Tag Archives: oil price

oil at $50 a barrel

June 8, 2016 By in oil and natural gas, shale oil, Uncategorized Tags: , , , , , , , , Leave a comment

It has been a wild ride.

Crude began to run up in early 2007.  It went from $50 a barrel to a peak of around $150 in mid-2008.  Recession caused the price to plunge to $30 a barrel late that year.  From there it began a second, slower climb that saw it break back above $100 in early 2011. Crude meandered between $100 and $125 until mid-2014, when increasing shale oil production from the US caused supply to outstrip demand by about 1% – 2% a year.  That was enough to cause a second slide, again to $30, that appears to have ended this February.

Since then, the price has rebounded to $50 a barrel, where it sits now.

To recap:  $50, then $150, then $30, then $125, then $30, now $50.

Where to from here?

We know that supply remains relatively steady, with additions to output from the Middle East offsetting falls in US shale oil liftings caused by lower prices.  We also know that lower prices have stimulated consumption.

The past eight years have also shown us that crude can have exaggerated reactions to small shifts in supply and/or demand.  So, in one sense, no knows what the crude oil market will do next.

On the other hand, we can set some parameters.

–the first is psychological.  The oil price has fallen to $30 a barrel twice in the last eight years.  The first was in the depths of the worst recession since the Great Depression.  The second was during a period of general market craziness earlier this year (caused, I think, by algorithms run amok).  I think it’s a reasonable assumption that prices will have a difficult time getting that low again–and if they do that they won’t stay there for long.

–the second is physical, and is about shale oil.  Overall shale oil output in the US is now shrinking.  Firms still pumping out shale oil are of two types:  companies being forced by their banks to sell oil to repay loans; and companies whose costs are low enough that they’re making a reasonable profit at today’s prices.  Cash flow from the first group is by and large going to creditors, so this output will diminish as existing wells are tapped out.  That’s probably happening right now, since shale oil wells typically have very short lives. This means, I think, the question about when new supply comes to market–putting a cap on prices, and perhaps causing them to weaken–comes down to when healthy shale oil firms will uncap existing, non-producing wells, and/or begin to drill new ones in large enough amounts to reverse the current output shrinkage.

I’m guessing–and that’s all it is, a guess–the magic number is $60 a barrel.

My personal conclusion, therefore, is that the crude price may still have a gentle upward bias, but that most of the bounce up from $30 is behind us.

 

 

 

latest news on oil

February 25, 2016 By in oil and natural gas, Uncategorized Tags: , , , , , , 1 Comment

Three developments in the last week or so:

—Saudi Arabia has clarified for reporters the significance of its recent agreement with Russia, Venezuela and Qatar to refrain from increasing oil production.  The Saudis have no intention of decreasing production, as the media had speculated, but will not pump out more than it is doing at present.

This makes it resoundingly clear, as if it weren’t already, that Saudi Arabia is taking a page out of J D Rockefeller’s nineteenth-century playbook.  It intends to maintain oversupply until weaker, higher-cost competitors are driven out of business.

—the International Energy Agency has revised up its estimate of how long it will take for steadily increasing world demand for petroleum to catch up to the current level of supply.  The breakeven date is being pushed back into 2017.

This breaking even consists of two separate elements:  the point when daily usage rises to/above the level of current oil production, and the subsequent–possible quite extended–period during which accumulated excess inventories will be run off.

My first guess is that the prices of oil equities will begin to readjust when the first of the two comes into sight.

—J P Morgan announced with its latest earnings report that it is tripling the reserves it is providing on its balance sheet for potential oil company loan losses.

This is “old” news, in the sense that this is accounting recognition of economic damage that has already occurred.  Two reasons for the lag:

—bank loans are typically secured by the oil and gas reserves that the borrower owns.  Their value can change either because the selling price of output rises/falls, or because the quantity of output that can be brought to the surface at a profit changes with price.   It’s conceivable that a small firm that had a million barrels of reserves a year ago only has 500,000 today–because 100,000 have been produced and 400,000 are not economically viable at today’s selling price. Because of this, in an extreme case a halving of the oil price could conceivably wipe out 90% of the value of reserves.  Figuring this out depends on getting a report from petroleum engineers who “audit” reserves annually.  Many such reports have presumably been just rolling in since yearend.

—accounting theory and tax law both argue against a bank making a good-faith guess at what the potential liability will be.  The more prudent course is to wait for reserve reports (required in the loan covenants) from borrowers.

My bottom line:  the only surprise here is the IEA surmise that supply and demand won’t be back into balance before next year.  Otherwise, the oil market adjustment process appears to me to be playing out as one might have expected six or more months ago.  On the good news front, we’re passing the seasonal low point for oil demand.  On the bad news side of the ledger, there’s no evidence that the successful, if economically crazy, stock market trading linkage between equities and oil is being broken.  If I were a trader, though, I’d keep working the trade despite the lack of economic underpinnings until I stopped making money with it.

 

 

 

can the oil cartel raise prices by cutting back production

February 18, 2016 By in Current Market Thoughts, Uncategorized Tags: , , , 3 Comments

cartel action in the offing?

That’s the rumor that has been supporting the oil price over the past week or so, despite this being the weakest season of the year for petroleum demand.  The story is that OPEC and Russia are having discussions right now about withholding output from the market in order to push prices up.

How likely is this to happen?

How likely is it that prices will rise if OPEC and others take action?

Supply/demand data

–world oil demand is about 95 million barrels a day, according to the International Energy Agency.  That figure has been growing at about a 1.5 million daily barrel clip over the past few years.  The IEA forecasts growth in demand to drop to a gain of 1.2 million in 2016, due to economic slowdown in China and the EU.  But demand will still likely be 96 million barrels/day by December.

–world oil supply is about 97 million barrels daily, according to the IEA.  That’s about 3 million barrels higher than at the end of 2014, due to increases in output from the US (2 million), Iraq (1 million) and Saudi Arabia (1 million-), partly offset by a bunch of production declines elsewhere.

–of the 97 million barrels of output, 39 million come from OPEC and about 14 from the former Soviet Union (11 million from Russia).  The rest come from oil consuming areas like the US, the EU and China.  These producers are, in my view, highly unlikely to cut output except when the selling price falls below the out-of-pocket costs of getting oil to the surface.

 

What I find fascinating about oil–and maybe this is just me–is the figures above show the gigantic fall in price since mid-2014 has been caused by a difference between supply and demand of only about 2%.  In fact, the IEA is forecasting continuing downward pressure on the oil price even though it thinks that the excess supply will be reduced to about 300,000 barrels daily, about 0.3%, by yearend.

It’s also important to note that demand for oil is relatively insensitive to changes in price over periods of a year or two or three.  Greater fuel efficiency of cars, substitution of natural gas or alternative energy, better insulation against heat and cold in construction, high taxes on fossil fuels in most developed countries (ex the US), are among the reasons.  What’s key for this discussion is that higher prices are very unlikely to make a dent in demand.  That’s a strong reason in favor of cartel action.

So, what would OPEC + Russia have to do to create a supply deficit?

…remove 2 million barrels of oil daily from world supply.  Let’s say 3 million, just to be on the safe side.  Given that OPEC + R control output of 53 million, that would mean each member reducing production by about 6%.  Assuming that increasing supply from US shale oil would only become economic at $40 a barrel, implying that’s the highest sustainable level prices are likely to achieve, OPEC + R could reap an almost immediate 25% increase in revenue by trimming output by 6%.  That’s a powerful incentive for economies radically dependent on oil sales and running short of cash.

Could this happen?

More tomorrow.

 

 

the weird relationship between stocks and oil

February 17, 2016 By in Current Market Thoughts, Uncategorized Tags: , , , , , 2 Comments

Over the past several months, there’s been a strong correlation between the movement of the crude oil price with the movement of stock prices around the world.  Oil goes up, stocks go up; oil goes down, stocks go down.

Until last week, there has been a certain logic to the link–a logic I think is incorrect, but a logic nonetheless.  Traders seem to be observing, correctly, that when economic activity is weak the demand for oil declines, both because consumers economize and industry uses less.  When that happens, the price of oil falls.  Therefore, traders say (incorrectly), the sharp drop in the oil price over the past 20 months is evidence that the world economy must be weaker than we think.  So low oil price = sell, or short, stocks.

 

Two problems with this line of thought:

–this is a little pedantic (actually, just skip over this paragraph), but logically “weak economy ⇒ falling oil price” doesn’t imply the converse, “falling oil ⇒ weak economy”.  It implies “not weak economy ⇒ not falling oil price.”  It’s like if you’re standing out in the rain, you get wet.  But if you’re wet, it doesn’t mean you’ve been standing out in the rain.  You may have been taking a shower.  Put a clearer way, the fact that a falling oil price is a symptom of economic weakness doesn’t mean it causes it.

–global demand for oil is, in fact, rising, not falling, according to the International Energy Agency.

 

Nevertheless, whether it makes sense or not to me, oil and stocks have been going up and down in lockstep.  So it makes sense to someone else–actually, a lot of someone elses.  And, like when it makes no sense but you see the train is barreling down the track at you, the best course of action is to step off the rails and out of the way.

That’s not the real weirdness.  Here’s where that comes in:

Over the past few days, oil and stocks have been going up on the rumor that a number of big oil producers, including OPEC and Russia, are talking about cutting back their production in order to prop up prices.

This would obviously be good for them.  If they’re getting $30 a barrel now and can move the price to $40 by reducing output by, say, 10%, their revenue goes up by 20%.  If the price got to $50, they’d be 50% better off than today.

However, this doesn’t make the world as a whole better off, nor does it stimulate the global economy.  It’s a transfer of money from oil consumers to oil producers.  It’s good for Saudi Arabia, Russia et al, but it’s bad for the US, Europe, Japan and China.  In the parts of the world the S&P 500 represents, it helps about 10% and hurts the other 90%.  So a rising oil price caused by cartel manipulation is a big net minus for the S&P.

Despite this, stocks soared yesterday, in robotic fashion according to the rule that stocks move in the same direction as oil.  Go figure.

the Obama $10 per barrel oil tax

February 8, 2016 By in oil and natural gas, shale oil, Uncategorized Tags: , , , , 1 Comment

Last week, the Obama administration said its upcoming budget will contain a proposal for a $1o a barrel tax on oil.  Its purpose would be to fund infrastructure, as well as to use price as a tool to redirect Americans toward other forms of energy.

Anything more than these bare bones is still a puzzle.

Clues:

–the adminstration says the tax would not be collected from oil producers at the wellhead, i.e., it isn’t a tax on crude oil

–nevertheless, the tax would be collected by oil companies

–the levy would not apply to oil products refined in the US and then exported

–it would apply to oil products refined abroad and imported, though.

Effect:

A barrel (42 gallons) of crude oil refined in the US ends up on average as 19 gallons of gasoline, 12 of diesel/heating oil and 10 of other stuff.

If passed on to end users completely and evenly by the as yet unspecified collectors, a $20 a barrel ta would mean a $.24 per gallon increase in the retail price of each product.

This would be a baby step along the road to lessening dependence on OPEC already traveled by every other country in the developed world in the 1970s.  Better late than never, in my view.

My take:

We’ll hear more later this week, I guess.  But it strikes me from what has been said so far that the proposal has been defined more by what Mr. Obama doesn’t want to do than by anything positive he intends to accomplish.

–I think collecting the $10 at the wellhead from producers would likely tip some shaky shale oil producers into bankruptcy and discourage others from doing any development.  After all, in a world awash in extra crude oil being stored in bunkers and even on ships tethered off the shores of producing countries, how is any independent US producer going to be able to pass on any part of the $10 to its refinery customers?

The waning of US shale would also have the disastrous consequence of handing control of the crude oil market back to OPEC and Russia.

–adding $.25 to the federal tax on gasoline and diesel fuel, which I think would be the simplest and most economically sound alternative, would upset the US auto companies, who are now raking in money from selling gas-guzzling SUVs.  Autos are a traditional Democratic constituency and a perennial problem-child industry that the government rescued from bankruptcy less than a decade ago.  So a gas tax is likely off the table.

In addition, a Republican congressman already raised the gasoline tax issue last year.  He got a lot of grief and no support from anyone on either side of the aisle.

–This leaves refiners and/or distributors is most likely to be the parties taxed.  To me, this implies that the $10 cost would be shared among producers, refiners and end users according to who has the most market clout.  2015 results from refiners and distributors tell us that they have already been keeping a substantial portion of the benefits of lower crude oil prices for themselves, rather than passing them on to customers.  My guess is that shrinking margins for refiners and middlemen would be the primary effect of the proposed new levy.

Also, if the past is any guide, the issue of tracking and differentiating between refined products for export and those for domestic use would be a regulatory/compliance–and a fertile field for fraud.

 

As we get more details, we’ll be able to decide whether the oil tax is something concrete or just wishful thinking.