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Prices should fall to around $30 once the empty nature of an OPEC-plus-Russia production freeze is understood. A return to the grim reality of over-supply and the weakness of the world economy could push prices well into the $20s.

A Production Freeze Will Not Reduce The Supply Surplus

An OPEC-plus-Russia production cut would be a great step toward re-establishing oil-market balance. I believe that will happen later in 2016 but is not on the table today.

In late February, Saudi oil minister Ali Al-Naimi stated categorically, “There is no sense in wasting our time in seeking production cuts. That will not happen.”

Instead, Russia and Saudi Arabia have apparently agreed to a production freeze. This is meaningless theater but it helped lift oil prices 37 percent from just more than $26 in mid-February to almost $36 per barrel last week. That is a lot of added revenue for Saudi Arabia and Russia but it will do nothing to balance the over-supplied world oil market.

The problem is that neither Saudi Arabia nor Russia has greatly increased production since the oil-price collapse began in 2014 (Figure 1). A freeze by those countries, therefore, will only ensure that the supply surplus will not get worse because of them. It is, moreover, doubtful that Saudi Arabia or Russia have the spare capacity to increase production much beyond present levels making the proposal of a freeze cynical rather than helpful.

(Click to enlarge)

Figure 1. Incremental liquids production since January 2014 by the United States plus Canada, Iraq, Saudi Arabia and Russia. Source: EIA & Labyrinth Consulting Services, Inc. (click image to enlarge)

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A Secret About Oil You Won’t Find Anywhere Else

March 2, 2016

A Secret About Oil You Won’t Find Anywhere Else

This is going to be a far larger problem than Wall Street realizes.

In early 1983 – the first week of February, to be precise – the inventory of crude oil in the U.S. reached an all-time economic high. I say “economic high” because nominal supply of crude oil has since far surpassed its 1983 number. In fact, current U.S. crude-oil inventory (504 million barrels) is the actual all-time high. Supply today is about 150 million barrels more than total supply in 1983.

Obviously, we have a lot more oil in storage than we’ve ever had before – about 40% more. But nominal supply numbers aren’t as important as you might think. Demand for crude oil in our economy has grown a lot since 1983.

To make a bona fide “apples-to-apples” comparison to today’s supply glut, we should measure the amount of oil supply relative to consumption. In 1983, the number of days’ worth of consumption in the U.S. hit a peak of 33.4. That’s the largest amount of crude oil we’ve ever held in private storage, relative to demand. That’s the all-time highest amount of “economic supply” – supply in relation to actual demand.

Much like today’s glut, the glut of oil from the mid-1980s was caused by a sustained increase in U.S. production. More oil was coming from Alaska’s North Slope. The Trans-Alaska pipeline began operation in July 1977. It had an immediate effect on total U.S. supply.

U.S. oil production grew from 227 million barrels per month in 1977 to almost 270 million barrels per month in July 1986 – an increase in monthly production of 18.9% over nine years. As you might remember, gasoline prices fell to well below $1 per gallon… and we saw a commercial real estate and banking crisis in Texas. Houston real estate didn’t recover for 20 years.

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

Peak Oil: Just A Distraction Pt 2

February 16, 2016

Peak Oil: Just A Distraction Pt 2

In the end, does the choice of words really matter?
The “Yes, we’ve reached Peak Oil” versus the “No, we have not” is a distraction—and I’ve done my part to contribute.

But without recognizing and accepting the simple truth that we’re drawing down a finite and depleting resource which necessitates almost unimaginable adaptations and transitions to Plan B, the limits of human ingenuity and technological prowess will inevitably be reached if we keep tweaking the one finite resource mankind has relied upon more than any other.

And thus the heart of the matter.

The wells won’t run dry next week or next month. The sky is not falling. But the peak rate of conventional crude oil production was reached a decade ago. That’s an important fact glossed over by those disputing the message about our future oil supply. For all the Happy Talk courtesy of fossil fuel industry cheerleaders picking nits, that fact alone is an enormous problem.

The higher production totals of recent years are a genuinely impressive achievement, and should not be discounted. But shale production has shown itself to be what peak oil advocates said it would be: a costly, time-consuming, technology-intensive effort with a relatively limited shelf life.

Today’s low, low prices and declining demand owing to current economic conditions, when combined with a less than enthusiastic investment climate and the high debt levels carried by most oil producing companies, is squeezing that pipeline. The “glut” spoken of is a reflection of these factors much more so than a testament to how much oil industry can produce with just a snap of the fingers.

The diminished funding has resulted in severe reduction in exploration projects. They won’t start back up overnight if or when economic conditions improve.

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

OPEC Will Not Blink First

February 11, 2016

OPEC Will Not Blink First

An OPEC production cut is unlikely until U.S. production declines by about another million barrels per day (mmbpd). OPEC won’t cut because it would accomplish nothing beyond a short-term increase in price. Carefully placed comments by OPEC and Russian oil ministers about the possibility of production cuts achieve almost the same price increase as an actual cut.

Bad News About The Oil Over-Supply from IEA and EIA

The International Energy Agency (IEA) and U.S. Energy Information Administration (EIA) shook the markets yesterday with news that the world’s over-supply of oil has gotten worse rather than better in recent months. IEA data shows that the global liquids over-supply increased in the 4th quarter of 2015 to 2.24 million barrels per day (mmbpd) from 1.62 mmbpd in the 3rd quarter (Figure 1).

Figure 1. IEA world liquids market balance (supply minus demand). Source: IEA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

Supply increased 70,000 bpd and demand decreased 550,000 bpd for a net increase in over-supply of 620,000 bpd. The sharp decline in demand is perhaps the most troubling aspect of IEA’s report. The agency forecasts tepid demand growth of only 1.17 mmbpd in 2016 compared with 1.61 mmbpd in 2015. The weak global economy is the culprit.

EIA’s monthly data showed the same trend. Over-supply in January increased to 2.01 mmbpd from 1.35 mmbpd in December, a 650,000 bpd net change (Figure 2). Supply fell by 370,000 bpd but consumption dropped by a stunning 1.02 mmbpd.

Figure 2. EIA world liquids market balance (supply minus consumption). Source: EIA and Labyrinth Consulting Services, Inc.

(Click image to enlarge)

The January 2016 Oil Price Head-Fake

Recent comments about a possible OPEC cut were largely responsible for the late January “head-fake” increase in oil prices (Figure 3). WTI futures increased 27 percent from $26.55 to $33.62 per barrel between January 20 and 29.

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

The Most Ominous Warning That Oil Storage Is About To Overflow Has Arrived

February 11, 2016

The Most Ominous Warning That Oil Storage Is About To Overflow Has Arrived

It was just last week when we said that Cushing may be about to overflow in the face of an acute crude oil supply glut.

“Even the highly adaptive US storage system appears to be reaching its limits,” we wrote, before plotting Cushing capacity versus inventory levels. We also took a look at the EIA’s latest take on the subject and showed you the following chart which depicts how much higher inventory levels are today versus their five-year averages.

And now with major US refiners dumping crude, as we detailed overnight, those fears are surging.

U.S. Energy Information Administration data on Wednesday showed inventories at the Cushing, Oklahoma delivery hub hit a record 64.7 million barrels last week – just 8 million barrels shy of its theoretical limit – stoking concerns that tanks may overflow in coming weeks.

And now, given the “super-contango” in 3-month it is extremely clear that storage concerns are at their highest in 5 years…

Simply put, as one trader noted, speculators are now “making the leap to Cushing storage never being more full… will actually overfill, or even stop taking crude oil deliveries outright.”

It was just last week when we said that Cushing may be about to overflow in the face of an acute crude oil supply glut.

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

Oil Production Is Going To Drop And Oil Prices Are Likely To Increase

February 8, 2016

Oil Production Is Going To Drop And Oil Prices Are Likely To Increase

Rystad Energy, an independent oil and gas consulting services and business intelligence data firm in Oslo, Norway, has online, a wealth of information concerning upstream oil production projects and costs. Some of it is a bit dated but some of their charts date from late 2015.

The two below Rystad charts were published by CNN Money on November 23, 2015.

This is overall or average cost, not marginal cost. It cost Canada $41 to produce a barrel of oil but only cost Russia $17.20. I guess that is why Canada is cutting back but Russia is not.

Here is the breakdown between capital expenditures and operational expenditures. Why would the United Kingdom’s operational expenditures be two and one half times those of Norway? After all, they are both drilling basically the same oil field.

So why is not the price of oil having a more dramatic effect on production? Well it is, it just takes a while. Here are some plans from about a year and a half ago, when the price of oil was much higher.

Rystad published the two below charts in their US Shale Newsletter in January 2015 but the data dates from the 4th quarter of 2014, just as the price of oil had started to drop.

At that time Bakken (ND) had a break even price of $53 while Eagle Ford oil had a break even price of $42 and Eagle ford condensate a break even price of $50.

The below chart, from the same newsletter, assumes $90 a barrel oil.

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

The IEA’s Oil Production Predictions for 2016

February 4, 2016

The IEA’s Oil Production Predictions for 2016

The IEA Oil Market Report, full issue, is now available to the public. Some interesting observations:

Non-OPEC oil supplies are nevertheless seen sharply lower in December. Overall supplies are estimated to have slipped by more than 0.6 mb/d from the month prior, to 57.4 mb/d. A seasonal decline in biofuel production, largely due to the Brazilian sugar cane harvest, of nearly 0.4 mb/d was the largest contributor to December’s drop. Production in Vietnam, Kazakhstan, Azerbaijan and the US was also seen easing from both November’s level and compared with a year earlier. Persistently low production in Mexico and Yemen were other contributors to the year-on-year decline.

As such, total non-OPEC liquids output slipped below the year earlier level for the first time since September 2012. A production surge in December 2014 inflates the annual decline rate, but the drop is nevertheless significant should these estimates be confirmed by firm data. Already in November, growth in non-OPEC supply had slipped to 640 kb/d, from as much as 2.9 mb/d at the end of 2014, and 2.4 mb/d for 2014 as a whole. For 2015, supplies look likely to post an increase of 1.4 mb/d for the year, before contracting by nearly 0.6 mb/d in 2016. A prolonged period of oil at sub-$30/bbl puts additional volumes at risk of shut in as realised prices fall close to operating costs for some producers.

IEA Forecast 2

The IEA has every month of 2016 Non-OPEC production below the year over year 2015 production.

IEA Non-OPEC YoY

For the past four years, North America has carried the load as far as the increase in Non-OPEC production is concerned. Now the IEA believes North America will suffer the lions share of the decline in 2016.

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

Oil Markets Are Balancing Faster Than IEA Would Have Us Believe

January 22, 2016

Oil Markets Are Balancing Faster Than IEA Would Have Us Believe

Fundamentals point toward market balance but pessimism is dragging oil prices down. IEA has apparently succumbed to this negativity but their data suggests that things are getting better, not worse.

In a business-as-usual world in which nothing unusual happens, the world will be close to market balance some time in 2016. If anything unusual happens, all bets are off and oil prices could rebound much faster than anyone imagines.

A Year of Extreme Price Cycles

NYMEX WTI futures prices have fallen 34 percent since October 2015, and are below $30.00 per barrel for the first time since 2003. Prices have gone through four cycles of 30-40 percent increases and decreases over the past year (Figure 1).

Figure 1. NYMEX WTI futures prices and price cycles in 2015. Source: EIA, Bloomberg & Labyrinth Consulting Services, Inc.

(Click image to enlarge)

The two price rallies from March-to-June and from August-to-October were based largely on hope and the price decline from June-to-August represented a return to the reality of supply and demand fundamentals.

The most recent price decline that began in October is a bit different. Here, confirmation bias has replaced critical thinking about the oil market. The ruling paradigm is that prices are likely to stay low for years or even for decades and evidence is easily found that favors and confirms this bias. I believe that this paradigm is incorrect.

Despite troubling signals of structural weakness in the global economy, data suggests that the oil market is stumbling toward balance. Although I have said that prices must go lower in order to flush out the zombie producers, IEA’s statement in the January Oil Market Report that the world could drown in over-supply is based more on sentiment and pessimism than on data.

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

Why oil under $30 per barrel is a major problem

January 19, 2016

Why oil under $30 per barrel is a major problem

A person often reads that low oil prices–for example, $30 per barrel oil prices–will stimulate the economy, and the economy will soon bounce back. What is wrong with this story? A lot of things, as I see it:

Oil producers can’t really produce oil for $30 per barrel

A few countries can get oil out of the ground for $30 per barrel. Figure 1 gives an approximation to technical extraction costs for various countries. Even on this basis, there aren’t many countries extracting oil for under $30 per barrel–only Saudi Arabia, Iran, and Iraq. We wouldn’t have much crude oil if only these countries produced oil.

Figure 1. Global breakeven prices (considering only technical extraction costs) versus production. Source: Alliance Bernstein, October 2014

2. Oil producers really need prices that are higher than the technical extraction costs shown in Figure 1, making the situation even worse.

Oil can only be extracted within a broader system. Companies need to pay taxes. These can be very high. Including these costs has historically brought total costs for many OPEC countries to over $100 per barrel.

Independent oil companies in non-OPEC countries also have costs other than technical extraction costs, including taxes and dividends to stockholders. Also, if companies are to avoid borrowing a huge amount of money, they need to have higher prices than simply the technical extraction costs. If they need to borrow, interest costs need to be considered as well.

3. When oil prices drop very low, producers generally don’t stop producing.

There are built-in delays in the oil production system. It takes several years to put a new oil extraction project in place. If companies have been working on a project, they generally won’t stop just because prices happen to be low. One reason for continuing on a project is the existence of debt that must be repaid with interest, whether or not the project continues.

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

(Re-)Covering Oil and War

January 15, 2016

(Re-)Covering Oil and War

The first thing that popped into our minds on Tuesday when WTI oil briefly broached $30 for its first $20 handle in many years, was that this should be triggering a Gawdawful amount of bets, $30 being such an obvious number. Which in turn would of necessity lead to a -brief- rise in prices.

Apparently even that is not so easy to see, since when prices did indeed go up after, some 3% at the ‘top’, ‘analysts’ fell over each other talking up ‘bottom’, ‘rebound’ and even ‘recovery’. We’re really addicted to that recovery idea, aren’t we? Well, sorry, but this is not about recovering, it’s about covering (wagers).

Same thing happened on Thursday after Brent hit that $20 handle, with prices up 2.5% at noon. That too, predictably, shall pass. Covering. On this early Friday morning, both WTI and Brent have resumed their fall, threatening $30 again. And those are just ‘official’ numbers, spot prices.

If as a producer you’re really squeezed by your overproduction and your credit lines and your overflowing storage, you’ll have to settle for less. And you will. Which is going to put downward pressure on oil prices for a while to come. Inventories are more than full all over the world. With oil that was largely purchased, somewhat ironically, because prices were perceived as being low.

Interestingly, people are finally waking up to the reality that this is a development that first started with falling demand. China. Told ya. And only afterwards did it turn into a supply issue as well, when every producer began pumping for their lives because demand was shrinking.

All the talk about Saudi Arabia’s ‘tactics’ being aimed at strangling US frackers never sounded very bright. By November 2014, the notorious OPEC meeting, the Saudi’s, well before most others including ‘analysts’, knew to what extent demand was plunging. They had first-hand knowledge. And they had ideas, too, about where that could lead prices. Alarm bells in the desert.

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

Doom and Gloom for North American Oil Producers

January 1, 2016

Doom and Gloom for North American Oil Producers

Oil Prices

To the dismay of U.S. shale producers, oil prices continue their long slow slide into the abyss. Perhaps the current price of $35 per barrel – an 11 year low – is the final destination. More than likely, however, it’s a brief reprieve before the next descent.

Photo credit: Mohammed Ameen / Reuters

Oil exporters, including Saudi Arabia and Russia, have maintained high production rates. Their goal is to bankrupt U.S. shale companies and preserve market share. At the same time, oil demand is tapering as the global economy cools.

Global crude oil and condensate (c+c) production as of June 2015. In record high territory.

The combination of high production and declining demand has resulted in excess supply, and lower prices. The trend of lower prices won’t change until either demand increases or production decreases. At the moment, it doesn’t appear that either of these factors will change any time soon.

So how low can oil prices go? If you recall, in the late-1990s, oil prices dropped below $20 per barrel. Goldman Sachs thinks we’ll see $20 per barrel oil again.

Obviously, oil prices can’t go to zero. However, this offers little consolation for the many oil companies that borrowed gobs of money from Wall Street to leverage development of fracked wells that require $60 per barrel oil to pencil out.

Contrary to widespread expectations, Russian production has proved more than resilient in the face of low prices. The decline in the ruble and high export taxes on oil (which are based on threshold prices) have left Russian producers in a competitive situation.

Declining Hedges

So while it isn’t possible for oil prices to go to zero. It is possible for the stock prices of oil companies to go to zero. In fact, over the next 12 months there could be a rash of bankruptcy’s that results in delisted, worthless shares.

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

Doom and Gloom for North American Oil Producers

December 30, 2015

Doom and Gloom for North American Oil Producers

Lower Oil Prices

excess natural gas burns southeast of Baghdad Photo credit: Mohammed Ameen / Reuters

1-World3 Global crude oil and condensate (c+c) production as of June 2015. In record high territory.

So how low can oil prices go? If you recall, in the late-1990s, oil prices dropped below $20 per barrel. Goldman Sachs thinks we’ll see $20 per barrel oil again.

2-Russia3 Contrary to widespread expectations, Russian production has proved more than resilient in the face of low prices. The decline in the ruble and high export taxes on oil (which are based on threshold prices) have left Russian producers in a competitive situation.

Declining Hedges

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

Lower Oil Prices Are Shaking the World

December 26, 2015

Lower Oil Prices Are Shaking the World

The long-term effects will echo for a decade or more.

Oil prices fell by over half from June 2014 to January 2015 (Brent: $110 to $50), then another one-third since (to $35). Natural gas and coal prices have also plunged, partially due to the same forces but also from substitution.

These are the results from a modest slowing of demand growth and — more importantly — the decision of the Saudi Princes to wage the first financial waragainst next-gen oil producers, those that tap oil sands, shale fields, and deep ocean deposits.

This is how Bloomberg put it:

Saudi Arabia won’t be satisfied with another temporary rebound in oil prices, such as the one that occurred last spring: Their U.S. competitors would just increase output again. They must inflict permanent damage by demonstrating to investors that with shale, they can’t bet on any kind of predictable return.

This will not end quickly; the list of casualties will be long. Goldman found $1 trillion in “stranded” or “zombie” investments in oil fields — a year ago at $70 oil. At $35 oil the total would be much larger.

The end will come with the bankruptcy or restructuring of many next-gen oil corporations, followed by a newly empowered (and perhaps expanded) OPEC cutting production to bring spare capacity back to average (3 or 4 million b/day) — providing a valuable production cushion for the world economy’s supply of this vital input. The long-term effects will echo for a decade or more: a higher cost of capital for and depressed risk-taking in the petroleum and coal industries.

The bond market has already begun to price in the coming bankruptcies of oil and natural gas Exploration and Production companies. But the geopolitical implications remain largely unexplored.

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

Oil Forecast From a Reputable Firm

December 7, 2015

Oil Forecast From a Reputable Firm

The below charts were derived from the data published by a very reputable oil and gas analyst and forecaster in Texas. Because the firm charges for their data forecast I am at not at liberty to disclose their name.

All data through 2014 is the actual price and production data. Data from 2015 through 2025 is forecast data. This data came out over a month ago so some of 2015 is forecast data.

All production data is in million barrels per day and is Crude + Condensate except the World forecast which includes NGLs. Notice also that all U.S. data dates from 2008 while all other data begins with 2013.

Oil price drops only slightly next year then rises in 2017 and 2018. Then it levels out for about 5 years before rising sharply in 2024 and 2025. My guess, and it is just my guess, is that the world begins to realize that oil production will never rise again.

This firm clearly has world oil production peaking in 2015 then dropping for five years before leveling out to up slightly for three years. Then resuming its decline in 2024 and 2025.

They have the US declining only slightly in the next two years then starting a slow climb until we peak in 2021 at a point just 40,000 barrels per day above the previous 2015 peak.

They have the Gulf of Mexico peaking in 2021 at 2.13 million bpd. The Permian peaks in 2020 at 1.9 million bpd. Eagle Ford peaks in 2019 abd 2020 at 1.51 million bpd and the Bakken peaks in 2021 abd 2020 at 1.36 million bpd.

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

Peak Oil: Right Again [Pt 2]

December 3, 2015

Peak Oil: Right Again [Pt 2]

IMGP1044

We continue with an examination of the statements offered in a recent example of cherry-picked nonsense, an article entitled: “Earth Is An Oil-Producing Machine — We’re Not Running Out.” The fine art of misleading the uninformed….

Delighted with the discovery that “Earth is actually an oil-producing machine” [a secret all these eons!], our cheerleading scribe then confidently bases that bold proclamation on “[r]esearch from the last decade.”

As noted in my most recent post, “the ‘research’ relied upon by the author were two related and generously interpreted articles from 2008—neither of which appear to have been elaborated upon since then.” Those articles were based on research conducted in 2002 and again in 2005, as explained below.

On a roll now, the writer then adds: “In other words, as Science magazine has reported, the ‘data imply that hydrocarbons are produced chemically’ from carbon found in Earth’s mantle.’” Excellent foundation and a rock-solid piece of substantiation—but for the fact it’s more than a bit misinterpreted [if that matters].

An at best marginally relevant, minuscule sampling of “data” which arguably implies something to dispute established evidence—albeit in a vague sort of way—is so much more weighty than decades of substantive yet contradictory research on point, isn’t it? We have all the utterances we need … especially if we ignore the principal scientist’s disclaimer [as quoted in Mother Jones]:

Giora Proskurowski, a researcher at Woods Hole Oceanographic Institution, recently discovered small amounts of hydrocarbons forming through an abiotic process deep in the Atlantic. The abiotic oil believers have seized on his findings, but Proskurowski says sorry—talk of bottomless, Saudi-free oil is ‘a pipe dream’

This begs at least one question: Is a “pipe dream” for new sources of oil reasonably close to could possibly being sort of “plentiful” nonetheless, if facts weren’t a consideration … perhaps?

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

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