s. That is very bad news for the global economy. Those who believe that technology is always the answer need to think about that.

Through that lens, Permian basin tight oil plays are the best of a bad, expensive lot.

Table 1. Weighted average break-even price for top operators in Permian basin tight oil plays. Source: Drilling Info, company documents and Labyrinth Consulting Services, Inc.

Not Shale Plays and Not New

The tight oil plays in the Permian basin are not shale plays. Spraberry and Bone Spring reservoirs are mostly sandstones and Wolfcamp reservoirs are mostly limestones.

Nor are they new plays. All have produced oil and gas for decades from vertically drilled wells. Reservoirs are commonly laterally discontinuous and, therefore, had poor well performance. Horizontal drilling and hydraulic fracturing have largely addressed those issues at drilling and completion costs of $6-7 million per well.

Permian Basin Overview

The Permian basin is among the most mature producing areas in the world. It has produced more than 31.5 billion barrels of oil and 112 trillion cubic feet of gas since 1921. Current production is approximately 1.9 million barrels of oil (mmbo) and 6.6 billion cubic feet of gas (bcfg) per day.

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Is The End In Sight For Alaska’s Oil Based Economy?

Is The End In Sight For Alaska’s Oil Based Economy?

Alaska Rig

Alaska has long been one of the few U.S. states without an income tax. Thanks to its incredible bounty of natural resources, the state had more than enough cash coming in through oil company taxes and especially Prudhoe Bay production. All of that is starting to change. After a 40 year oil boom that transformed Alaska from a frozen tundra into one of the richest states in the country, the oil price crash is bringing reality back to bear.

Alaska’s problems go deeper than the current oil price collapse though. Simply put, the state is getting long in the tooth – at least as far as its productive assets go. The Prudhoe Bay Oil field, once the largest such field in North America, is starting to reach the end of its life. In 1985, the Prudhoe Bay field was pumping 2 million barrels per day – roughly a quarter of the total U.S. output. Today it is pumping 500,000 barrels a day. That’s leaving the 800 mile Trans-Alaska pipeline seriously under-utilized.

Roughly 90 percent of Alaska’s general fund revenues are tied to oil. Between the oil price collapse and the inexorable decline of oil production over time, Alaska now faces a $4B budget deficit, all while the state has slid into an oil related recession over the last year. With the State’s rainy day fund burning through $11 million per day, that energy fund will be exhausted in less than two years.

All of this is a new challenge for Alaska and its roughly three-quarters of a million residents. Alaska has traditionally lightly yoked its residents with the lowest tax burden of any state across the country. In contrast, it has also had the highest per capita spending in the country thanks to its vast swath of territory. Both facets of this social compact may have to change.

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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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