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Page added on May 9, 2014
Why Oil Prices Haven’t Gone Crazy
Why Oil Prices Haven’t Gone Crazy
By Matthew Philips
Bloomberg Businessweek
Illustration by 731
The oil markets have plenty of reasons to be spooked. In Libya, home to Africa’s largest reserves, production has fallen more than 80 percent since militias seized control of the country’s biggest ports last summer. Most of Iran’s oil remains trapped as well. Sanctions aimed at punishing Iran for its nuclear weapons program have crippled its crude exports by 1.5 million barrels a day. Nigeria is in the midst of its worst oil crisis in years: Rising violence, plus rampant sabotage and theft, have knocked out about 300,000 barrels of oil output a day. In Venezuela, which has the world’s largest oil reserves, production has remained unchanged after years of underinvestment.
Political chaos and violence are keeping 3.5 million barrels of daily oil production off the market, according to estimates by Citigroup (C). With tensions heating up over Ukraine, pressure is building for Western countries to impose Iran-style sanctions on Russia, the world’s largest oil producer. That would likely send prices soaring and push Europe, which gets 30 percent of its oil from Russia, into recession.
Yet through all the turmoil, oil markets have been strangely complacent. The price of Brent crude oil, the most traded oil contract in the world, fell from $110 a barrel on April 24 to $107 on May 6. The past three years have been one of the most stable periods for oil prices in recent memory, says Eric Lee, an oil analyst with Citigroup. Last year marked the smallest range of daily price movements in more than 10 years, according to the U.S. Department of Energy.
STORY: Want Cheaper Oil? Pray for Stability in Libya
The oil markets remain placid because almost all the oil production lost over the past few years has been replaced by the U.S. shale boom and increased Canadian production. U.S. shale oil production started to rise quickly in early 2011, right as the Arab Spring was kicking off. Since then, daily oil output in the U.S. has climbed by about 3 million barrels, to more than 8 million barrels. Canada has added more than 1 million barrels to its daily oil output since May 2011. “North America’s shale boom has been a huge calming factor,” says Lysle Brinker, an oil analyst at IHS Energy. “Without it, we might be seeing $150 oil right now.”
It’s hard to overstate the impact that rising U.S. oil output has had on global energy trade. Imports now make up only 28 percent of all the petroleum the U.S. consumes, down from 60 percent in 2005. In 2010 the U.S. was importing about 1 million barrels a day from Nigeria; now it’s 38,000. Much of the oil the U.S. used to import now goes to Asia. That’s helped keep markets well-supplied and prices immune from turmoil.
This calm may not last. Over the next five years, the world could experience an oil glut followed by a shortage. According to the International Energy Agency, which tracks oil markets, oil output by non-OPEC producers will rise by 1.7 million barrels per day in 2014, while total global demand will grow by only 1.4 million barrels. That has a lot of analysts predicting a crash in prices.
STORY: Oil Thieves of the Niger Delta
Underpinning this view is a rapid slowdown in China’s economic growth. For years, Saudi Arabia, as OPEC’s largest supplier, has had the most influence on oil prices, but some analysts believe demand from China now determines the price of oil. If that’s true, prices could drop sharply. Demand for oil in China has fallen for the past two quarters, including a 3 percent drop in the first quarter of this year, according to research firm Sanford C. Bernstein (AB). That marks the first back-to-back decline since the financial crisis of 2008-09.
U.S. crude stockpiles are near a record high, causing traders to cut their bullish bets on the futures market. Also, Libya is finally exhibiting signs of exporting again. Talks between Iran and officials from the United Nations Security Council, scheduled to begin on May 13, could result in the rollback of sanctions and increased exports of oil. Iraq is producing more oil than it has in 35 years. If this keeps up, then over the next two years, “You’re talking about prices in the low $70s,” says John Kilduff, a partner at Again Capital, a New York hedge fund that focuses on energy.
Longer term, the problem may be an insufficiency of oil. Crude is becoming much more expensive to produce. Major oil companies have increased spending on exploration and production by 14 percent a year since 2005, only to see their combined production fall. This has many big oil companies lowering their capital spending in 2014: ExxonMobil (XOM) has announced it will cut spending by 6 percent, Chevron (CVX) by 5 percent. Royal Dutch Shell (RDSB:LN) is looking to reduce spending by 20 percent this year. “Oil majors are being eaten alive” on exploration costs, says Steven Kopits, an oil analyst at Princeton Energy Advisors. Charles Maxwell, a veteran energy analyst, says that lack of spending today will eventually lead to higher prices. “That’s going to bite us big time,” he says. “2019 is going to be hell.”
17 Comments on "Why Oil Prices Haven’t Gone Crazy"
Boat on Fri, 9th May 2014 8:45 am
Don’t forget the Iraqi pipelines that were disrupted to the tune of over 1 mbpd that is still down.
Political chaos and violence are keeping 3.5 million barrels of daily oil production off the market, according to estimates by Citigroup
Is the Iraqi pipeline part of this estimate and why was it not mentioned. Is there a conspiracy theory at play? lol
bobinget on Fri, 9th May 2014 9:36 am
US “Advisors” have been ‘requested’ and sent to Nigeria. Ostensibly to find 250 ‘lost girls’.
The level of corruption in Nigeria rivals any historical
example. While there are fewer then six hundred Boko Haram, there are tens of thousands dependent on stolen oil. http://www.cnn.com/2014/05/08/world/africa/boko-haram-leader-plan/
These next African oil wars resemble beginnings of
US involvement in Vietnam.
Congressional Republicans are as aware of LYBIA’S
diminished exports as the names of all their children.
One tactic will be to get ‘revenge’ on Libyan,
Nigerian, terrorists with US killer drone intervention at first, later with ‘tactical’ special forces. The point will be made, “if we do not intervene, China will”. BTW,
China’s oil requirements have grown, not diminished.
(just check motorized vehicle, aircraft, military, sales, consumption, export, figures)
Whenever one hears China’s economy is slipping, look behind the headline.
Saudi Arabia cannot physically support Egypt much longer. When KSA oil shipments slow to a drip, Egypt will most certainly become the new Peak Oil Poster Child. Will Egypt’s new military leader press for ‘alternative energy solutions’ or move into neighboring
failed oil states like Yemen and Libya?
According to lessons learned, past experience, don’t expect African oil to come cheap.
paulo1 on Fri, 9th May 2014 9:37 am
Imports only 28%, since when? I thought US imports fluctuated between 40-48% this year?
Paulo
noobtube on Fri, 9th May 2014 10:06 am
The foreigners are stealing African oil and then threaten to attack Africans if they don’t let the Americans and Europeans get away with it.
If the Americans and Europeans launch another resource war on African soil, I don’t think they are going to like the outcome.
Look how well it turned out in Libya. Expect a whole lot more of that.
Mike999 on Fri, 9th May 2014 10:28 am
By 2019, I’ll own a Volt.
Mike999 on Fri, 9th May 2014 10:29 am
Exxon cut CAPEX spending by 50%.
Pops on Fri, 9th May 2014 11:31 am
I thought this was a pretty good overview except the part about…
“The oil markets remain placid because almost all the oil production lost over the past few years has been replaced by the U.S. shale boom and increased Canadian production. ”
IMO the real reason the oil market has been “placid” is because it is constrained by a production cost floor and a demand ceiling.
More on that here:
http://peakoil.com/forums/the-price-of-collapse-t68138.html
& a chart here
http://peakoil.com/forums/cushing-ok-peak-t69637.html?hilit=%5BIMG%5Dhttp://i58.tinypic.com/25a6ovb.jpg%5B/IMG%5D#p1191924
Boat on Fri, 9th May 2014 12:42 pm
palo1,
A while back you thought the US imported 10 mbpd. Well it’s actually 8.8 if you include everything like finished petroleum products. But we export 3 mbpd. Our consumption is right at 19 mbpd.
5.8 divided by 19 is right at 30%
These numbers aren’t perfect but get pretty close as a rough estimate I think. But I took general math in HS. My girlfriend sat in front of me in algebra and that didn’t work so well.
Ezrydermike on Fri, 9th May 2014 1:57 pm
like so many articles the terminology is used interchangably so it’s hard to figure out wth people are comparing. article talks about oil and switches to petroleum. Are these the same? Quick browse on EIA site for weekly / monthly avgs in mbpd for crude oil, not petroleum or petroleum products….US refiner crude oil imports = 15.226; US crude oil production = 8.033; crude oil imports = 7.375. so it would seem we are importing about 48% of the crude oil we are refining.
Boat on Fri, 9th May 2014 2:29 pm
http://www.eia.gov/dnav/pet/pet_move_wkly_dc_nus-z00_mbblpd_w.htm
top line imports total…8.8
crude oil…6.8
exports, crude oil .74
the reason you have to get into petroleum products is because we export a lot more than we import.
Can you show me the link it shows 15.226 oil imports?
Ezrydermike on Fri, 9th May 2014 2:38 pm
sorry boat, I meant refinery crude input, not imports. damm terminology again.
I understand what you are saying about petroleum products…my point is that they are not the same as crude oil and this article appears to be comparing them to each other.. I see a lot of mixing and matching of terms from everywhere.
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=wcrrius2&f=4
Boat on Fri, 9th May 2014 2:42 pm
Ezryder,
that chart would mess me up for sure.
shortonoil on Fri, 9th May 2014 8:28 pm
Pops said:
“IMO the real reason the oil market has been “placid” is because it is constrained by a production cost floor and a demand ceiling.”
That is fundamentally what is happening. Oil prices are not out of line from a historical point of view. Our projections give a mean price for 2014 at $116/barrel, with a lower 98.5% confidence interval of $97/barrel (see graph# 17 at our site). By our determination shale oil only reduces the price of crude by less than $2.00/barrel. You have to remember that about half of shale production is glorified paint thinner (pentane) which doesn’t process into transportation fuels. Because it doesn’t take part in a combustion process it doesn’t contribute energy to the general economy, so its effect is minimal.
The world economy is contracting from petroleum depletion, and excessive credit creation as a response. The cost of production is increasing, and the end consumer is tapped out. A geopolitical crisis is likely to drive prices up about $10, and that will then become the new floor until the next event takes place.
http://www.thehillsgroup.org
GregT on Sat, 10th May 2014 2:02 pm
Mike999,
Buy, and enjoy your new Volt now. According to our hydro electric company here in the pacific northwest, half of all electric power consumption by 2020 will need to be subsidized by conservation.
If you feel the need, armour plating, and perhaps a machine gun turret, might be in your best interest. I’m thinking that the general public won’t be overly impressed much by your technological prowness, when they can’t afford to heat their own homes.
Davy, Hermann, MO on Sun, 11th May 2014 7:23 am
Short said – The world economy is contracting from petroleum depletion, and excessive credit creation as a response. The cost of production is increasing, and the end consumer is tapped out. A geopolitical crisis is likely to drive prices up about $10, and that will then become the new floor until the next event takes place.
Short, I am not sure the efforts of the financial PTB can continue to repress the price of money through the many and varied global efforts of liquidity, low interest rates, and confidence measures. We are at the edge of the “oil goldilocks range” This is on the upside and bottom side for affordability of consumption and the physical ability of production. We are in a very dangerous financial situation of a new normal driven by financial repression to maintain liquidity and confidence. If confidence is breached it is “all she wrote”. What is worrisome is the trend of consumer affordability dropping and the physical production cost rising. It is a matter of time before these trends breach an effective range for BAU. This breach is the end of the financial system. I am not sure this will be the financial system collapse trigger but it is the final brick wall for the global financial system. The financial systems biggest dangers are structural. Now that we have a globally interconnected world, the financial system is a BAU time bomb that will end this global system. The end of this global system is the end of the “delocalized local”. This means the local that supports us all is in danger and must adapt quickly or there will be a die-off.
Boat on Sun, 11th May 2014 8:58 am
One of the reasons refineries in Europe and the US are shutting down is because of nat gas using CHP tech. Using fuel oil or oil byproducts without CHP to refine with is close to a $2 a barrell disadvantage.
Tex which is the US largest CHP tec user runs at 20% and projected to grow to 35% by 2020. \
Because CHP systems run at a 60-90% efficiency and coal at 30-33% efficiency it is clear that refineries that changed with the market are thriving and others are closing.
Because of the efficiency of the refineries in the gulf we now export from 3-4 mbpd when in 2010 we didn’t. The market is changing fast. All thanks to fracking and improved tech.
Davy, the world economies aren’t shrinking. The use of oil replacements is growing fast.
Boat on Sun, 11th May 2014 11:35 am
Here is another article that helps explain what is happening on the ground in the oil business.
http://www.nola.com/business/index.ssf/2014/04/marathon_petroleum_to_seek_per.html
There is no BAU in the refinery process.
Fuels once burned from oil to process more oil are going through huge upgrades to survive. Nat gas is cheaper for feedstock so much of the oil that used to be used in processing is now turned into more product.
The good news is that this newer tech is not only much more efficient but has a lot fewer emissions.
the end result if far fewer refineries but much bigger ones because scale matters.
Now all these changes may not save humanity from a huge crash but these are huge changes.
In tex alone CHP which captures heat and uses it accounts for 20% of electrical power. By 202o the percentage is forecasted to be closer to 35%. Tex is no small project. The US largest electrical producer.