When writing about markets, here and elsewhere, I usually try to avoid the temptation to write sensational things. Words like “collapse” and “crash”, or “surge” and “explode” attract clicks, which in turn often translates to cash for a writer, but major events like that are rare. That is all fine and logical, but…WTI really does look like it is about to collapse.
Let’s be clear, I am not necessarily talking about a return to the sub-$30 of the beginning of 2016 here, but a return to the more recent lows around $42 before too long is distinctly possible, and if that happens, who knows where we go from there? There are, as I have noted in the past, reasons to believe that the long-term path of oil is still upward, but more immediately there is one dominant factor that keeps adding downward pressure, large and still growing supply from North American shale producers.
Some say, as in this FT piece, that there are signs that U.S. shale production has peaked, but then that was also supposed to be the case in 2015 and 2016. I am sure that if I could bother to go back further I would find that the same thing was said in previous years too. The fact is though, that as the EIA chart below shows, after dropping off as price declined at earlier this year, U.S. crude production is growing again and will be higher this year than last and is expected to be higher again in 2018.
(Click to enlarge)
The second chart, directly above, indicates why American producers are pumping at a growing rate. WTI has been recovering ever since the low of $26.05, and is now at levels not seen since June of 2015. There are reasons for that recovery, most notably the production cuts agreed by OPEC countries and others including Russia and improving global growth, but those bullish factors are now fully priced in and the effect of that is to encourage U.S. E&P companies to, to borrow a phrase, drill, baby, drill!
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I have been waiting for the expansion in North American production to slow and for demand growth to dominate pricing, but it hasn’t happened. It seems there are only two thing that will potentially bring that about… a lack of available drill sites, or a big drop in price. Anybody who has witnessed the actions to date of the current U.S. Presidential Administration and Congress will know that the first is not about to happen soon, which leaves us with the second.
When OPEC and other signatories to the deal got together recently in Vienna they announced that there was almost total adherence to the scheduled cuts. That was greeted by most people, including, I will freely admit me, as a positive for oil prices. It is certainly rare based on the results of other agreements to cut and therefore impressive, but there is a basic problem. Now that the appropriate level of cuts has been achieved, production in the participating countries will at best remain at current levels. U.S. production, however, continues to increase exponentially.
There are, as I said, some bullish factors, and there is always the chance of a major unforeseen event disrupting supply, but all else being equal the next big move in oil will be caused by the most basic driver of price for any commodity; the balance between supply and demand. As it stands, every increase in demand and attempts at reduction in supply outside the U.S. is being more than compensated for by increases in domestic production, and eventually the price must reflect that, despite a continued positive outlook for economic growth.
Related: The Drastic Drop Off In U.S. Oil Imports
That is especially true if further cracks start to appear in the production cuts agreement. Russia already rumbled some dissatisfaction at the last meeting of the parties to the cuts, and if crude prices simply stall for a while and U.S. exports continue to increase it is unlikely that the Russians will continue with a policy whose net effect is to enrich U.S. oil companies.
There is, then, a chance of an event that would cause a collapse in oil prices, but that may not even be needed. The simple mechanics of pricing, supply, and demand need only to do their thing and the result will be a drop in oil prices that justifies the use of words like “collapse”.
By Martin Tillier for Oilprice.com
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Well done, Martin Tillier! Hat's off to you, Sir...
See, in previous articles on Oilprice.com recently I have commented about articles being posted that were extremely bullish in sentiment--maybe because as WTI was nearing $60/bbl analysts were not speculating on what's next but instead jumped to talk of $75 - $100/bbl (or more) on WTI as a new norm, and I mentioned how analysts with bearish sentiments never, ever dare to speculate on similar downward price movements without fear of being labeled as greedy or just altogether crazy.
But right away in this article Mr. Tillier said he tries to avoid such wild headlines and he even said oil could return to prices they have already seen in 2017 (not years ago): $42/bbl.
This is important, folks...as Russia has stated numerous times that they can survive on $40/bbl oil forever; and last year, when WTI was in the $30s/bbl (after quickly escaping the mid-$20s), U.S. oil industry professionals said, "Just give us $40/bbl" and BOOM! It happened almost overnight, even without OPEC, NOPEC, and their jawboning meetings.
In fact, in February of 2016 (when WTI hit multi-year lows of $26.05/bbl) it was the Saudis themselves that said that unlike any other producers, they can still turn a profit at $10/bbl. Many already know that they cannot break-even at this point, but let's be honest: Any price of WTI above $40/bbl has Brent (and OPEC's Basket) closer to $45/bbl and everyone is breaking even (except for Canada's oil sands and of course, Venezuela--they all demand $100-$140 WTI as a minimum).
So, with prices still far from $42/bbl on WTI, let's just call it what it really is: Greed on behalf of OPEC's & NOPEC's part, and an addiction to petro-dollars from Canada & especially Venezuela...I still have the utmost respect for U.S. oil workers, but they too don't need $60/bbl on WTI to pay off last year's debt AND still have plenty left over for capex on new explorations.
This is exactly my point: It comes off sounding extremely bullish to the point of absolute desperation on the part of folks like yourself when as I first commented on this article (last night, 12/10) and as of right now (12/11 at 9:30 Central), WTI is trading between $57 and $58/bbl.
2018 is less than 1 month away, so just a few weeks...but still, give it a whole year from now and you're suggesting a $42+/bbl gain (interesting amount, considering this article's author, Martin Tillier, predicts prices could return to that number). You're wish/hope/pipe dream fantasy represents an approx. 75% gain from where we are now.
So, what if someone with a bearish outlook did the same thing? A $42 drop (also roughly 75% decline) would bring oil prices to between $16 and $17/bbl. Can you imagine the mockery and uproar these sorts of estimates would create?
Once and for all, the oil markets are a double-standard, currently still in favor of the oil bulls. But once more, thanks again to Martin Tillier for providing very useful insight.
What people need to realize is the cheap oil is gone. We are now into more expensive shale oil. Technology has its limits and we are reaching them. Shale oil is also a lower quality oil being an API of 45 or higher. 2018 will be the year people and MSM realize the reality of the oil supply situation.
In about 7 months in 2h 2014 oil dropped from $105 to $48. Not many believed that could happen. Just as now not many believe it can go to $80-$90 in a year. Believe it. We are drawing down reserves. A minor disruption will cause an instant spike. I am more concerned about a mid east war than I am about shale being the miracle provider. We are in for higher prices; get used to it and conserve energy wherever you can.
My dad was recruited to run the American education system within ARAMCO back in the mid-sixties. I was a kid, but remember the oil guy and my dad sitting on the back porch drinking beer. Evan as a kid, listening intently to their conversation I remember the oil guy saying quite distinctly there we would never run out of oil that there was so much oil and he rattled off areas of the world and he said the only thing keeping us from getting to it was technology but he felt that would take care of itself. He specifically mentioned the Tar Sands in Canada as having more oil than Saudi Arabia.
Think about it. That was the mid sixties. I actually questioned what he said for 20 or thirty years but in retrospect now realize that "Peak Oil." was a false narrative all along. And so here we are today.
We have an energy picture that is no longer completely dependent upon oil. The move to a multi-polar world vs the old bi-polar deal was the start. The old oil "cartel" comprised of "third world countries (And I include Russia there) controlling the spigots is over. Now that the U.S. is back in play with shale oil and Canada in play, we become the swing players and have "pivotal power." And thus the approximate $50 ceiling on pricing. Our shale oil can make money at that. And now over the last few years, we see that as soon as the prices move "toward" fifty, our swing internation production kicks in and balances pricing.
This is the new reality and further, new solar and electric/battery technologies also reduce the overall market for oil thereby, long term, depressing the overall market. And eventually, they will likely solve the fusion problems. The only way oil prices will go up is when we fully transition to to other energy sources and the economies of scale of the oil/gas industry begin to deteriorate and potentially fall below market needs during the deterioration period. Eventually hydrocarbon Tech will be a supportive tech not the key energy source for a world.
So, talk and argue all you want. The best thing, for all of us is to look long term, "strategically" as a company and figure out how to ride the beast to the ground making as much money as you can along the way and figuring out how to become one of the remaining hydrocarbon based corporations on the planet... We are close to the peak on a bell curve over time, but we have passed the cusp and inexhorably, the direction will be down over time, assuming we don't destroy ourselves in some fashion.
http://bit.ly/2EFIkTY
1. Causality flows from price to production, and from price to CapEx. Price changes leads production changes by 3 month. And Price changes lead CapEx changes by 21 - 22 months. Generally, CapEx is a function of oil price.
2. The correlation between production and CapEx has been severed since 2014, when production rose even as the lagged CapEx declined.
3. CapEx will rise in 2018, as the effect of the delayed reaction from the recent rise in oil prices from the June 2017 low kicks in.
4. October 2017 global production will fall (year on year), but global output will rise (year on year) from November until at least March 2018, based on the impetus provided by the recent run/up in oil prices. Global output responds positively to a rise in oil prices with a delay of 3 to 4 months.
The relationships shown here work with aggregate global Capex, and not exclusively with new projects (which could take up to 5 years before becoming productive).
The Saudi's aren't stupid in this area and I think they still influence short term changes in the 6 month to a year range. And 20 bucks a barrel at 10 million barrels a month (Avg Saudi production) is 200 million a month increased income. So, if you can even keep that going for around a year, 2.5 billion ain't chump change and will pay for a war in Yemen.
IF, you, as a Saudi, take a long term approach toward milking the max income out of the long term decline of production, AND you have an excellent understanding of the production environment of the world, you might take a look at establishing a "floor" of around 50 bucks. You could create a program that looks at all the factors like Brazil getting their act together and increasing production or Venezuela finally getting some sanity and maximizing output or a stable Iraq/Syria resulting in inceased production or the Nigerians addressing their corruption issues and increasing their output.
The worst case scenario for oil would be if the world got its act together and socio-political situations stabilized. You can actually create algorithms pretty easily around all of this to predict what will happen over time. You can put an aggregate value to the overall stability situation based upon the individual areas of the world with a bias toward the producers and over time get a pretty good idea of what is going on in terms of extrapolating the future (short term) with declining accuracy forward into time. Unexpected things can impact this like the U.S. finding technology to revitalize their industry but even with them, at some point you understand the impact of that and can incorporate that into the macro calculations. Just wait and see what happens if the Japanese figure out how to access methane hydrates. That would completely upset the hydrocarbon markets.
And thus you can actually predict AND influence all of this to a degree over time knowing that you have a window of maybe fifty years within which to work. That fifty year time frame is pretty much the one where we either destroy ourselves as a species or figure a way out of the box we have placed ourselves in. If we figure a way out, it will involve energy and the ability to provide it unbelievably cheap and predictable with less impact on the environment.
No, this isn't a conspiracy theory, it is simple math. Anyone can predict pretty accurately into the future if you know and understand the dynamics of the processes, inputs, outputs and consumption levels. It isn't even difficult although what I am saying is an oversimplification. And time allows you to improve the processes you use to do it. Check it with Anova plug that into a CQI based management approach and you are good to go. In fact, if someone isn't doing this type of thing somewhere in a position to impact the macro processes, I would be amazed. Using the data to influence it all is a no-brainer. And even I, a simple middle class American knows this. Pay no attention to the man behind the curtain...