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Gasoline may stay cheap until we burn through the current market glut in perhaps a year.

We are now seeing declining growth and a deflationary economic contraction globally. In fact, the current $40-plus a barrel oil price is by itself good proof of that. The global collapse in the price of oil shows that with global supply remaining roughly constant over time at about 95 million barrels per day. The current low oil price, together with a price slump in other industrial commodities like iron ore, is really an indication of a broad and deep contraction in the global economy, much like 2008-2009.

The Texas shale drilling industry was supposed to keep us driving normally forever, or at least until the economy could recover enough so we could afford to make a transition to electric cars, right? Everyone connected to Wall Street and its financial followers with any media influence were saying that only about a year ago. Then the global oil price gradually collapsed from over $100 a barrel in mid-2014, down to its current price of about $45.

The reason that the Texas shale drilling boom is now in a state of deep decline and won’t easily bounce back is that shale drilling is losing money. Shale oil really needs $80 a barrel or above to break even in the context of fast well decline and shrinking number of sweet spots left to drill.

Shale drillers must keep producing oil at a loss because of their largely junk bond financing.

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

Peak Oil Ass-Backwards (part 2): Crashing OilPrices Aren’t Due to an Oil Glut But to DemandDestruction and Peaking Credit

September 14, 2015

Peak Oil Ass-Backwards (part 2): Crashing Oil Prices Aren’t Due to an Oil Glut But to Demand Destruction and Peaking Credit

As I began to mention at the end of the first part of this three-parter, I’ve only just recently come to the conclusion that oil prices aren’t going to have a tendency to rise due to the tightening of supply imposed by peak oil, but to depreciate. This of course flies in the face of the common logic of supply and demand, but when factoring in the method by which the majority of our money is created, a deflationary effect can be seen to come into play. This has taken me an absurdly long time to clue into, for although I’d steadfastly amassed a bunch of pieces (various information), I hadn’t realized they were actually all part of the same puzzle.

With peak oil and fractional-reserve banking being the first two pieces of this puzzle, the third piece that I needed to factor in (which oddly enough I’d already written about) is the fact that money is a proxy for energy. As I wrote in a previous post, Money: The People’s Proxy,

Simply put,… the core function of money is that it enables us to command energy – the energy used to move our bodies with, to power our machines, to feed to domesticated animals whose energy we then use to do work (which nowadays generally means entertaining us), etc. In other words, it might be tough and/or inconvenient, but one can get by without money. You can’t get by without energy.

In other words, at their core, our economies don’t run on money, they run on energy. Moreover, it doesn’t even really matter what you use as your form of currency – coins, pieces of paper, gold, zero and one digibits, conch shells, whatever – because if you don’t have the energy to perform the work and/or create the products your society expects, the money is virtually useless and worthless.

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

The Decline of Oil: Head-Fake or New Normal?

September 9, 2015

The Decline of Oil: Head-Fake or New Normal?

When production does finally collapse, that will set up the “nobody saw this coming” ramp in the price of oil.

In May 2008 I proposed the Oil “Head-Fake” Scenario in which global recession pushes oil demand down as oil exporters pump their maximum production in a futile attempt to fund their vast welfare states and thus retain their precarious political power.

Oil: One Last Head-Fake? (May 9, 2008)

The terrible irony of the head-fake, of course, is that the exporters’ efforts to pump more oil exacerbates the oversupply, further depressing prices. As exporters receive fewer dollars for their production, they attempt to compensate by pumping even more oil. Perniciously, this suppresses prices even more, setting up a positive feedback loop which pushes prices to the point that exporters are no longer able to fund their welfare states and Elites.

Something has to give, and thatsomething is the existing power structure in oil exporting nations.

Another factor deepens the eventual crisis triggered by drastically lower oil revenues. The majority of exporting nations under-invest in their oil production and exploration infrastructures, essentially guaranteeing declining production once the easy oil has been extracted.

This cycle of spending the fruits of current production while starving investment for the future is part of what is known as the resource curse: nations with an abundance of resources rely on the income generated by the sale of their resources which effectively stunts the development of a diverse economy and the institutions which such a diverse economy requires as a foundation.

The net result of the resource curse is national impoverishment as the resources are depleted. Diverting the majority of the oil revenues to support welfare states and Elites dooms the oil exporters to under-investment in future production.

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

How Fracking Changed the Economics of Oil Production Around the World

September 7, 2015

How Fracking Changed the Economics of Oil Production Around the World

James Meadway, chief economist at the New Economics Foundation, explains the interrelated economics behind China’s ‘Black Monday’ stock market crash, Middle Eastern oil and US fracking.

The ‘fracking revolution’ has transformed the economics of oil production globally, with the US becoming a bigger producer than Saudi Arabia and – after decades of dependency on oil imports – even being able to export some of its surplus production.

US shale oil is unusual, too, in being privately owned: most of the world’s oil reserves (over 70 percent) are in state hands. Like the North Sea 30 years ago, in a world dominated by state-owned companies and publicly owned reserves, US shale could look like a new frontier for private operators on the search for fat profits.

New technology, high oil prices, and plentiful cheap credit have encouraged the boom. Some $200bn has been borrowed to invest in fracking in the last few years, accounting for 15 percent of the entire $1.3tr US junk bond market. Investors were, in effect, betting on continuing high oil prices making their investments profitable for years to come.

Price Slump

Last year’s slump in prices trashed that calculation. From a mid-year high of $115 per barrel, by the end of 2014 the price per barrel had fallen by more than 40 percent. More than half of US shale rigs have been laid up since October.

The driver, last year, was the behaviour of OPEC – the Organization of Petroleum Exporting Countries. OPEC is a cartel agreement among major oil producers that seeks to manage the international market for oil. With oil prices already plunging over the summer, OPEC could be expected to ease off on production. Restricting supplies should, thanks to the magic of the market, produce a decent increase in the sale price of oil. Instead, with Saudi Arabia taking the lead, OPECdecided to continue production levels. No agreement on restricting output could be reached. Prices slumped.

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

Peak Oil Ass-Backwards (part 1): PeakOil, Meet Fractional-Reserve Banking

September 1, 2015

Peak Oil Ass-Backwards (part 1): PeakOil, Meet Fractional-Reserve Banking

(image by Viktor Hertz)

If the ongoing crash of oil prices over the past year – and now the stock market crashes of last week – have continuously taught me one thing, that would be that I’ve got very little clue regarding the economic implications ofpeak oil. To explain this I’ll have to take a circuitous, roundabout route here, but if you’ve been as afflicted as I’ve been then you might find the following a bit illuminating.

For starters, even though I learned about peak oil in 2005, fractional-reserve banking in 2006, and pretty much instantly proceeded to put two and two together, I still ended up falling for what I might unfairly call the “peak oil orthodoxy.” I’m not sure where I first came across this “orthodoxy” I speak of, but an example as good as any – and maybe even better than any – would be that of author and a former Chief Economist at CIBC (one of Canada’s Big Five banks), Jeff Rubin.

As Rubin explained it in his first of two peak oil books, because peak oil implies a curtailment on the supply of oil, and since the demand end of a growing economy is by definition increasing, the notion of supply and demand imply that prices will head upwards if supply is limited. Because of this, upon oil’s peak its price will eventually rise to such ungodly high levels that it’ll become unaffordable by many. Following that, its demand will therefore peter out, and so thanks to the new glut in supply the price will crash to equally ungodly low levels. Once things settle down and the consumer can once again afford the now lower-priced oil, the process will repeat itself since the new (and increasing) demand will once again bump up against the limits imposed by peaking oil supplies. As a result, another crash will occur. On and on the process repeats itself, but with the higher price spikes followed by higher troughs.

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

Commodity Markets In Distress As Oil Rout Continues

August 21, 2015

Commodity Markets In Distress As Oil Rout Continues

One hundred and eleven years after the birth of Count Basie, and the ongoing rout in the crude complex is in full swing today. Downhill one-way traffic continues amid headlines such as ‘No End in Sight for Oil Glut‘ and ‘Oil Poised for Longest Weekly Losing Streak Since 1986 Amid Glut‘. As the headlines get more apocalyptic, and the price projections get lower (this week: $15 oil, no, $10 oil), the more it feels like we are approaching a turning point. Or at least a whipsaw.

Looking at the overnight data releases, China has served to endorse the current mood of doom and gloom via a preliminary manufacturing print of prodigiously downbeat proportions. A print of 47.1 was seen, which was considerably lower than last month’s 47.8, and shy of the consensus of 47.7. It is the lowest print since March 2009 (hark, the belly of the great recession).

China Caixin Preliminary PMI (source: investing.com)

In other preliminary releases, Eurozone manufacturing on the aggregate came in above consensus (and in line with last month’s level), aided by a decent number from Germany, but held in check by a miss from France (showing increasing contraction to boot). Eurozone services data on the aggregate also beat consensus, ticking higher on the prior month.

Weakness across the commodity complex as a whole continues to be an ongoing theme in global markets. The below chart illustrates the losses seen in the stock prices of various oil and mining companies, with Bloomberg estimating that $2.05 trillion has been wiped off their market caps. Meanwhile, the Bloomberg Commodity Index of 22 raw materials has dropped to its lowest level since 2002.

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

The Peak Oil Crisis: A $4 Trillion Hole

August 20, 2015

The Peak Oil Crisis: A $4 Trillion Hole

Last week reporters at the Wall Street Journal sat down and did some arithmetic. They looked at how much oil was selling for in the spring of 2014 (over $100 a barrel); looked at what it is selling for today (under $50); and concluded that if prices stay low for the next three years, the global oil industry and the countries it finances will be out $4.4 trillion in revenues. As these oil companies, nationalized and publically traded, will be producing roughly the same amount of oil in the next few years, the $4 trillion will have to come mostly out of profits or capital expenditures.

This is where the problem for the future of the world’s oil supply comes in. The big oil companies, especially those that export much of their production, have been doing quite well in recent years. National oil companies have earned vast profits for their political masters. Publically traded ones have developed a tradition of paying out good dividends which they are loathe to cut.

This leaves mostly capital expenditures on exploring for and producing more oil in coming years to take a dive as part of the $4 trillion revenue hit. Even if oil prices of $50 a barrel or less do not continue for the next three years, this still works out to a revenue drop of $1.5 trillion a year or about three times the planned capital expenditures of some 500 oil companies recently surveyed.

The International Energy Agency just came out with a new forecast saying that while current oil prices have the demand for oil products increasing rapidly, there is still so much over-production that the oil glut is expected to last for another year or more before supply/demand comes back into balance. The return of Iran to unfettered production would not help matters.

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

U.S. Oil Glut An EIA Invention?

June 26, 2015

U.S. Oil Glut An EIA Invention?

In the latest weekly production data from the EIA, on the back of recent March revisions, the U.S. managed to post a 76,000 barrel per day increase in the lower 48. Production from Alaska fell by 61,000 barrels per day, putting overall U.S. output 15,000 barrels per day higher for the week ending June 12 compared to the previous week.

This comes at a time when multimillion barrel draws have become the norm. It is important to note that lower 48 production is estimated based on an EIA black box model, while Alaska is virtually real time data. That suggests that the weekly supply estimates are hugely overestimated.

These weekly supply numbers are then used as a basis to jump to the conclusion that the markets are suffering from too much supply. As stated on OilPrice.com many times before, the amount of “over supply” vs. the averages in the U.S. according to the EIA amounts to tens of millions of barrels of oil.

I continue to maintain that the EIA revision to production came very suspiciously at exactly the same time inventory draws began, as did the “Miscellaneous to Balance” figure used in calculating inventory. The chart below clearly shows when this figure started to grow and by what amount. It totals more than 30 million barrels since April and has been rising, which is virtually all of the oversupply above the mean in the U.S! To reiterate that number is at discretion of the EIA and is not an actual data point but an “adjustment.”

Data Errors Have Real World Consequences

This figure, as created by the EIA, has (with the media’s help) created the impression of a huge oil glut in the U.S. market. No one, either within the media or the industry, has asked for clarification of this number and it is instead taken as gospel. This is now wreaking havoc in energy states such as Texas, as well as threatening most oil companies as well as tens of thousands employed within the oil and gas industry. With such importance placed on a number which has impacted not only billions of dollars in company revenue but many lives for the worse, how can it be largely unchallenged by all but a few in the media?

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

Global Cooling Alert: World Faces Longest Oil Glut In Three Decades

June 16, 2015

Global Cooling Alert: World Faces Longest Oil Glut In Three Decades

The world is on the brink of the longest-lasting oil glut in at least three decades and OPEC’s quest for market share makes it almost unavoidable.

Oil supply has exceeded demand globally for the past five quarters, already the most enduring glut since the 1997 Asian economic crisis, International Energy Agency data show. If the Organization of Petroleum Exporting Countries were to keep pumping at current rates it would become the longest surplus since at least 1985 by the third quarter, the data show.

There are few signs the 12-nation group will cut back. Saudi Arabia, OPEC’s biggest member, will probably increase production to intensify pressure on U.S. shale drillers, Goldman Sachs Group Inc. predicts. OPEC’s supplies may be swollen further this year if Iran reaches a deal with world powers to ease sanctions on its exports, Commerzbank AG says.

“It seems to be taking longer for the oil surplus to clear, and, even without the return of Iran, IEA data indicates it could last for the rest of the year,” said Eugen Weinberg, head of commodities research at Commerzbank in Frankfurt. “Any expectations the oversupply will be gone by 2016 don’t look justified at this stage.”

OPEC pumped 31.3 million barrels a day in May and will probably continue to pump around that level “in coming months,” the IEA said in a report on June 11. The agency doesn’t forecast OPEC production.

Brent for August settlement gained 28 cents to $64.23 a barrel on the London-based ICE Futures Europe exchange at 12:04 p.m. Singapore time.

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

OPEC oil glut is shattering Harper’s superpower dream

June 4, 2015

OPEC oil glut is shattering Harper’s superpower dream

Producers’ brinksmanship has worked, and Canada is cutting production

In the battle to see who blinks first, OPEC hasn’t blinked. And it looks like it isn’t going to, as it meets this week in Vienna.

Six months ago the Organization of the Petroleum Exporting Countries, led by Saudi Arabia, announced it would keep pumping crude even though the world was swimming in the stuff.

While some analysts are predicting a surprise at this week’s meeting, most reports now say OPEC is not considering reining in production.

And whether or not OPEC continues to pump, there are new signs that Prime Minister Stephen Harper’s dream for Canada as an “emerging energy superpower” may be in trouble.

A report this week from Barclays showed Canadian production tumbling. The global giants with a stake in Canada’s oil sands have stopped expansion plans and many have walked away.

Meanwhile, Alberta oil producers have threatened to put new developments on hold until they see whether Rachel Notley’s new NDP government gives them what they want.

Missing a crucial window

To add insult to injury, low prices have emboldened the “dirty oil” lobby. There are new reports this week that the New York oil hub is rejecting petroleum from Canada’s “tarsands.”

Alberta’s oilsands may still contain some of the world’s largest petroleum reserves, up there with Venezuela and Saudi Arabia, but there is an increasing danger that Canada has missed a crucial window to develop and extract those resources.

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

Global oil glut grows to 2 million barrels a day as OPEC pumps more

May 14, 2015

Global oil glut grows to 2 million barrels a day as OPEC pumps more

International Energy Agency predicts oversupply of refined fuel, but points to rising demand

Fresh data on worldwide crude production shows the global glut of oil is growing with Saudi Arabia’s production near record highs, according to the International Energy Agency.

And there are signs the oversupply is moving into the market for refined products such as gasoline, meaning the recent rally in oil prices could lose steam, the IEA said in a report released today.

OPEC crude supply rose by 160,000 barrels a day to 31.21 million barrels a day in April, the highest since September 2012. Iraq and Iran boosted their output and top exporter Saudi Arabia was increasing its rig count.

There has been a slowdown in U.S. production, but global oil supply is still exceeding demand by two million barrels a day.

Many in the North American oilpatch have accused the Saudis of keeping output high to drive down U.S. production.

On the up side, there has been recovery in demand for crude as the U.S. and European economies gain steam. Demand for crude this year is projected to grow to as high as 1.1 million barrels a day, with the big surge expected later in the year.

U.S. data released today shows commercial crude inventories fell by 2.19 million barrels in the week ended May 8, the second week that inventories have fallen after rising for months.

WTI slips to $60

The new data on the worldwide oil glut hit oil prices in afternoon trading. West Texas Intermediate crude was down 62 cents to $60.13 US a barrel at the close, while Brent oil, the international crude contract, was off 34 cents at $66.52.

Meanwhile, Western Canada Select, the main Canadian contract continued to close the gap with WTI, moving close to its high for the year of $52.50.

Refiners have been buying more crude to take advantage of the low prices and are refining oil for summer driving earlier than usual. The signs of an uptick in oil prices helped accelerate their purchase of crude.

There are plenty of players who predict a fresh downturn in WTI prices as U.S. producers see the higher prices and turn the taps on again.

U.S. Oil Glut Story Grossly Exaggerated

March 30, 2015

U.S. Oil Glut Story Grossly Exaggerated

It’s called the “age of propaganda” where truth matters little and comes out later in so called revisions. Take the recent spate of economic data points from the Kansas City Fed which said that economic activity not only stalled but wasnegative at -4 vs expectations of +1. The recent durable goods statistics also show contraction as well.

Yet we see the services PMI at a 6 month high. How can these divergences be possible? Well for one, some statistics are hard while others are estimated/massaged and others are seasonally adjusted or estimated (only to be revised later). In oil, the same thing appears to be occurring as we speak. The near record pace of oil storage additions in some weeks nearing 8-10 million barrels per day comes at a time when all indicators are that oil production is slowing.

Even using the EIA’s own data, production is up some 500,000 per day since October or 3.5M per week. So how can more than two times that be added to storage while gasoline demand accelerates to 5% year over year from low single digits? Refinery maintenance is part of it, yes, as well as seasonality as people drive less in absolute terms, so as production continues this would explain storage adds, but to this magnitude?

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

Just as Global Oil Glut Deepens, China Cuts Oil Imports

March 20, 2015

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.

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

IEA sees renewed pressure on oil prices as glut worsens

March 13, 2015

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.

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

US May Run Out Of Oil Storage Space As Soon As June

March 10, 2015

US May Run Out Of Oil Storage Space As Soon As June

On Sunday, we noted that the economics of the floating storage play could spell further declines for crude prices. With a global stock increase that’s some 3 times larger than that which occurred during the last period of oversupply, expect cheap, on-land storage to prove inadequate necessitating the use of VLCCs. According to Soc Gen, determining how far the front end of the curve would have to fall in order for traders to arbitrage the difference between buying and storing physical oil and selling paper forward is a good indicator for where prices may find a floor:

…the bank is looking for the front end of the curve to fall until the contango is wide enough to make the floating storage play enticing.

The example Soc Gen uses shows that Brent needs to see ~$49 before the trade is sufficiently profitable.

The takeaway, we noted, is that storage availability and contango should be taken into account when considering the future direction of oil prices. With production still climbing despite the decline in rig count, it seems supply may, in short order, outstrip storage capacity for as the following two charts show, crude storage capacity in the US is now at 60% and is set to be completely exhausted by June:

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

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