Today, I'm going to try and tackle the reasoning for my 'wild' predictions for oil reaching triple digits by the end of 2017. While I am nearly alone in these forecasts, they are not just pulled out of space, but with deep regard for the fundamental supply/demand picture that everyone mostly agrees upon, combined with what I think is a deeper insight into the likely trajectory of oil company leverage, financing and the role of financial oil derivatives.
Despite the technical nature of this discussion, I think I can make a strong case for $120 oil in 2018 using only two charts of my own making - one charting global demand, which is more universally agreed upon, and then an overlay of global production, which is more open to prediction.
First, demand: Almost all analysts including the EIA and IEA agree that demand continues to grow at a steady pace throughout the rest of the decade, and even a minor economic downturn will only slow the pace of growth (green line), but not upend the upward trend line of demand. Sorry to those environmentalists who pray for an end to carbon use growth in the next decade - virtually no one currently believes it will happen.
(Click to enlarge)
Now, let's overlay the rudimentary global production line(s) on top, put some likely dates on this chart and describe some of the possible scenarios: Related: Advantage U.S. In The Global Petroleum Showdown?
(Click to enlarge)
First, we notice that the blue line of production going back before the oil crash is steeper than the demand line - hence the current gluts we are experiencing and low barrel prices. Low prices have made production growth begin to slacken, which I've indicated by easing the slope of the light blue line. It's clear that if nothing else happened from here, we'd still see future production outstrip demand - hence some analysts' fear of never seeing triple digit oil prices, or at least a much lower for much longer scenario. Related: Saudi Arabia Tries to Slow Iran Oil Exports, Without Much Success
But most analysts agree that the sharp drop in Capex budgets, not just among shale producers, will have its effect on sharply lowering production this year and putting growth in reverse, efficiencies and well cost reductions notwithstanding. What's critical to note is how the media, and surprisingly most analysts, see global oil merely through the prism of U.S. independent shale players. To me, this is the critical grave mistake they make. Recent lease outcomes in the Gulf of Mexico, problems in Brazil and the likely end of spending for all new Russian oil projects are just a few of the other gargantuan gaps in global production we're likely to see after 2016.
I've drawn two lines in black on production; one that most of the analysts including the EIA are making in how they see this production curve playing out, and mine - how I see it likely playing out.
While the EIA and most other analysts agree that sharp capex drops will begin to have their halting effects on oil production, they tend to argue over when those production drops come and how steep they will be. In all cases, they argue that any drop in production will be answered by a rally in oil prices, to the degree that U.S. shale players again 'turn on the spigots' and reestablish the gluts that have kept us under $50 a barrel for most of the last year. In this scenario, production never - or at least exceedingly slowly - rebalances to match demand.
I see it much differently. I could argue that the shale players, even with their low well drilling costs and backlog of 'drilled but uncompleted wells' (DUCs) cannot in any way repeat their frantic production increases they achieved from 2012-2014 ever again. I believe this because of financing constraints and the lack of quality acreage among other reasons - but I don't have to even "win" this predictive argument. Related: Why We Could See An Oil Price Shock In 2016
Longer-term projects from virtually all other conventional and non-conventional sources that have not been funded for the past two years will see their results, in that there won't be the oil from them that was planned upon. Chevron estimated in 2013 that oil companies would have to spend a minimum of $7-10 trillion dollars to 2030 to merely keep up with demand growth and the natural decline of current wells. And this was without factoring in the drop in exploration spending that is occurring now and throughout the next two years. Severe capex cuts from virtually every oil company and state-run producer over the last two years has put this necessary spending budget way behind schedule.
You can see why I tend to have a much more radical view of the decline line in production beginning in late 2016 and lasting, in my view, at least until the middle of 2018, when production again only begins to get the funding (and time) it needs to try and "catch up".
Meanwhile, there will be, as I see it, a violent crossing of the demand and supply lines in my graph - and an equally violent move in the price of oil because of it.
Finally, when this trajectory becomes obvious, the financial markets will waste no time taking full advantage of it - with a massive influx of speculative money, driving up prices even more quickly and steeply.
I've seen that before - and am currently alone in believing how close we are in seeing it again.
By Dan Dicker of Oilprice.com
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Dan Dicker is a 25 year veteran of the New York Mercantile Exchange where he traded crude oil, natural gas, unleaded gasoline and heating oil… More
Comments
Best regards.
Werner J. Casotti
Oil Engineer, Mendoza, Argentina
2. The whole rationale for 120 oil is that we are underproducing. However, if it is a rational outcome to predict 120 in the future, the projects would be getting done now, despite current low prices--banking on 120 in the future.
How much can Iran export? The Iranians might not even know. Will the 2 religious factions turn on each other in Iraq, after the 'Islamic State' is defeated? Production won't keep increasing if a big civil war starts there. It could spread too, since Iran and the Saudis are likely to take opposite sides in such a war. It would be Syria squared. And if Iran and Putin start winning, do you think the US will sit by and watch Putin and friend take over the world's gas station? Not too likely.
The only safe bet is that within 4 years oil will be substantially more expensive than it is today. The main reason is the cut back in sending on exploration today, especially offshore.
Be thankful for the invention of horizontal drilling, along with the amazing fracking advances. Without them, we might be looking at $200 a barrel already. A little more US oil production on the margin has changed everything. But it won't last forever because the supply of easy oil is being depleted at an increasing rate. In the not too distant future, no amount of investment will be able to stop the supply of oil from declining. Within a couple of years of that happening, all hell will break loose, as the global economy is forced to start shrinking from less work getting done. That shrinking could threaten the entire over leveraged global financial system. Banks aren't designed to function for long in a shrinking economy.
The link below has a video clip that is well worth watching. The article I linked to has a small error. The article suggested that Mostque was expecting oil prices as high as $130 by late 2016; he actually said it was possible that oil prices could hit $130 in 2017, before falling back to an $80 to $100 equilibrium range. He also touched on net oil exports, noting that Saudi net oil exports this year could easily be a million bpd below their 2005 rate (and I concur).
Oil could hit US$130 as U.S. output 'falls off a cliff': Analyst (November, 2015)
http://www.bnn.ca/News/2015/11/10/Oil-could-hit-US130-as-US-output-falls-off-a-cliff-says-analyst.aspx
Excerpt:
Unlike many analysts, he says U.S. shale production is set to decline, and as such won’t provide the necessary stop-gap to supply the increasing appetite in world markets.
“U.S. production is about to have a Wile E. Coyote moment where it literally falls off a cliff. One-hundred-and-twenty-thousand barrels, maybe even next month, will drop off,” said Mostaque. He says the notion that shale producers can suddenly boost their output as needed is a common misconception.
The controversial call pushes against bearish sentiment from Wall Street titans like Goldman Sachs. The investment bank’s head of commodities research, Jeff Currie, said last month that he does not see the price of oil breaking above US$50 a barrel in the next year.
Mostaque was early to bet against oil, forecasting between US$50 and US$70 per barrel last summer (summer of 2014). He raised concerns about the commodity’s price stability before oil started its dramatic decline in 2014.
Now he’s calling prices to rally as four to five million barrels disappear from global markets over the next four to five years.
As for why companies are not taking advantage of this, just take a look at their balance sheets. They can't spend money they don't have, and need to protect their ratings and (try to) maintain dividends.
Would this buffer not allow the national and independent E&P companies to set their house in order with regards Capex spend?
Gary
Petroleum Engineer, UK
Once production declines catch up with rig counts, the spike will be inevitable. It may not last long, but the spike is coming.
The truth is single model of Tesla "people" car pre-sold 250k units. Chinese capital is right now super polluted and they are moving into electric bikes / cars - some whole cities already banned anything but electric.
Sure some may say this is very small change - only few percentage points of all cars in the US will be electric - but oil moves by such amounts - such small changes will move peak oil closer to 2017 / 2018.
This implies we will need less oil from the peak => prices will stay low as decreased production from existing oil infrastructure will be offset by lower demand.
Not the oil drillers' money ... they can simply borrow more from their desperate lenders ... the customers' money!
The customers cannot borrow because they have nothing to offer as collateral, only their willingness to waste a non-renewable resource for fun ... and for absolutely zero return. The absence of return is why the industry is insolvent, its cash flow is entirely borrowed.
The more loans offered to drillers, the more QE; the more 'extraordinary' monetary policy ... the more government support (borrowed), the further the customer fall underwater. The fuel/credit system as it functions today is undermining itself. In its attempt to stay alive one more day, the drillers are destroying their longer term prospects: without solvent customers there is no oil industry!
Now, someone please tell me how onrushing oil shortages are going to make customers richer? Tell me how customers who cannot afford $50 oil are going to afford $120?
Demand is a function from the quantity domain to the price codomain. Throwing in time the domain becomes a two-dimensional plane, not a line as this article implies. This is high-school maths, it can not possibly be a "mistake".
"Sorry to those environmentalists who pray for an end to carbon use growth in the next decade – virtually no one currently believes it will happen."
In what fossil fuels is concerned, emissions are bound to peak certainly before 2025 and possibly still within this decade. Neither gas nor coal seem set to replace the loss in oil production in the coming years:
http://attheedgeoftime.blogspot.com/2015/11/peak-coal-in-china-and-world-by-jean.html
Good luck in finding non fossil CO2 sources to replace that.
Electric Cars. What a joke. How many batteries does it take to pull a 55 ton load of bricks one city block. How many power plants does it take to recharge that many batteries. How much will those batteries weigh.
One gallon of diesel will pull that load 8 miles. How much does a gallon of diesel weigh.
Democrats. Born ignorant and die stupid.
Therefore buy, buy till it's not too late.
Last chance for producers to make a lot of money before crude oil comes obsolet...