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Page added on December 28, 2014

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Is U.S. in an oil price nirvana?

Is U.S. in an oil price nirvana? thumbnail

 

Dallas economist Bud Weinstein prays every night for $60 oil — give or take five bucks a barrel.

That’s the sweet spot, he says, where the U.S. economy gets a boost without putting the brakes on oil-producing states such as Texas.

Lately, West Texas Intermediate crude has been fluctuating at the lower end of Weinstein’s nirvana zone.

The price of oil has been cut nearly in half since June, punished by too much oil for a slowing world economy and piling on by speculators.

Oil prices tried to stabilize midweek, bolstered by indications of stronger demand from China and word that billionaire Harold Hamm, a kingpin in the North Dakota shale play, will scale back his company’s growth plans next year. But the reprieve was temporary with West Texas Intermediate ending Friday at $54.73 a barrel, down another $1.79 for the week.

When oil is selling for $55 to $60 a barrel, drivers save about $100 per month per U.S. household compared with the peak, Weinstein says. America’s manufacturers can make products cheaper, which makes them more competitive abroad.

“A strong case can be made that with oil in the $60 range, the pluses for the U.S. economy outweigh the negatives, even in the state of Texas,” says Weinstein, the associate director of Southern Methodist University’s Maguire Energy Institute.

U.S. prices are expected to average $63 a barrel in 2015, the U.S. Energy Information Administration says.

That’s enough to make Weinstein do a happy dance. At that level, production in the nation’s three major shale plays — including the Eagle Ford and the Permian Basin in Texas — would continue to grow, albeit at a slower pace, he says.

But what happens if the price moves much lower and stays there awhile?

“If prices fall to the $40 range, that’s a different story,” Weinstein says. “At that price, we do see significant retrenchment of the industry.”

Texas and the 31 other oil-producing states aren’t the only ones that will take a hit.

“Dirt-cheap oil isn’t necessarily good for the Rust Belt,” Weinstein says. “Steel mills along the Ohio River have come back to life in large part to supply components to the oil and gas industry in the Marcellus and the Utica.”

Energy-independent?

The most significant consequence of the shale revolution has been overlooked, says Weinstein, who has been studying the Texas economy for four decades.

The U.S. now leads in production of oil, natural gas, nuclear power and renewable energy, and it’s second in coal, he says. That means the country can no longer be held hostage by foreign energy suppliers.

“Every president since Jimmy Carter has said, ‘We need to become energy-independent,’” Weinstein says. “Well, 40 years later, we are virtually energy-independent.”

His boss, Bruce Bullock, director of Maguire, doesn’t expect prices to bottom out for another couple of months, when demand typically hits the lowest point.

So how low will oil go?

“Anyone who answers that with any confidence is delusional,” Bullock says. “The market is hypersensitive to the data du jour and day-to-day chatter from OPEC and industry experts.”

Bullock’s best guess is that West Texas Intermediate prices will bump around in the $50 to $60 zone before beginning to recover as the world economy stabilizes. Prices for West Texas Intermediate run in tandem with Brent crude oil but are about $4 cheaper because there’s a glut of U.S. oil that can’t be exported.

“The question is: How far and fast does oil come back up?” Bullock says. “There are a lot of moving parts that make that very difficult to predict. But the further it drops, the higher it’s likely to rebound.”

West Texas Intermediate hit its all-time high of $147.27 on July 11, 2008, just before the bottom dropped out of the U.S. economy.

But absent a major geopolitical event, you can forget about seeing that again anytime soon, Bullock says. “We’re in a new world of $70 to $75 oil — certainly for the next few years.”

That’s because of one stunning change.

Price war

OPEC — the once-almighty consortium of oil-producing nations led by the Saudis — has abdicated price control power to producers in North Dakota and Texas, Weinstein says. “This is an astonishing development. If I’d predicted this five years ago, you would have rolled on the floor. It gives America huge economic and political leverage.”

This new dynamic became apparent at OPEC’s meeting in Vienna late last month, when the cartel didn’t rein in production even a smidgen. That, in essence, declared a price war with the U.S. shale industry.

Prices went into a free fall and have struggled to find firm ground since then.

Bullock says the Saudis made a big mistake in thinking they could regain market share by letting prices fall. “OPEC has vastly underestimated the ability of the U.S. producer to adjust. By doing nothing, they have ceded their role as the swing producer in global markets.”

The plunge has probably been better than “a slow bleed over the next year to year and a half, where we’re going down a buck to a buck and a half a month,” Bullock says. “At least we know the environment we’re going to be dealing with. We can adjust capital expenditures appropriately and move on.”

So far, smaller exploration and production companies have announced plans to scale back capital budgets by about a third for 2015, Bullock says.

Of the majors, ConocoPhillips Corp. and Apache Corp. won’t spend as much on exploration and production as they originally budgeted, but they still plan to increase spending over 2014.

Other big players are likely to follow their lead, Bullock says.

Continental Resources Inc., Hamm’s Oklahoma City-based company, is cutting expansion plans 41 percent for 2015. But that’s still a year-over-year increase.

When industry capital spending plans are added together, Bullock says, production should be up slightly for the first half of 2015 and level off for the rest of the year. Demand should pick up in 2016, as should production.

“And the U.S. industry turns out to be pretty healthy,” Bullock says. “But it’s going to be a bit of a bumpy ride getting there.”

David Biegler, chairman of Southcross Energy Partners LP, a natural gas master limited partnership, says his reconnaisance jibes with Bullock’s predictions.

“We are hearing that production volumes of both oil and natural gas in the Eagle Ford in South Texas will continue to rise throughout 2015 and that additional midstream expansion [think pipelines, natural gas plants and natural gas liquids fractionation facilities] will still be necessary to get it to market,” Biegler says. “We are planning for a continuing rise in production in South Texas but at a lower rate of increase.”

Natural gas prices are going nowhere fast, says Biegler, former chief operating officer of TXU Corp., predicting that prices will continue to bump along in the low $3s per thousand cubic feet until winter demand boosts them to about $3.50.

Bullock agrees. “I don’t see it getting much above $5 for the next four to five years except on a spot basis now and then when we get an Arctic cold snap. The good news is the industry has been very adept at cutting costs to cope with lower prices.”

dallas news



13 Comments on "Is U.S. in an oil price nirvana?"

  1. JuanP on Sun, 28th Dec 2014 8:49 am 

    I would love it if it played out like this guy believes for US shale. I just want some semblance of BAU in the USA to last five more years. But I am afraid my gut tells me this guy is tripping.

  2. westexas on Sun, 28th Dec 2014 8:50 am 

    From the article:  “Every president since Jimmy Carter has said, ‘We need to become energy-independent,’” Weinstein says. “Well, 40 years later, we are virtually energy-independent.”

    Currently increasing US production, from very high decline rate tight/shale plays, has allowed the US to reduce its net oil imports, but we are still heavily dependent on crude oil imports. 

    Based on the most recent EIA four week running average data, US refineries were dependent on net crude oil imports for 44% of the crude oil processed daily in US refineries.   

    Globally, the supply of Global Net Exports of oil (GNE*) has been below the 2005 rate for eight straight years, falling from 46 mbpd (million barrels per day) in 2005 to 43 mbpd in 2013.  And so far, the developing countries, led by China, have consumed an increasing share of a post-2005 declining volume of GNE.  The volume of GNE available to importers other than China & India fell from 41 mbpd in 2005 to 34 mbpd in 2013.  

    *GNE = Combined net exports from the (2005) Top 33 Net Exporters, total petroleum liquids + other liquids, EIA data

  3. bobinget on Sun, 28th Dec 2014 9:00 am 

    Excerpt; Wednesday’s EIA report:

    “U.S. crude oil imports averaged 8.3 million barrels per day last week, up by 1.2 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.6 million barrels per day, 1.4% above the same four-week period last year.

    Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 878,000 barrels per day. Distillate fuel imports averaged 376,000 barrels per day last week”.

    I know, I know, no one likes to be slammed up the side of the head by fact. EIA is as close to factual
    as we get in today’s mendacious oil world.

    (i’m just getting warmed up)

    I realize the US also EXPORTS petroleum products.
    Here’s the skinny; We still come up short 5,837 MB p/d after counting exports. (importers need those products)
    http://www.eia.gov/petroleum/supply/weekly/pdf/highlights.pdf

    Canada will be shipping more oil to Eastern Canada by 2016, then currently South of the border.

    Mexico’s production dribbles down a porcelain parkway.

    2015: Half of Venezuela’s exports, 2.3 MB p/d goes to China as debt service. Another million to Central America, the Caribbean and South America.

    Libya’s failed state status, exacerbated by almost 100% export dependency, now curtailed indefinitely.

    The US no longer imports oil from Nigeria.

    The US has thrown in militarily with Saudi Arabia. Saudi exports of over 9.6 MB p/d is geopolitically, perhaps even geologically, unsustainable.

    Iran and Russia are counted as adversaries.

    How’s that sound, mr energy independence?

  4. paulo1 on Sun, 28th Dec 2014 9:39 am 

    Westtexas beat me to it and said it as it needs to be told to society. There are numbers for God’s sake that underline his points. Nothing wishy washy.

    There is a propaganda war going on to keep this ‘all is well’ meme going and I see no end in sight. Phrases like ‘American exceptionalism’, and ‘energy independent’ uttered by people in power or by those vying for influence and/or leverage seems very akin to ‘master race’. It is scary to see from someone outside the US. Very troubling.

  5. rockman on Sun, 28th Dec 2014 10:35 am 

    It never amazes me that some folks persists in the unsupportable claim that increased global production has brought down the price of oil. For those foolish enough to support this claim here’s your chance.

    For several years the world has produced about the same amount of oil. More specifically since 2011 OPEC has produced in a narrow range: 29.8 to 30.9 million bopd. The inflation adjusted price for oil ranged from $89 to $92 per bbl.

    Even more recent: During 2013 the world produced an average of 90.1 million bopd… essentially the same as produced to day for an average price of $92.41/bbl. And today, with the same amount of oil in the market place the price has fallen about 35%

    So, Mr. Phelps, if you chose to accept this mission, please explain why all oil producers have chosen to reduce their incomes by 1/3 if the economies are still as willing and capable of paying $92/bbl. IOW why is OPEC et al forcing refiners to pay less for oil then the economies can afford?

    BTW US oil production increased by 1.1 million bopd from 2013 to the current rate. Global decline of existing fields is conservatively estimated to be 1.5%. IOW global production capability of existing fields has declined a bit more in the last 12 months then the US shale boom has added.

    So again: why are the world’s oil producers “volunrarially” reduced their revenue by $1 TRILLION PER YEAR if the economies could afford to pay the same price for the same amount of oil they consumed less then 12 months ago? To hurt US shale producers who are adding less production then the existing fields are declining?

    Common sense would indicate global oil consumption should boom and take every bbl of production capability at these bargain prices IF the collapse of prices isn’t due to a decline of global economic activity. After all that’s what happen when “oversupply” crashed the 12 month average price from $98/bbl in 2008 to $58/bbl in 2009, right? It certainly wasn’t due to the economic damage caused by prolonged high oil prices, right?

    Hmm…I forgot: the world bought less $58/bbl oil in 2009 then it bought $98/bbl oil in 2008. Excluding China, and perhaps India, let’s see how the world’s Healthy” economies increase consumption of all this cheap oil.

  6. Boat on Sun, 28th Dec 2014 11:13 am 

    If the US is ever to become energy independent it will shift to an electric economy. When is the direction not if. Oil and nat gas are just bridges.

  7. Nony on Sun, 28th Dec 2014 11:24 am 

    Rock:

    World volume is up year over year since 2009 and up since 2008, net.

    Bottom line is more oil volume supplied. (and now at a lower price).

    There’s a demand component in the drop, but it’s not a volume drop. It’s a decrease in expectations of future increase.

    Lots of analysts who know more about this subject technically than you do, say supply had an effect. You seem to want to blame every price increase on depletion and every price decrease on the economy.

  8. Plantagenet on Sun, 28th Dec 2014 11:32 am 

    If $60 oil can reignite global GDP growth and keep BAU going for another five years then I’m all for it.

    Don’t know about you, but I”m not looking forward to a global economic collapse caused by peak oil.

  9. wildbourgman on Sun, 28th Dec 2014 12:16 pm 

    Excellent point Rockman.

  10. rockman on Sun, 28th Dec 2014 12:57 pm 

    “Bottom line is more oil volume supplied. (and now at a lower price).” According to the EIA global oil production increased by 0.4% from 2012 to 2013 while the average oil price increased from $89/bbl to $92/bbl. So according to the EIA in 2013 more oil was supplied at a HIGHER PRICE then was supplied in 2012. And in the 1Q 2014 the same volume of oil was being supplied at the WTI average price of $100/bbl as is being supplied today at a price 40% lower. In fact, WTI futures closed at $55/bbl Friday.

    So we have pretty much the same amount of global oil production as well as US shale production as we did just 6 months ago in July when WTI Cushing was posting $103.59/bbl as we have today with the WTI futures closing at $55/bbl just last Friday. It would appear that in the last 3 years the amount of oil in the market place has not affected the price of oil.

    So are the consuming economies no longer capable of affording the higher oil prices forcing petroleum suppliers to lower their prices (which would also force them to reduce the price they pay for oil) or did the world’s oil producers volunteer (for whatever particular reasons) to take $1 TRILLION PER YEAR LESS for their assets? I’ll let everyone answer that question for themselves.

  11. Nony on Sun, 28th Dec 2014 1:06 pm 

    http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=5&pid=53&aid=1

    Volume is up year over year, every year. You always want to blame the price rises on depletion rather than demand increasing. And when price goes down you want to blame it on the economy even when it should be crystal clear that we have not had a major recession in the last few months.

    Add onto that cherrypicking periods and ignoring seasonality.

    “So according to the EIA in 2013 more oil was supplied at a HIGHER PRICE then was supplied in 2012. And in the 1Q 2014 the same volume of oil was being supplied at the WTI average price of $100/bbl as is being supplied today at a price 40% lower. In fact, WTI futures closed at $55/bbl Friday.”

    Do you even think about what you’re writing? Do you understand supply and demand curves? You MADE MY ARGUMENT. The 2013 versus 2012 PROVES increased demand an important factor (not just “POD”). And now we have equal volume at a lower price. That HAS TO BE a shift in the supply curve to more oil. It’s mathematical.

  12. shortonoil on Sun, 28th Dec 2014 2:42 pm 

    Could it be that the readership of the Dallas News is as clueless as the author of this piece​?
    Are they seeing this as just another every day down turn in petroleum prices, or are they beginning to realize that there are very fundamental problems in the world of oil? Problems that have no quick easy answer; problems that will not just go away if ignored. Problems that will change the face of the world!

    http://www.thehillsgroup.org/

  13. Perk Earl on Sun, 28th Dec 2014 3:39 pm 

    “Bullock says the Saudis made a big mistake in thinking they could regain market share by letting prices fall. “OPEC has vastly underestimated the ability of the U.S. producer to adjust. By doing nothing, they have ceded their role as the swing producer in global markets.”

    I don’t think OPEC underestimated anything. They’re just smart enough to know this price reduction will take it’s toll on other producers with higher priced operations, but it will take ‘TIME’, a word Bullock is too impatient to recognize.

    This is my favorite quote in the thread and there are some good one’s today;

    “Common sense would indicate global oil consumption should boom and take every bbl of production capability at these bargain prices IF the collapse of prices isn’t due to a decline of global economic activity. After all that’s what happen when “oversupply” crashed the 12 month average price from $98/bbl in 2008 to $58/bbl in 2009, right? It certainly wasn’t due to the economic damage caused by prolonged high oil prices, right?”

    Yeah, where’s the increasing consumption of a robust global economy chewing up as much energy as can be thrown at it – ah that’s right, it faltered at high prices, especially when the fat cat stimulus of QE got pulled out from underneath it.

    Coincidentally but not surprisingly, the value of the dollar started heading higher when QE subsided, due to an improved view by currency investors of the dollar. In turn emerging market economies currencies devalued, increasing the cost to them for oil, reducing demand, adding to downward pressure on oil price.

    The question I have is; Is the world economy now permanently forced down to a lower oil price, that will say never go higher now than $90 thru 2015. at least not for long. Then will the top price in 2016 be 80, then in 2017 70, and so on like Short suggests until we can no longer afford the stuff to keep the world economy going?

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