Category Archives: oil

BP Energy Outlook 2016

January 27, 2017 By in oil, oil and natural gas, shale oil, shale oil and gas, Uncategorized Tags: , , , 2 Comments

BP just released its annual Energy Outlook.  

The company is projecting faster development of shale oil, coming mostly over the next few years from the US, than it previously thought.  Renewable energy supply will rise more quickly; (heavily polluting) coal usage will fall faster.  Most of the action will be in developing nations like China and India.  The US will attain energy self-sufficiency in a handful of years, oil self-sufficiency shortly after that.

 

To me, the most interesting topic the release brings up is not actually contained in the report.  It comes from comments by Spencer Dale, BP’s chief economist, during a press conference promoting the new Outlook.

According to the Financial Times, Mr. Dale said that there’s “twice as much technically recoverable oil available as the world is expected to need between now and 2050.”

First, “technically recoverable” means only that all of this oil can be extracted from the ground using current oilfield methods.  It does not mean it can be done profitably.  In fact, the choice of the word “technically” suggests BP believes that a significant portion is uneconomical at today’s prices.

Second, according to BP, much of this oil is unlikely to see the light of day…ever.    That’s because global demand for energy is likely to grow by less than 2% yearly.  Most of that will be supplied by renewables and natural gas; oil demand increases by less than 1% annually.

At some point, as the price of renewable energy continues to fall, and absent a decline in the oil price, demand for oil begins to shrink.   Since one might imagine that this drop might not take place thirty years, it may be of little practical concern to you and me.  However, for OPEC countries like Saudi Arabia, which holds perhaps 100 years worth of economically viable oil, and whose economy is radically dependent on petroleum, this is a significant worry.

Investment implications (assuming BP is correct):

–the oil price is unlikely to go up

–OPEC + shale oil will squeeze out higher cost oil production from the rest of the world

–future shale oil company profits will come as much from lowering production costs as from new finds

–big oil firms probably still have plenty of stranded assets (meaning oilfield investments that have become uneconomical and where recovery of the money already spent is unlikely) on their balance sheets.

 

 

 

 

more oil production cuts announced

December 12, 2016 By in oil, shale oil, Uncategorized Tags: , , , , Leave a comment

the news

Over the weekend, a group of non-OPEC oil producing countries, including Russia and Mexico, announced they will pare their collective crude oil output by 500,000 daily barrels.  About 60% of the total reduction will come from Russia.

On hearing that, Saudi Arabia said it would reduce its liftings by more than its already-promised 486,000 daily barrels.  The kingdom didn’t specify an amount, however–and the wording of its statement suggests the number will be small.

Nevertheless, the combined declarations have been enough to raise the price of oil in commodity trading by about 5% today, and 10% in total.

To put these figures into perspective, world crude production is around 98 million barrels per day.  So we’re talking about less than a 2% reduction in total output.

for oil producing countries

In one sense, the agreements have already been a financial success for the countries involved.  For most, they’ll reduce future output by, say, 2% and are already receiving 10% more for the 98% they are still selling.  That combination brings in 8% more dollars.

On the other hand, a $50+ price per barrel gives new life to shale oil producers in the US.  All to that that a fracking-friendly administration in Washington and the likelihood is that crude oil output from the US will begin to rise rapidly next year, offsetting at least some of the near-term output reductions now being achieved.

for investors

For us the situation is not so clear.

–Oil exploration and development companies in the US have already risen substantially on the original OPEC cutback announcement

–We’re also only about six weeks away from the beginning of the seasonally weakest part of the year for oil.  Crude oil bought in late January can’t be refined into heating oil and delivered to retail customers before the winter is over.  The driving season doesn’t begin in earnest until April.  So demand for the two principal refined products will be at a low ebb from January – March.  Soft demand usually translates into weaker crude prices.

–At some point, we’ll begin to see US crude output pickup

–The promised output cuts won’t take effect until the new year, so it’s impossible to find countries cheating on their output reduction pledges today.  The history of all commodity cartels tells us, however, that cheating will happen.  And if past is prologue, evidence of cheating will trigger a substantial price decline.

So we can reasonably expect a substantial bump in the crude-can-only-go-up-from-here road shortly.

Although I’m not doing anything at the moment, my reaction to all this is that I’m closer to being a seller of oil exploration firms than a buyer.  If I had a relatively large position (I don’t.  I only own one e&p stock), I’d be trimming it today, with an eye to possibly buying back in late January.

 

 

 

 

Saudi Arabia’s about-face

December 7, 2016 By in oil, oil and natural gas, Saudi Arabia, shale oil, Uncategorized Tags: , , , 1 Comment

About a week ago, Saudi Arabia brokered an agreement among oil producing countries to cap their aggregate output of crude at 32.5 million barrels daily.  This will require daily liftings to be reduced by 1.2 million barrels.  Of that 1.2 million barrels in cuts, the Saudis themselves will account for 486,000, or just over 40%.

This Saudi decision flies in the face of the kingdom’s previous policy and its experience in the 1980s, when it repeatedly reduced production in a vain attempt to stabilize prices.  What happened back then?   …other OPEC countries, with more pressing needs for cash and with relatively short-lived reserve bases (so playing a long game made little sense, just as today), failed to make the output reductions they agreed to.  More than that, they boosted their liftings instead in amounts that more than offset the Saudi cutbacks.  So prices continued to fall, and for years afterward Saudi Arabia lost access to long-time customers.

Over the past two years, because of the bitter experience of the 1980s, Saudi Arabia has refused to reduce its output despite pleas from other OPEC members.  It  has even increased production a bit.

…until now.

What should we make of this about-face?

The superficial arithmetic for Riyadh is clear–reduce output by 5%; the price per barrel rises by 10% as a result; total revenue rises by 5%.  That’s assuming no cheating by other parties.  But in the case of every economically-driven commodities cartel, cheating always happens.  And the Saudis know that OPEC proved itself no different from other cartels 35 years ago.

 

What’s interesting about this case is that for us as investors situations like these, where we have imperfect information, arise more often than we would like to believe.  Rather than obsessing about what we don’t know in these cases, it’s important to see what conclusions we can draw from what we do know.

In particular:

–Saudi Arabia simply can’t have forgotten about its experience in the first half of the 1980s.  It must believe that eventually some parties will fail adhere to their production quotas.  But it must have some reason to believe that this won’t happen immediately

–it’s possible the kingdom thinks that with supply and demand are almost evenly matched, output reductions will cause the crude oil price to rise substantially.  The price rise will ward off cheating

–the Saudis must also think that what they’re doing now is a better strategy for them than that of pumping full-out and keeping prices low.  Why should this be?  My first thought is that Riyadh’s finances are not in strong enough shape to continue to endure $40 a barrel oil

–the Saudis must realize as well that $50+ a barrel will reinvigorate the shale oil industry in the US, capping any possible price rise.  On the other hand, keeping prices at, say, $40 a barrel won’t make shale oil go away.  The industry will simply lie dormant for a while, ready to spring to life again when prices are higher.  On the other hand, they may no longer believe that they can destroy the shale oil business forever by keeping prices low.  they may even fear that technological advances and cost-cutting will make shale viable at $40 if they are allowed to take place.  So, counterintuitively, the best strategy for combating the threat of shale may be to discourage the development of such new techniques by keeping prices higher

my take

Buy shale oil and monitor OPEC closely.

 

 

 

 

 

yesterday’s report on US crude oil supplies

November 3, 2016 By in oil, oil and natural gas, Uncategorized Tags: , , , , Leave a comment

the EIA

Each week the Energy Information Administration (EIA), an independent statistical agency in the Energy Department that collects, analyzes and publishes extensive amounts of energy data, releases a report on US inventories of crude oil.

background

Over the past quarter-century, the typical US crude oil inventory stock level has been around 325 million barrels (excluding the Strategic Petroleum Reserve of 700- million barrels).  The figure shows some seasonal variation in most years, peaking in late Spring – early Summer and reaching a low point in late Winter.  But these swings have usually been relatively mild.  Before the current period of oversupply, for example, the weekly figure had never come in above 375 million barrels.

Between August 2014 and May 2016, however, the inventory number rose steadily from 331 million barrels to 510 million.  Since then, the figure has been gradually declining.  That, and talk of OPEC members placing a ceiling on the cartel’s overall production, have created the belief among speculators on Wall Street that the worst of the global crude oil oversupply might be behind us.

…until now.

the November 2nd report

The November 2nd EIA report shows crude oil inventories leaping by a huge 14.4 million barrels,to a total of 483 million.  While even the 468 million barrel inventory figure of a week ago is way above normal, the shock  to financial markets is that the change–typically one or two million barrels in either direction in any given week–is so big and that it is in the direction of more oversupply.

Even though one data point doesn’t make a trend, this one appears to have let a lot of air out of the balloon of crude oil bulls.

 

I’m still on the sidelines.  I continue to think we won’t the first clear signal of the state of the crude market until the seasonally slack period in late January – early February.

 

 

 

 

firming oil prices: seasonal strength or something more?

October 20, 2016 By in Industry Analysis, oil, oil and natural gas, shale oil, shale oil and gas, Uncategorized Tags: , , , , Leave a comment

September through mid-January is the period of greatest seasonal strength in oil prices.  Early in this period, refineries shift from making gasoline to supply drivers to manufacturing heating oil in advance of winter in the northern hemisphere.  There’s normally some friction in the supply chain as this takes place.  But the key reason for current oil price strength, I think, is the typical behavior of wholesalers, retailers and end users accumulating supplies of heating oil for winter use as autumn commences.

This period of strength usually ends in late January–after which there’s be no time to get newly-refined heating fuel to users before the weather warms.

What follows from February through April is the period of greatest seasonal weakness for oil.

 

What to make of current firmness in crude.  Is there any evidence that the proposed OPEC production limiting agreement is exerting upward pressure on the price?

My private hunch is that, yes, there is.  At the same time, I also think there will be little lasting (meaning over six months or a year) collective discipline to keep to promised quotas once they’re seen to be having an effect.  Budget deficits are too large and the third world us-against-them cohesiveness that enabled OPEC’s remarkable past cartel success is no longer present.

 

Still, I think that prices will be strong seasonally for a while in any event, so there’s no need to have a view on whether a production agreement will stick.  That time will come early in the new year.

At that point, for 2017 investment success, having a (correct) opinion about oil will be crucial, I think.  I’m hoping–and anticipating–that I’ll be able to make that decision on other grounds, i.e., the innate cheapness (or not) of shale-related exploration stocks, even without price increases.  In the meantime, I’m content to be on the sidelines.