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Iran Starts Air Force Drills Near The World’s Crucial Oil Chokepoint

Iran Starts Air Force Drills Near The World’s Crucial Oil Chokepoint

Iran Airforce

Iran’s Air Force and the Islamic Revolution Guards Corps began on Friday fighter jet drills over the waters near the world’s most important oil chokepoint, the Strait of Hormuz, Iran’s IRNA news agency reported on Friday.

Aircraft including nine F-4, six Sukhoi, and four Mirage started the war games in the Persian Gulf and the Sea of Oman waters, IRNA said.

The maneuver is a warning that Iran’s enemies will face a “stern response” if they show ill-will toward Tehran, the AP quoted the official Iranian news agency as saying.

Earlier this year, Iran threatened to close the Strait of Hormuz for all tanker traffic if the U.S. drives Iranian oil exports to zero.

As the first round of U.S. sanctions on Iran kicked in last month and the second round of sanctions—including on Iranian oil exports—is set to snap back in early November, the Islamic Republic has recently stepped up rhetoric about controlling the most vital oil flow chokepoint in the world.

U.S. Secretary of State Mike Pompeo rebuffed Iran’s claims saying in a statement posted on Twitter: “The Islamic Republic of Iran does not control the Strait of Hormuz.”

The Strait of Hormuz is the world’s most important chokepoint, with an oil flow of 18.5 million bpd in 2016, the EIA estimates. The Strait connects the Persian Gulf with the Gulf of Oman and the Arabian Sea and is the key route through which Persian Gulf exporters—Saudi Arabia, Iran, Iraq, Kuwait, Qatar, the UAE, and Bahrain—ship their oil. Only Saudi Arabia and the UAE have pipelines that can ship crude oil outside of the Persian Gulf with additional pipeline capacity to bypass the Strait of Hormuz, which is a route of more than 30 percent of the daily global seaborne-traded crude oil and petroleum products and more than 30 percent of the liquefied natural gas (LNG) flows.

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Iran Sanctions Are Damaging The Dollar

Iran Sanctions Are Damaging The Dollar

Iran

Painful sanctions on Iran have demonstrated the long reach of the U.S. Treasury, forcing much of the globe to fall in line and cut oil imports from Iran despite widespread disagreement over the policy. Yet, we are only in the first few chapters of what may ultimately be a long story that ends with the erosion of the power of the U.S. dollar.

The role of the greenback in the international financial system is the reason why the U.S. can prevent much of the world from buying oil from Iran. Oil is traded in dollars, and so much of international commerce is based in dollars. In fact, as much as 88 percent of all foreign exchange trades involve the greenback.

Moreover, multinational companies inevitably have some commercial ties to the U.S., so when faced with the choice of business with Iran or losing access to the U.S. financial system and the American market, the choice is an easy one.

That means that even if European governments, for instance, support importing oil from Iran, the dominance of the U.S.-based financial system leaves them with very few tools to do so. European policymakers have scrambled to try to maintain a relationship with Iran and have tried to convince Iran to stick with the terms of the 2015 nuclear deal – and Iran is still complying – but that doesn’t mean that European refiners, who are private companies, will run the risk of getting hit by U.S. sanctions by continuing to import oil from Iran. In fact, they began drastically cutting oil purchases from Iran months ago.

The dollar is supreme, it seems.

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The Biggest Risk In Today’s Oil Markets

The Biggest Risk In Today’s Oil Markets

Refinery

The oil market is “tightening up,” but the Trump administration could still spoil oil prices if its aggressive trade war against China drags down economic growth.

The U.S. stepped up the trade conflict with China on Monday when the Trump administration announced $200 billion in tariffs on Chinese imports. The move had been expected for weeks but trade proponents had hoped that the administration would ultimately shelve the idea when push came to shove.

Not only did Trump move forward with punitive tariffs on China, but he also hinted that another $267 billion in tariffs are under consideration.

The trade war could hit the oil and gas markets in several ways. First, the back-and-forth escalation of tariffs could drag down economic growth. The first round of tariffs, which hit $50 billion in Chinese goods, targeted a relatively narrow set of products. But the latest $200 billion in tariffs will raise the cost for a wide array of consumer goods in the U.S., which could slow the economy. Specific industries that are affected by the tariffs will see more concentrated damage.

Second, oil and gas are likely to be specifically affected by the trade war, which wasn’t the case in the previous rounds of tariffs. China announced $60 billion in retaliatory measures on Tuesday, which included a 10 percent tariff on imported LNG from the United States.

The problem with the trade fight is that once the tariffs are in place, there is pressure on both sides not to back down. That doesn’t bode well to a swift resolution of this conflict.

Over the longer-term, the tariff upends the economics of building new LNG export terminals in the United States. China has emerged as the main driver of LNG demand growth, and any new export terminal located anywhere around the world likely has China at the center of its calculations.

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Is The Shale Slowdown Overblown?

Is The Shale Slowdown Overblown?

Permian

The shale industry has hit a bit of a rough patch, with pipeline bottlenecks, cost inflation and a crowded field contributing to a drilling and production slowdown. But many in the industry are confident that the lull will be temporary.

There are several strategies that shale companies are starting to pursue, such as pivoting to other shale plays, curtailing drilling activity, or drilling wells but deferring completions. According to Halliburton’s CEO Jeff Miller, as reported by Argus Media, these strategies are actually relieving a bit of pressure on the Permian basin and the cost inflation that has come with the concentration of drilling and the associated bottlenecks.

As the Permian runs into trouble, shale companies are pivoting to the Eagle Ford, the Bakken, the Niobrara and even Wyoming’s Powder River Basin, according to comments from executives at a recent conference hosted by Barclays.

In fact, a flurry of research reports from top investment banks recently also back up the notion that the shale industry will continue to press forward, despite significant headwinds. In June, the latest month for which solid production data is available, the EIA said that U.S. output rose by 230,000 bpd, and about 165,000 bpd of that total came from Texas – evidence that the Permian has not been suffering from a slowdown, at least as of June.

Goldman Sachs says that the growth will continue, and the bank pointed to the fact that the shale industry has increased spending over the course of this year, above original guidance. “[W]e maintain our outlook for 1.3 mn bpd of US oil production growth in 2018, though with producers increasing FY18 budgets by ~7% in aggregate, there could be potential for upside to our 1.1 mn bpd growth estimate in 2019 as capital spend in 2H18 translates into higher growth into 2019,” Goldman analysts wrote in a note earlier this month. “The impact of these capex increases plus Permian bottlenecks in 2019 are likely to be key.”

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Why WTI Could Crash In The Coming Weeks

Why WTI Could Crash In The Coming Weeks

Texas Oil

West Texas Intermediate could drop to US$65 a barrel later this year on the back of extra maintenance work at U.S. refineries, Tom Kloza from the Oil Price Information Service has warned. Speaking on CNBC, Kloza said this maintenance season was the last chance for many refineries to hop on the new bunker fuel train by boosting their capacity for low-sulfur diesel and fuel oil.

“The next six to seven weeks we’re going to see demand for crude drop by about 1 to 1.5 million barrels a day. It’s refinery maintenance season,” Kloza said.

The new bunker fuel emission rules, effective from 2020, stipulate that only vessels using fuels with sulfur content of 0.5 percent or less will be allowed to roam the oceans. The change is part of the International Maritime Organization’s strategy to cut carbon emissions from maritime transport by half by 2050.

The change has been touted as beneficial for refiners that are equipped to produce low-sulfur fuel oil and diesel, as well as LNG producers. Yet the adjustment will take time, and during this time demand for crude will be lower. How serious the effect on WTI prices will be remains to be seen, however.

For starters, many of those following WTI must have already factored in maintenance season and winter as weakening demand press down on prices. True, Kloza’s comment that this maintenance season will have a more severe impact on prices makes sense, but this additional maintenance should not come as a surprise to market watchers: there has been a lot of coverage about the IMO fuel rules and there’s likely to be even more in the run-up to its entry into effect.

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The U.S. Calls On Russia To Cap Soaring Oil Prices

The U.S. Calls On Russia To Cap Soaring Oil Prices

US

As crucial mid-term congressional elections in November draw near, the Trump administration is feeling the heat over higher oil prices. London-traded global oil benchmark Brent breached the $80 per barrel price point on Wednesday, its highest level since May 2. NYMEX-traded U.S. oil benchmark West Texas Intermediate Crude (WTI) reached over $70 per barrel on Wednesday.

While both benchmarks pared gains on Thursday, moving back from four month highs, as investors focused on risk from the ongoing emerging market crises and trade disputes that could trim demand as supply tightens, high oil prices along with corresponding higher gasoline prices in the U.S. have the opportunity to play havoc with Republican hopes to hold onto key seats in November and retain control in Congress. Such a loss would ensure that Trump’s second half in office would face severe uphill battles with possible heightened calls from Democrats for impeachment.

Amid higher oil prices that could easily settle above $80 per, U.S. Energy Secretary Rick Perry is reaching out to Russia.

“The kingdom (Saudi Arabia), the members of OPEC that are opting their production to be able to make sure that the citizenry of the world does not see a spike in oil price … are to be admired and appreciated, and Russia is one of them,” Perry said after meeting Russian Energy Minister Alexander Novak in Moscow on Wednesday.

The U.S., Russia and Saudi Arabia are also working together to make sure the world has access to affordable energy, Perry added.

Reaching out to Russia

In what can arguably be called an act of concession prompted by worries over spiking global oil prices, Perry said he proposed creating a joint investment fund to develop new projects with Russia, adding the Russian Direct Investment Fund (RDIF) could be part of such a fund. The RDIF said that is supported such a fund.

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Why Can’t Japan Kick Coal And Nuclear?

Why Can’t Japan Kick Coal And Nuclear?

Coal

Earlier this year we reported on a startling anomaly in the global energy market that even the experts couldn’t have predicted. Just one nation, alone against the greening tides, was turning back to coal–Japan. Now, half a year later, a newly released report shows that Japanese financial institutions have funneled US$92 billion into coal and nuclear development—a sum bigger than the gross domestic product of Sri Lanka – in the months between January 2013 and July 2018 alone.

Energy Finance in Japan 2018: Funding Climate Change and Nuclear Risk was commissioned by a climate change-focused non-government organization (NGO) called 350.org based in the United States. The study found that the Japanese finance industry gave US$80 billion in loans and underwriting services, the majority (50 percent) of which went straight to coal development, with the other half split between nuclear and other fossil fuel resource companies. The other US$12 billion went to bonds and shares in the same industries.

Among the 151 Japanese financial institutions analyzed in the Energy Finance in Japan 2018study, only 38 of them were not involved with coal or nuclear energy projects. A similar 350.org study from last year shows that Japanese insurance companies represent a large proportion of investors in domestic and international coal industries. Japan’s single biggest investor in coal for the five-year period studied was Mitsubishi UFJ Financial Group (MUFG), followed by Nippon Life Insurance (NLI) and Nomura Holdings.

These numbers mark a stunning turnaround for Japan, which at one point was almost entirely dependent on nuclear, a far cleaner, more efficient energy source than coal. So why the about turn? There is actually a very clear source of Japan’s changing energy attitudes: the Fukushima Daiichi nuclear disaster.

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Oil Markets Enter “Crucial Period”

Oil Markets Enter “Crucial Period”

Oil

Oil prices edged up this week on lost supply from Iran and Venezuela, although those supply concerns are somewhat offset by worries over demand.

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OPEC downgraded demand while the IEA said in a report that supply outages are “tightening up” the oil market. With Iran sanctions less than two months away, “we are entering a very crucial period for the oil market,” the IEA said.

Oil market remains “fragile,” Russian energy minister says. Russia’s energy minister Alexander Novak said that the global oil market remains “fragile” because of production declines and geopolitical unrest. “This is huge uncertainty on the market – how the countries, which buy almost 2 million barrels per day of Iranian oil will act. Those are Europe, Asia Pacific region … There is a lot of uncertainty. The situation should be closely watched, the right decisions should be taken,” Novak said. He said Russia could step in if the market needs more supply. “Russia has potential to raise production by 300,000 barrels (per day) mid-term.”

U.S. shale companies increased hedging for 2020. U.S. shale companies took advantage of relatively high oil prices in the second quarter to lock in hedges beyond 2019, according to the Houston Chronicle and Wood Mackenzie. Permian shale drillers increased 2020 hedging by 431 percent in the second quarter of this year, an indication that E&Ps are worried about pipeline bottlenecks stretching beyond 2019. WoodMac says the hedging activity that far out is unusual. The risk of hedging is that some companies could eliminate upside exposure if pipelines are completed on time and oil prices rise.

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Perry Tells Russia To Stop Using Energy As Economic Weapon

Perry Tells Russia To Stop Using Energy As Economic Weapon

Nord Stream 2

The United States welcomes competition from Russia on the global energy markets, but Russia can no longer use energy as an economic weapon, U.S. Secretary of Energy Rick Perry saidon Thursday during his meeting with Russia’s Energy Minister Alexander Novak in Moscow.

At the meeting, “Secretary Perry also expressed his disappointment and concern about Russia’s continued attempts to infiltrate the American electric grid,” a statement from the U.S. Department of Energy on the meeting says.

“Secretary Perry made clear that while the United States welcomes competition with Russia in energy markets across Europe, Asia and elsewhere, Moscow can no longer use energy as an economic weapon. The United States is now in a position to offer these nations an alternative source of supply,” the DOE said.

Russian gas giant Gazprom, which holds a third of European natural gas market, has in the past cut supply to Europe via Ukraine due to disputes over pricing, and has prevented customers from reselling natural gas, dominating most of the markets in central and southeastern Europe.

Referring to the controversial Gazprom-led Nord Stream 2 gas pipeline project to Germany, “President Trump has made clear that the United States staunchly opposes the Nordstream 2 Pipeline, which would expand a single-source gas artery deep into Europe,” the DOE said.

“The U.S. supports the desire of European nations to minimize their dependence on Russia as a single energy supplier, and look forward to increasing LNG exports to the region, as announced by President Trump and EU President Juncker in June.”

During his visit to Moscow, when asked if the U.S. could impose sanctions on Nord Stream 2 and if more energy sanctions were being planned, Secretary Perry told reporters “Yes to your first question and yes to your second.” However, sanctions are not where the U.S. and Russia want to go, the AP quoted Secretary Perry as saying.

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The U.S. Is The World’s Top Oil Producer, But For How Long?

The U.S. Is The World’s Top Oil Producer, But For How Long?

oil storage

The U.S. Energy Information Administration (EIA) said on Tuesday that the U.S. likely surpassed Saudi Arabia and Russia earlier this year to become the world’s top crude oil producer. The EIA based its disclosure on preliminary estimates in its Short-Term Energy Outlook which is released every month.

The U.S., in news that was widely covered by media at the time, bypassed Saudi Arabia in February to become the second largest global oil producer, the EIA says. It was the first time in more than 20 years that the U.S. out produced Saudi Arabia. Then in June and August, U.S. output bypassed Russia for the first time since February 1999.

The EIA expects that U.S. crude oil production, most of it light sweet crude, will continue to exceed Russian and Saudi Arabian crude oil production for the remaining months of 2018 and through 2019.

The EIA disclosure comes as oil markets are trying to make sense out of both supply and demand questions as well as geopolitical uncertainty. Since President Trump decided in May to reimpose sanctions against Iran over its nuclear development program, uncertainty has seized the market. The first row of new sanctions against Iran were put in place in August, while more hard-hitting sanctions against the country’s energy sector will take effect on November 4.

Trump’s quandary

With the prospect of as many as 1-2 million barrels per day (bpd) of Iranian barrels being removed from global markets, both Saudi Arabia, likely bowing to pressure from Trump, and also Russia, have already pledged to increase output to keep a ceiling on prices. This uncertainty comes as crucial mid-term congressional elections, slated for November, approach. The concern for Trump and Republican candidates has been higher global oil prices and higher gasoline prices hitting voters in the pocket book and possibly causing voter backlash at the polls.

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Can Oil Demand Really Peak Within 5 Years?

Can Oil Demand Really Peak Within 5 Years?

Eagle Ford

Oil demand could peak as soon as five years from now.

Predicting the point at which the world reaches peak oil demand has become something of a cottage industry. The estimates range, but tend to fall somewhere around 2030 or later. However, two new predictions – just out this week – put peak oil demand as soon as the 2020s, perhaps around 2023, much faster than almost anybody is predicting, not least oil companies and their investors.

A new report from the Carbon Tracker Initiative says that a combination of technology, policy and “necessity” will translate into a peaking of oil demand in the 2020s. By necessity, Carbon Tracker refers to the need to transition to cleaner energy on environmental grounds and the drive to avoid the geopolitical pitfalls of energy dependence. Moreover, the “emerging market leapfrog” ultimately means that oil demand destruction could happen sooner than many people think.

“The motor of change now lies in the emerging markets, which is where all the growth in energy demand lies,” the Carbon Tracker report argues. “They have less fossil fuel legacy infrastructure, rising energy dependency, and are anxious to seize the opportunities of the renewables age. We believe it highly likely therefore that emerging markets will increasingly source their energy demand growth from renewable sources not from fossil fuels.”

The adoption of renewables at such a blistering rate will only be possible because costs continue to fall. Carbon Tracker argues that the rate of adoption for solar PV, wind, batteries and electric vehicles will follow an “s-curve,” referring to a period of slow growth that suddenly morphs into a steep growth curve after it passes a certain threshold.

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Why The U.S. Is Suddenly Buying A Lot More Saudi Oil

Why The U.S. Is Suddenly Buying A Lot More Saudi Oil

oil storage

For a few months now, OPEC has been boosting production to ease concerns about high oil prices amid expected supply losses from Venezuela and Iran.

The cartel’s largest producer and exporter, Saudi Arabia, has been specifically targeting an increase in crude oil exports to the most transparent market, the United States, which reports crude oil imports and inventory levels every week.

On the one hand, the Saudis are looking to regain their foothold in the American market after having cut shipments to the United States to a 30-year-low at the end of last year, when OPEC’s efforts to erase the global oil glut were in full swing.

On the other hand, the Saudis are responding to the demands of their staunch ally U.S. President Donald Trump, who has repeatedly slammed OPEC for the high gasoline prices, urging the cartel in early July to “REDUCE PRICING NOW!”

In the week to August 31, the four-week average of U.S. crude oil imports from Saudi Arabia exceeded 1 million bpd for the first time since June 2017, data by the EIA showed.

At that time last year, Saudi Arabia started to purposefully reduce its exports to the United States, where inventory data and refinery runs are reported every week. Those reports influence the price of oil and investor sentiment.

In the last week of October 2017, the four-week average of U.S. imports from Saudi Arabia was just 506,000 bpd—almost half of the four-week average of 1.009 million bpd for the last week of August this year.

In October 2017, U.S. imports from Saudi Arabia stood at 582,000 bpd—the lowest level since November 1987, as OPEC’s leader, its fellow OPEC members, and Russia-led non-OPEC allies part of the production cut pact were working to drain the global oil glut that weighed on oil prices and on the incomes of oil producing countries.

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How Much Longer Can The Saudis Suppress Oil Prices?

How Much Longer Can The Saudis Suppress Oil Prices?

Riyadh

When earlier this week reports emerged that Saudi Arabia is striving to keep oil prices in the range of US$70-80 per barrel in a bid to balance its need for higher prices with President Trump’s insistence that oil is kept within reasonable bounds, few must have been surprised.

OPEC’s leader and passionate supporter of Trump’s policy towards Iran had few useful moves in an environment featuring fast-rising prices and unhappy consumers from India to the States. It found itself between the rock of high prices, necessary for the Kingdom to pursue the widely advertised economic reforms under its Vision 2030 program, and the hard place of its closest ally’s own agenda, which unsurprisingly involved lower prices at the pump ahead of the midterm elections this November.

According to some, the hard place will disappear after the midterm elections. S&P Global Platts senior writer on oil Herman Wang is among them. In a recent analysis, Wang wrote that Trump’s pressure on Riyadh to keep a cap on prices could dissipate after the elections, potentially offering Saudi Arabia the freedom to adjust its production any way it sees fit to get to a more desirable price level.

Yet the extent of this freedom remains an open question: Wang notes that the midterm elections are a day after the entry into effect of the second round of U.S. sanctions against Iran, and additional supply will need to be provided to soften the blow. Trump has already authorized the sale of 11 million barrels from the Strategic Petroleum Reserve in November, but this will not be enough: S&P Platts analysts estimate the sanctions could take 1.4 million bpd of Iranian crude off the global market. Someone else will have to step in and pump more if prices are to stay within the current range.

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The Next Global Oil Hotspot

The Next Global Oil Hotspot

offshore rig Bonga Shell

There are at least 41 billion untapped barrels of crude oil in sub-Saharan Africa, the U.S. Geological Survey estimated two years ago. During the downturn, oil companies bought licenses there and waited for the price environment to improve to advance their drilling plans. Independents such as Tullow Oil and Kosmos Oil expanded on the continent alongside supermajors such as BP. Now, these drilling plans are gathering pace.

Uganda is one of the hot spots. A newcomer on the oil scene, the landlocked country has welcomed Tullow Oil, CNOOC, and Total in its oil-rich regions. The country’s government sees investments of US$15-20 billion made into its oil industry during the next three to four years and plans to build a pipeline to the Tanzanian coast and a refinery to jumpstart an oil industry, even though no oil is being produced in Uganda yet.

Senegal is another focus of attention. The SNE project, comprising three offshore blocks, might contain up to 1.5 billion barrels of crude, Australian explorer FAR, one of the partners developing the SNE, said. The partnership also includes ConocoPhillips, Cairn Energy—the operator—and Senegal’s oil company Petrosen. The final investment decision on the project is expected next year. The first phase of the project would tap an estimated 240 million barrels.

Senegal is also a potential major gas producer. Kosmos and BP—partners in the offshore gas discovery Tortue that extends into Mauritania waters—expect a final investment decision (FID) for the Greater Tortue project around the end of 2018 and are aiming for first gas in 2021.

Kenya is another African oil hopeful. First oil in Kenya was found in 2012 by Tullow Oil and in June this year the east African country even started exporting crude under a pilot scheme that would see 2,000 bpd trucked to the port city of Mombasa and stored until there is enough to be loaded on tankers and shipped abroad.

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Shale Won’t Trigger The Next Financial Crisis

Shale Won’t Trigger The Next Financial Crisis

Gulf of Mexico

Many think that debt and negative cash flow by U.S. shale companies will crash the global financial system. I believe the opposite is more likely, that a developing financial crisis may crash oil prices and test the survival of shale plays.

In The Next Financial Crisis Lurks Underground, Bethany McLean argues that the U.S. energy boom is on shaky ground because of excessive debt and failure to show profits after a decade of drilling. This thoughtful op-ed raises concerns that many have expressed since the advent of tight oil production.

The problem with her thesis is that debt from the U.S. oil sector is just not big enough to crash the global financial system. Losses and bankruptcies in that sector in 2015-16 were substantial and yet, did not threaten the stability of world financial markets. In the improbable worst case scenario, the U.S. government would step in as it did for the auto industry in 2009.

Higher oil prices are inevitable at some time sooner than later because of under-investment over the last several years of low prices. This is compounded by lack of big discoveries and ever-present geopolitical supply interruptions and outages.

Ms. McClean correctly identifies the link between near-zero interest rates and the rise of tight oil financing. She fails, however, to acknowledge the 2004-2008 plateau of world production at the same time that demand from China greatly increased. This pushed oil prices to more than $100/barrel–the main factor that made tight oil development feasible. Because that price trend continued for 4 years, supply overshoot led to the oil-price collapse of late 2014.

The two price cycles since then are shown in Figure 1 as a cross plot of oil price vs comparative inventory (current oil + product stock levels minus the 5-year average of those stock levels).

(Click to enlarge)

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Olduvai II: Exodus
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