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Saudi Arabia’s Oil-Price War Is With Stupid Money
Saudi Arabia’s Oil-Price War Is With Stupid Money
Saudi Arabia is not trying to crush U.S. shale plays. Its oil-price war is with the investment banks and the stupid money they directed to fund the plays. It is also with the zero-interest rate economic conditions that made this possible.
Saudi Arabia intends to keep oil prices low for as long as possible. Its oil production increased to 10.3 million barrels per day in March 2015. That is 700,000 barrels per day more than in December 2014 and the highest level since the Joint Organizations Data Initiative began compiling production data in 2002 (Figure 1 below). And Saudi Arabia’s rig count has never been higher.
Figure 1. Saudi Arabian crude oil production and Brent crude oil price in 2015 U.S. dollars. Source: U.S. Bureau of Labor Statistics, EIA and Labyrinth Consulting Services, Inc.
Market share is an important part of the motive but Saudi Minister of Petroleum and Mineral Resources Ali al-Naimi recently emphasized that “The challenge is to restore the supply-demand balance and reach price stability.” Saudi Arabia’s need for market share and long-term demand is best met with a growing global economy and lower oil prices.
That means ending the over-production from tight oil and other expensive plays (oil sands and ultra-deep water) and reviving global demand by keeping oil prices low for some extended period of time. Demand has been weak since the run-up in debt and oil prices that culminated in the Financial Collapse of 2008 (Figure 2 below).
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OPEC Says US Oil Boom Will End This Year
OPEC Says US Oil Boom Will End This Year
OPEC says the demand for oil – its oil – will rise during 2015 because the cartel is winning its price war against US shale producers by driving them out of business.
“Higher global refinery runs, driven by increased [summer] seasonal demand, along with the improvement in refinery margins, are likely to increase demand for crude oil over the coming months,” the cartel said in its Monthly Market Report, issued, April 16.
OPEC forecasts demand at an average of 29.27 million barrels per day in the first quarter 2015, a rise of 80,000 bpd from its previous prediction made in its March report. At the same time, it said, the cartel’s own total output will increase by only 680,000 barrels per day, less than the previous expectation of 850,000 barrels per day, due to lower US and other non-OPEC production.
Related: Latest EIA Predictions Should Be Taken With More Than A Pinch Of Salt
The United States appears to have been OPEC’s chief target when, at its November meeting in Vienna, its members, under Saudi leadership, agreed to maintain production at 30 million barrels per day despite falling prices caused by an oversupply of oil.
Average global oil prices began plunging in late June 2014 from more than $110 per barrel to a low of around $50 in January. They’ve now settled to around $60, and Laurence Fink, the CEO of Black Rock, the world’s largest asset manager,said in an interview April 16 on CNBC that the price of a barrel of oil probably would go no lower than $60 this year, but also rise no higher than $80.
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The Latest Media Attempts To Suppress Oil Prices
The Latest Media Attempts To Suppress Oil Prices
It started with the Iranian supply overhang and has grown louder by the day in the media. While we were all supposed to be cowering in fear at the 1MB/D that would be coming from Iran any day, it emerged instead that not only is the deal in doubt, as the only real agreement was to agree to say there was an agreement, but any such additional supply won’t occur imminently. Far from it.
That sanctions will only be lifted through intensive verification is now the reality and this process will take time. And even that isn’t fully agreed upon as we now learn. Be that as it may, we wake up yet again with more evidence that the Cushing cries have all but died and now shifted to the forward curve which has flattened. This is the normal course after a price collapse as the market begins to gain confidence that it will rebalance soon.
Hedging by producers is now also playing a role as the financially strapped ones are pressuring prices to lock in whatever little profit they have, ahead of the October credit redetermination, in order to preserve liquidity. A further source of pressure is articles now seeping out at an increasing rate in the media regarding OPEC increasing production (which only appears as a response to much higher than anticipated demand, disproving what the same media asserted months ago). OPEC’s strategy will most likely be short-lived but now, if one can believe it, we’re supposed to buy the latest “worrying news” of rig counts increasing?
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Is Saudi Arabia Setting The World Up For Major Oil Price Spike?
Is Saudi Arabia Setting The World Up For Major Oil Price Spike?
In order to maintain a grip on market share by pushing U.S. shale producers out of the market, Saudi Arabia (and OPEC) is willing to use up its spare capacity. That could lead to a price spike.
Saudi Arabia produced 10.3 million barrels per day in the month of March, a 658,000 barrel-per-day increase over the previous month. That is the highest level of production in three decades for the leading OPEC member. On top of the Saudi increase, Iraq boosted output by 556,000 barrels per day, and Libya succeeded in bringing 183,000 barrels per day back online. OPEC is now collectively producing nearly 31.5 million barrels per day, well above the cartel’s stated quota of just 30 million barrels per day.
Related: Latest EIA Predictions Should Be Taken With More Than A Pinch Of Salt
The enormous increase in production comes into a market that is still dealing with extraordinarily low prices. The move could be interpreted as a stepped up effort on behalf of Saudi Arabia to maintain market share at all costs. More output will prolong the slump in oil prices, which will force even more U.S. shale production out of the market. The signs of success are already showing – the U.S. is set to lose 57,000 barrels per day in production in May, and rig counts are still falling.
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Latest EIA Predictions Should Be Taken With More Than A Pinch Of Salt
Latest EIA Predictions Should Be Taken With More Than A Pinch Of Salt
The U.S. government released its landmark Annual Energy Outlook on April 14, with some rather bold predictions about the future of oil and gas.
The EIA released the 2015 edition of its report at a Washington conferencehosted by the Center for Strategic and International Studies. Here are a few nuggets from the much-anticipated report:
• In its Reference Case, U.S. oil production continues to rise for the rest of the decade, keeping prices from spiking. As a result, the EIA thinks oil prices will stay below $80 per barrel through 2020.
• The U.S. becomes a net exporter of energy in 2019 as higher production combines with lower demand from improved vehicle efficiency
• Shale production peaks and begins to decline after 2020
• OPEC manages to offset falling U.S. production in the next decade with increases in output coming from several Middle Eastern countries
• The EIA is so confident about adequate supplies that it does not foresee oil prices surpassing $100 per barrel again until 2028
• Still, there is a lot of variation among the different scenarios. In its Low Oil Price case, Brent stays at $52 per barrel in 2015, but in its High Oil Price case, it surges to $122 this year
• Electricity from renewable energy increases by 72 percent between 2013 and 2040, with its share of the electricity market rising from 13 to 18 percent
Related: Off-Grid Solar Threatens Utilites In The Next Decade
These projections provide some markers for the road ahead, but the EIA is notoriously off the mark when it comes to accurately forecasting what comes next for energy markets. It routinely extrapolates current trends forwards, assuming very little will change.
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Who’s To Blame For The Oil Price Crash?
Who’s To Blame For The Oil Price Crash?
When we think of the recent drop in oil prices, the question is not only who started it, but who’s responsible for keeping the prices falling.
Probably no one would dispute that the price plunge began with the eager and copious production of oil from shale formations in the United States. From the American perspective, that was beneficial because it was bringing energy self-sufficiency to a country with the reputation as the world’s largest importer of oil.
Despite unproven concerns about hydraulic fracturing, or fracking, a common way to extract oil and gas from underground shale rock, the practice has proven extremely productive. And that’s the source of the oil glut that began driving down prices in late June 2014.
Related: Oil Rebound May Come Sooner Than Expected
Even one of fracking’s biggest supporters, legendary oil man T. Boone Pickens, blames the US shale boom for triggering the price slough that’s been hammering the energy industry. He’s doesn’t subscribe to the environmental concerns about fracking, but he says he can also recognize when his industry has latched on to too much of a good thing.
“I’ve fracked over a thousand wells,” Pickens, the chairman of BP Capital Management, said March 23 at a panel discussion in Monterey Calif. “I’ve never had a failure on one of them. … Texas, Oklahoma lead in fracking wells and it has been a great success for both those states.”
Yet Pickens thinks it’s time for US companies to take a break from their frantic production to allow oil prices to achieve some balance. In an interview with theFinancial Times published March 18, he said shale companies have “overproduced,” and that it’s up to them to rein in output to help restore oil prices to a more profitable level.
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Oil Market Knee-Jerk Reaction To Nuclear Deal Unjustified
Oil Market Knee-Jerk Reaction To Nuclear Deal Unjustified
A group of exhausted diplomats did the unthinkable. The P5+1 countries and Iran came to a massive and historic framework agreement over Iran’s nuclear program, paving the way for a final deal to be hashed out before the real deadline in June. Negotiations went past the self-imposed March 31 deadline and despite sinking optimism on April 1, all parties managed to overcome enough of their differences to hammer out the outlines of a deal. Iran’s ability to build a nuclear weapon will be hampered, and crucially for oil markets, Iran is within reach of receiving relief from western sanctions.
It is unclear how quickly Iran will be able to ratchet up its oil production, however, even if a deal is forged. Reviving some of its battered oil fields will require international investment. To be sure, Iran is an enormous prize for the oil majors, but there will likely be a lag between sanctions relief and actual investment. Iranian President Hassan Rouhani has courted foreign oil companies, but even if sanctions are removed, oil companies will think twice before they jump in. That’s because the U.S. insists on a mechanism of having sanctions “snap back” into place if Iran does not live up to its side of the deal. For oil companies thinking about pouring billions of dollars into a country, the possibility that sanctions will snap back presents enormous risk. After only recently having seen what happens when international sanctions are brought down like a hammer – ExxonMobil had to pullout of a major drilling project in Russia last year because of sanctions – the industry will take its time. Consequently, despite the historic agreement – a very important development indeed – the flood of Iranian oil will likely take quite a bit of time before it begins flowing.
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This Is What Will Determine If Oil Prices Go Up Or Down
This Is What Will Determine If Oil Prices Go Up Or Down
It appears as if oil prices could be on the verge of a rebound, with new data showing that the U.S. oil patch is hitting an inflection point. While specific shale regions – such as North Dakota’s Bakken and Texas’ Eagle Ford – have posted production declines, overall U.S. oil output managed to edge up in recent months.
But now that U.S. production has finally dipped, it may augur a new phase for oil markets in which production cutbacks could lead to higher prices. The Energy Information Administration reported on April 1 that total U.S. oil production fell for the week ending on March 27, falling 36,000 barrels per day to 9.38 million barrels per day.
The prior week’s production level of 9.42 million barrels per day was the highest level in three decades. If output continues to decline, mid-March 2015 could mark the peak of U.S. oil output, at least for the foreseeable future.
Related: Three Triggers That Will Send Oil Crashing Again
That would raise the possibility that oil prices have bottomed out. Where do they go from here? Is it possible that oil prices could dip any lower? If they are indeed about to rise, will they rise quickly or stay flat for a while before gradually ascending?
There are several major determinants of oil prices one should consider.
1. U.S. Production. The first and most important thing to watch is the aforementioned levels of U.S. production. Weekly figures come out from the EIA and we should get a better sense of where U.S. oil flows are going next week. Consistent weekly drops will put upward pressure on prices.
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Low Oil Prices Not Enough To Kill Off Oil Sands, Yet
Low Oil Prices Not Enough To Kill Off Oil Sands, Yet
On Friday I visited the University of Alberta in Edmonton, where falling oil prices have brought a record provincial budget deficit despite aggressive tax increases and spending cuts. Here I pass along some of what I learned about how the plunge in oil prices is affecting Alberta’s oil sands operations.
A couple of factors have cushioned Canadian oil producers slightly from the collapse in oil prices in the U.S. First, while the dollar price of West Texas Intermediate has fallen 45% since June, the Canadian dollar depreciated against the U.S. dollar by 18% over the same period, and now stands at CAD $1.26 per U.S. dollar. Since the costs of the oil sands producers are denominated in Canadian dollars, the currency depreciation is an important offset. There has also been some narrowing of the spread between synthetic and other crudes. As a result of these factors, the University of Alberta’s Andrew Leach calculated that when WTI was selling for US $50 a barrel, Canadian producers were receiving CAD $60 per barrel of synthetic crude.
Related: U.S. Oil Glut Story Grossly Exaggerated
Source: Andrew Leach.
Oil sands and U.S. tight oil production have been the world’s primary marginal oil producers in recent years, by which I mean the key source to which the world could turn in order to get an additional barrel of oil produced. Ultimately, in this regime, it is the long-run marginal cost of the most costly producing operation that puts a floor under the price of oil.
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T. Boone Pickens Points The Finger At U.S Shale
T. Boone Pickens Points The Finger At U.S Shale
So what do you do when you believe devoutly in hydraulic fracking but also understand that too much fracking is responsible for an oil glut that’s hammering the price of oil like a pile-driver?
If you’re legendary Texas oil billionaire T. Boone Pickens, you call for a time out. But you don’t cloak that call trying to make excuses for the controversial oil-extraction process, which injects water and chemicals into underground rock to free fossil fuels trapped within. You simply stick to the financial facts of the case.
That’s why Pickens was speaking so positively about fracking on March 23 in Monterey, Calif., at a panel discussion hosted by the Panetta Institute, named for Leon Panetta, the former White House chief of staff, CIA director and defense secretary.
Related: No Surprises: Obama’s Fracking Rules Upset Everyone
“I’ve fracked over a thousand wells,” said Pickens, chairman of BP Capital Management. “I’ve never had a failure on one of them. … Texas, Oklahoma lead in fracking wells and it has been a great success for both those states.”
There was pushback, though, from Steven Chu, President Obama’s former energy secretary, and Carol Browner, who ran the Environmental Protection Agency (EPA) under President Bill Clinton and was Obama’s director of energy and climate change policy.
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Just as Global Oil Glut Deepens, China Cuts Oil Imports
Just as Global Oil Glut Deepens, China Cuts Oil Imports
“We don’t want to lose our share in the market,” Kuwait Oil Minister Ali al-Omair said on Thursday. OPEC had to maintain production despite the plunge in price since last summer, he said, underscoring Saudi Arabia’s position. OPEC would not cut production to goose prices. It would not let the American fracking boom off the hook.
The price of oil promptly dropped. West Texas Intermediate is trading at $43.79 a barrel as I’m writing this, having annihilated much of the Fed-inspired rally on Wednesday.
No one wants to cut production. In fact, in the US production is still soaring. Demand is lackluster. What gives? Crude oil is piling up around the globe.
Commercial inventories across all OECD countries can now supply 28 days’ of OECD demand, near the very top of the range, the EIA reported.
In the US, the amount of oil in commercial storage facilities (not counting the Strategic Petroleum Reserve) is at historic highs. Another 9.6 million barrels were added during the latest week. To put that in perspective: the US produces 9.3 million barrels per day. So in one week, the US added nearly one day’s production to its already high crude oil stocks! According to the EIA, stocks now amount to 458.5 million barrels, up 22% from a year ago.
By another measure, at the end of February the US was sitting on 29 days’ supply, the most since the 1980s when the last big oil bust was wreaking havoc in the American oil patch.
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IEA sees renewed pressure on oil prices as glut worsens
IEA sees renewed pressure on oil prices as glut worsens
(Reuters) – Oil prices might have stabilized only temporarily because the global oil glut is worsening and U.S. production shows no sign of slowing, the International Energy Agency said on Friday.
The West’s energy watchdog said the United States may soon run out of spare capacity to store crude, which would put additional downward pressure on prices.
That process would last at least until the second half of 2015, when growth in U.S. oil production is expected to start abating.
Combined with an increase in global demand, the expected U.S. production slowdown would give some support to oil prices and respite to oil producers’ group OPEC, the IEA said.
“On the face of it, the oil price appears to be stabilizing. What a precarious balance it is, however,” the Paris-based IEA said in its monthly report.
“Behind the façade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly.”
The IEA said steep drops in the U.S. rig count have been a key driver of the recent price rebound, which saw Brent crude rising to $60 per barrel after falling as low as $46 in January from last year’s peaks of $115.
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OPEC’s Strategy Is Working Claims Saudi Oil Minister
OPEC’s Strategy Is Working Claims Saudi Oil Minister
Saudi Oil Minister Ali al-Naimi, the architect of OPEC’s strategy to regain market share by causing the price of crude oil to plunge, says his plan is working, and data from petroleum research firms seem to back him up.
Making his first public comments in two months, al-Naimi told reporters in the southwestern Saudi city of Jazan that the markets have cooled off, and cited Brent crude, the global benchmark, as an example, noting that its price has stabilized at about $60 per barrel.
He also pointed to data that inexpensive oil is driving up demand, notably in China and the United States, which eventually could lead to price stability or to a price rebound.
But Al-Naimi warned naysayers not to upset this new balance. “Why do you want to rock the markets?” he asked. “The markets are calm. … Demand is growing.”
Related: OPEC Considers Emergency Meeting On Oil Prices
If al-Naimi is right, then his strategy was correct, and it acted quickly. It was only three months ago at OPEC’s headquarters in Vienna that the Saudi ministerpushed through a plan to maintain oil production at 30 million barrels a day, declaring a price war with US shale oil producers who rely on costly hydraulic fracturing, or fracking, to extract oil embedded tightly in underground rock.
The US shale producers had not only created a global oil glut, which was depressing the price of oil, but they also had turned their country from OPEC’s biggest customer to a nation headed towards energy independence.
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The Rig Count “Meme” (And Why The Bounce In WTI Is Likely Over)
The Rig Count “Meme” (And Why The Bounce In WTI Is Likely Over)
Recently, the Baker Hughes Rig Count has become all the rage. I did a search on Bloomberg, using only Bloomberg generated articles, with “Rig” and “Count” as matches in the headline only.
Back in October, there were barely any articles at all. The number of articles increased year end, but the articles were still concentrated on the day of the announcement. The first, and so far only, Saturday article was on January 31st. There were Sunday articles on February 18th and February 15th.
The first time I talked about Rig Count in a report was back on December 19th. By the 29th it had become part of our report and things to watch for – on the 29th I sent out the info at 1:30 pm – which, believe it or not, was the first time many saw the number that day. Contrast that to more recent reports where the headlines now come out instantaneously?
Very Little “Near Term” Info
The Rig Count data is very interesting. We used it primarily to support our Jack and Diane thesis on oil and the economy – which I think is winning more and more acceptance.
Secondarily, we thought it would support the price of oil, not because it did much for supply, but because everyone would focus on it, and too many bears had shown up. I think that is exactly what happened.
WTI Pricing
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