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If you have been following the price of oil over the last few months, the chances are you’re a little confused. On the one hand you have the likes of A. Gary Shilling who, in this Bloomberg article, loudly trumpets the prospect of oil at $10/Barrel, and on the other there is T. Boone Pickens, who, at the end of last year was predicting a return to $100 within 12-18 months. Pickens prediction has moderated somewhat as WTI and Brent crude have continued to fall, but in January he was still saying that oil would return to $70 or $80/barrel in the near future. So, who is correct?

The answer is neither one. As with most things in life it is unlikely that the truth lies at either extreme. Pickens, and Shilling and other commentators suggesting that oil will fall to levels not seen since 1998, purport to have sound reasons for saying what they do, but the real reasons for such comments are most likely the two oldest human motivations in the book, greed and hubris. “Talking your book” is nothing new in financial markets and, while Pickens has an insider’s knowledge of the oil business, he also has a massive stake in driving oil higher however he can. Shilling is in the business of garnering eyeballs and clicks, hence the competition for the most outrageous prediction among the bears.

I know it isn’t sexy and it probably breaks some unwritten rule of internet hackery to say it, but the most likely scenario is that WTI futures will bounce around current levels for a while before gradually recovering to the $60-$70/Barrel level. It could even reach Pickens’ revised $70 or $80 level before too long, but we are unlikely to see $100 in the near future without some major external influences.

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

If Oil Prices Are Surprising, Then That Can Only Mean Demand

February 23, 2015

If Oil Prices Are Surprising, Then That Can Only Mean Demand

Crude oil futures have been quite volatile of late, particularly in the front months where even the slightest changes in expectations of whatever factor (rig counts, CEO comments, etc.) send WTI surging or tumbling by turn. Despite that, however, the outer years on the curve have seen not just more stability but a steady downward pressure of late. I think a lot of that has to do with futures investors reconciling actual contango options with the idea that demand is far more of not just a problem, but a longer-term problem.

At the front end, rig counts have gained most attention but only as they relate to the surge in inventory. The US is overflowing with oil and production remains at a record high, but the two of those factors together don’t actually count as much in terms of price as is made out by most commentary. It is far too difficult for many to discount the entire economics professions’ complete dedication to the US “booming” economy in order to see a huge demand problem in oil prices; far easier to simply repeat the words “record supply” and leave it at that.

If you actually view the futures curve of late, the curves of recent days has crossed in the outer years. In other words, where prices have moved around at the shorter end, out at the long end the curve has shifted significantly downward regardless of short term pricing. That relates to both contango, as noted above, but also I believe growing recognition that supply is overwrought and demand is what may be impaired – perhaps more permanently than anyone thought possible only a few months ago.

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

Essential Oil Production Statistics – February 2015

February 3, 2015

Essential Oil Production Statistics – February 2015

This is the second in a monthly series of posts chronicling the action in the global oil market in 12 key charts. The January 2015 post is here. EIA oil price and Baker Hughes rig count charts are updated to end January 2015, the remaining oil production charts are updated to December 2014 using the IEA OMR data. The main oil production changes from November to December are:

World total liquids up 150,000 bpd
OPEC up 80,000 bpd
N America up 80,000 bpd
Russia and FSU up 180,000 bpd
Europe down 70,000 bpd (compared with December 2013)
Asia down 60,000 bpd

1. The continued growth in production into December shows that global production growth had significant momentum that has not yet been curtailed by the price rout.
2. The fall in the oil price continued throughout January, WTI hitting a low of $44.80 on January 26th and Brent hitting a low of $45.13 on January 13th.
3. The main dynamic statistic has been the plunge in US oil rig count down to 1223 rigs on January 30th from a recent high of 1609 rigs on October 10th 2014.
4. The rig count news led to a strong rally in oil price on 30th January.
5. I anticipate that the price rout is not yet over and it will require significant falls in production to take root before a real price recovery gets underway.

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

This Week In Energy: The War For Market Share Is Only Just Beginning

February 1, 2015

This Week In Energy: The War For Market Share Is Only Just Beginning

This week saw yet more bad news for the oil sector, as the EIA’s latest figures released on Wednesday showed U.S. Inventories at levels not seen since 1982, when the agency first started collecting such data. To put it another way, the last time an ounce of gold bought you 29 barrels of oil was 1988. This resulted in a dip midweek before modest gains began to emerge yesterday off the back ofnews coming from Iraq of Islamic State militants launching an offensive on Kurdish forces near the oil-rich city of Kirkuk. Iraqi production rose by 200,000 barrels a day for a total monthly output of 3.9 million, according to a Bloomberg survey of industry experts, while total OPEC production rose by 483,000 barrels a day to 30.905 million barrels a day. Building on yesterday’s modest gains, we are seeing some highly promising signs after this morning’s trading, with oil prices currently up by over 7 percent at $47.97, but even so, it appears that the supply glut will continue as the battle for market share continues.

This war for market share may intensify further as yet more pressure mounts on the Obama administration to lift the U.S. crude export ban which has lasted for over 40 years. There are several fronts to the export battle, both external and internal. Latest poll data from Reuters suggests more Americans are now in favor of oil exports than ever before (though only by a small margin). In terms of public opinion, the overriding factor is concern over gasoline prices, which have halved in recent months thanks to the drop in crude oil prices. Former National Security Advisor to President Obama, Tom Donilon, says a complete lifting of the ban would be the “correct policy decision,” citing economic benefits, securing America’s energy future, foreign and energy policy goals as the benefits. Elsewhere experts maintain that easing the ban would have a positive impact for consumers in terms of gasoline prices as more crude oil on the international markets would maintain lower prices. However, not everyone would rejoice at the ban being lifted, first and foremost the U.S. refining industry, that has benefitted greatly from cheaper domestic crude oil supplies. Four refinery CEOs have already sent letters to the Senate Energy and Natural Resources Committee Chairwoman Lisa Murkowski to highlight the thousands of long-term, well-paid jobs that have been created by the U.S. shale boom replacing imports of foreign oil.

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

Oil Rig Count Plunges Most Ever, Oil Price Soars, Inventories Too: Catch Falling Knife, Get Fingers Sliced Off

January 30, 2015

Oil Rig Count Plunges Most Ever, Oil Price Soars, Inventories Too: Catch Falling Knife, Get Fingers Sliced Off

The oil industry is dead-serious when it talks about slashing operating cost and capital expenditures. They have to. Preserving cash is suddenly a priority, after years when money was growing on trees.

In the US, the cost cutting has reached frenetic levels. One place where it shows up on a weekly basis is the number of rigs actively drilling for oil. And that rig count dropped by 94 to 1,223 in the latest week, as Baker Hughes reported today. A phenomenal plunge, by far the worst ever. In January, the rig count crashed by 276, the most ever for a calendar month. That’s 18.4%! the rig count is now down 386 from its peak on October 10, by nearly a quarter!

And yet, it’s still just the beginning. The chart shows the breathless fracking-for-oil boom that started after the financial crisis. Not included are the rigs drilling for natural gas. That fracking boom had started years earlier and ended in a glut and total price destruction that continues to this day (chart). Note the two-month cliff-dive, the worst ever. During the financial crisis, the oil rig count fell 60% from peak to trough. If this oil bust plays out the same way, the rig count would drop to 642! The bloodletting in the industry would be enormous.

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

The Latest Oil Glut: Once Bitten, Twice Shy

January 30, 2015

The Latest Oil Glut: Once Bitten, Twice Shy

It comes as little surprise that the author of a book entitled Snake Oil: How Fracking’s False Promise of Plenty Imperils Our Future is a critic of the natural gas industry and a proponent of peak oil theory. With the recent plunge in oil prices, it feels like the right time to check back in with Richard Heinberg of the Post-Carbon Institute and get his perspective on how plunging oil prices will affect the energy and transportation industries. Heinberg and host Alex Wise discuss the impact of cheap oil on the North American natural gas boom, how it may alter consumer behavior in the near term, and the need for sound policy to guide us through the long-term challenge of living in a post-carbon world.

…click on the above link to listen to the podcast…

Bearishness Continues Among Oil Industry Experts

January 28, 2015

Bearishness Continues Among Oil Industry Experts

The business world is full of sometimes conflicting theories about what caused the plunge in oil prices during the past seven months, and how low that price will go. But Goldman Sachs seems to have come up with a unified theory.

It began late in the afternoon of Jan. 26 when Gary Cohn, the president of Goldman Sachs Group Inc., told the CNBC television program “Closing Bell” that he expected the average price of oil, now around the $45 range per barrel, to fall further, perhaps as low as $30 per barrel.

“My view is we’re probably in the lower, longer view,” said Cohn, a former oil trader. “We could definitely get down to $30.”

On the same day, Jeff Currie, Goldman’s chief commodity analyst, issued a research paper saying the demand for oil is slowing down in emerging economies, including China, meaning that the price of crude will stay low for a long time, and may never return to the prices they fetched 10 years ago.

In fact it was Currie who predicted that the price of oil would exceed $100 as it did a decade ago. Now, though, he points to a more recent element in the equation: the surge in shale oil production by the United States.

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

Tight Oil Production Will Fade Quickly: The Truth About Rig Counts

January 27, 2015

Tight Oil Production Will Fade Quickly: The Truth About Rig Counts

U.S tight oil production from shale plays will fall more quickly than most assume.

Why? High decline rates from shale reservoirs is given. The more interesting reasons are the compounding effects of pad drilling on rig count and poorer average well performance with time.

Rig productivity has increased but average well productivity has decreased. Every rig used in pad drilling has approximately three times the impact on the daily production rate as a rig did before pad drilling. At the same time, average well productivity has decreased by about one-third.

This means that production rates will fall at a much higher rate today than during previous periods of falling rig counts.

Most shale wells today are drilled from pads. One rig drills many wells from the same surface location, as shown in the diagram below.

(click image to enlarge)

The Eagle Ford Shale play in South Texas is one of the major contributors to increased U.S. oil production. A few charts from the Eagle Ford play will demonstrate why I believe that U.S. production will fall sooner and more sharply than many analysts predict.

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

Oil prices fall on market relief over Saudi policy

January 26, 2015

Oil prices fall on market relief over Saudi policy

(Reuters) – Oil prices fell on Monday, with U.S. crude falling close to a nearly six-year low, as Saudi Arabia’s new King Salman moved to assuage fears of an unstable transition and any policy change in the world’s largest oil exporter.

Salman was quick to retain veteran Saudi oil minister Ali al-Naimi on Friday, in a message aimed at calming a jittery energy market following the death of King Abdullah last week.

March Brent crude LCOc1 was trading down 63 cents at $48.16 per barrel by 1106 GMT, wiping out modest gains made on Friday but off an early low of $47.57.

West Texas Intermediate (WTI) crude for March delivery CLc1 was at $45.10 a barrel, down 49 cents. Front-month WTI touched an intraday low of $44.35, just above the $44.20 hit on Jan. 13, which was its lowest level since April 2009.

Saudi Arabia, the world’s top oil exporter, led the 12-member Organization of the Petroleum Exporting Countries (OPEC) last November in a decision to keep oil production steady at 30 million barrels per day. This has added to a global supply glut that has more than halved prices since June.

“Oil markets will take comfort from the speed and stability of the succession process, and the announced pledge for continuity of policy,” said Majid Jafar, chief executive of Crescent Petroleum, a UAE-headquartered oil and gas producer focussed on the Middle East.

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

The most important thing to understand about the coming oil production cutbacks

January 25, 2015

The most important thing to understand about the coming oil production cutbacks

What the current oil price slump means for world oil supply is starting to emerge. “Layoffs,” “cutbacks,” “delays,” and “cancellations” are words one sees in headlines concerning the oil industry every day. That can only mean one thing in the long run: less supply later on than would otherwise have been the case.

But perhaps the most important thing you need to understand about the coming oil production cutbacks is where they are going to come from, namely Canada and the United States.

Why is this important? For one very simple reason. Without growth in production from these two countries, world oil production (crude oil plus lease condensate which isthe definition of oil) from the first quarter of 2005 through the third quarter of 2014 would have declined 513,000 barrels per day. That’s right, declined. Including Canada and the United States, oil production rose just under 4 million barrels per day.

That means substantial cutbacks in the development of new oil production in Canada and the United States could lead to flat or falling worldwide oil production.

But, why will any oil production cutbacks come primarily from Canada and the United States? For another very simple reason. Post-2005 oil production growth in these countries came from high-cost deposits in Canada’s tar sands and in America’s tight oil plays. New production from these high-cost resources simply isn’t profitable to develop in most locations at current prices.

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

Why the Hysteria Over Oil Prices Is Overblown

January 23, 2015

Why the Hysteria Over Oil Prices Is Overblown

Wild stormy weather stops us in our tracks. Factories close. Offices are abandoned. School is cancelled. After the rush to stock up, stores are shuttered. And when the storm hits, it’s all we can think about — especially if the power goes out.

It can seem like an eternity, and can obliterate any pre-storm memory. This sounds eerily similar to the oil price tempest we are in the middle of right now. Today’s price seems like the only reality, except that the plunge is still on. Are we going to survive this thing? Can we ever expect a return to calm?

Dial in to the news, and you’d be tempted to think not. It’s natural that storms bring about their own brand of myopia, but that’s when experience should make us wiser. And we all have a lot of that to draw on. We only have to rewind back to 2008 to see a very similar situation to today’s. Back then, oil prices slid from well over $100 per barrel at the peak to $40 at the trough, all in about five months. Currently, prices are tumbling from just over $100 to just over $40 over a six-month span. Just eyeballing the raw data, the similarity is staggering. So are other key features.

Both episodes were preceded by positive predictions. Back in 2008, fears that we were running out of oil led to very believable predictions of imminent $200 per barrel crude. Supply constraints in the 1970s led to very similar longer-term predictions. In today’s case, predictions weren’t as wild, but in general forecasters preferred to believe that a return to global growth would keep prices in the triple-digit zone. Funny how diametrically wrong pundits can be, even with a wealth of instructive recent experience.

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

Iraq Shrugs Off Low Prices, Boosts Output To Record Levels

January 21, 2015

Iraq Shrugs Off Low Prices, Boosts Output To Record Levels

Despite oil prices at their lowest levels in five years, Iraq is producing at record levels.

For the month of December, Iraq produced nearly 4 million barrels per day, according to Oil Minister Adel Abdul Mahdi, an all-time high for the war-torn country. That is critical for a government that depends on oil for more than 90 percent of its revenues. Rather than paring back production levels to stop a price slide, Iraq is doing what all rational actors are aiming to do (if they can): produce more oil to make up for lost revenues from rock bottom prices.

“Because of the new challenges, especially the price of oil, Iraq has to try its best to raise it oil production and exports,” Deputy Prime Minister Rowsch Nuri Shaways said in Davos, Switzerland on January 21.

OPEC has continuously vowed to let the market sort itself out rather than try to fix falling prices, which has the oil cartel staring down high-cost production in North America. In its latest monthly report, OPEC reported an uptick in production – the 12-member group produced an average of 30.2 million barrels per day (bpd) in December, about 142,000 bpd more than the previous month. The increase came almost entirely from Iraq, which does not operate under the OPEC quota. Iraq managed to boost monthly output by 285,000 bpd, more than offsetting a decline of 184,000 bpd in Libya.

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

Fossil Fuel Use is Limited by Climate, if Not by Resources.

January 19, 2015

Fossil Fuel Use is Limited by Climate, if Not by Resources.

We appear to be living in rather peculiar and unsettling times. A year ago, discussions and fears were over the high oil price, which until September 2014, had been above $100 a barrel http://uk.reuters.com/article/2014/09/09/markets-oil-idUKL3N0RA1L220140909. The price rose to $115 in June 2014, but has subsequently plummeted, with West Texas Intermediate falling to $43 and North Sea Brent Crude to $47 earlier in the week. Today, both have rallied marginally to around $48, with an untypical mere 21 cents between them. Since Brent typically trades at around ten dollars above WTI, any apparent synchrony between the two tends to reflect price-volatility, as indeed is the case now.

It is fair to say that the crash in oil price was not anticipated by most people who keep an eye on the oil supply situation, and accordingly, its cause is a matter of intense speculation, and the likely prognosis even more so. Among the various factors that have been brought culpable for ithttp://www.economist.com/blogs/economist-explains/2014/12/economist-explains-4, we may list: a slowing of the Chinese economy, and little recovery in Europe, so that demand has fallen, and that moreover, supply of crude oil has soared ahead of expectation. The latter is accounted for by supplies of oil returning from Iraq and Libya, and overwhelmingly, the ramping-up of oil-production in the U.S., principally released from impermeable shale-formations by hydraulic fracturing (“fracking”). While the U.S.is not a major exporter of oil, the increase in its own domestic production has reduced the amount of oil it needs to import, so leaving a bigger surplus on the global market. Saudi Arabia produces around 10 million barrels a day, or one third of the output from OPEC, which has refused to cut back on production primarily to avoid losing its market sharehttp://www.reuters.com/article/2015/01/08/us-opec-oil-idUSKBN0KH1HA20150108. Thus the result is overproduction against demand, leading to a glut of oil, and this has pushed the price down markedly.

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

Dumb and Dumber: U.S. Crude Oil Export

January 19, 2015

Dumb and Dumber: U.S. Crude Oil Export

Exporting crude oil and natural gas from the United States are among the dumbest energy ideas of all time.

Exporting gas is dumb.

Exporting oil is dumber.

The U.S. imports almost half of the crude oil that we use. We import 7.5 million barrels per day. The chart below shows the EIA prediction that production will slowly fall and imports will rise (AEO 2014) after 2016.

(click image to enlarge)

This means that the U.S. will never be self-sufficient in oil. Not even close.

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

Be Prepared For An Oil Price Spike

January 18, 2015

Be Prepared For An Oil Price Spike

The recent collapse in oil prices has taken pundits and oil producers by surprise. It was only six months ago that prices were over $100/bbl and at that time they had been above $100/bbl for three and a half years. In fact the stability had become uncanny, so perhaps we should have seen the collapse coming. I would like to claim I had been prescient but sadly I wasn’t.

There are lots of conspiracy theories on offer, but it seems to me the root of Saudi Arabia’s refusal to defend the oil price lies in its fear of a repetition of the loss of market share that OPEC suffered in the early eighties. But there are good reasons why the 2010’s are not the 1980’s.

I like to analyze the numbers, as therein lies the explanation for OPEC and more particularly Saudi Arabia’s stance. Let’s look back to the early eighties and see what happened to OPEC’s market share after the oil price shocks of the seventies.

Oil prices since 1965, in 2015 dollars with both total world oil supply and OPEC market share and spare capacity up until 1990 shown in the background.

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

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