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Page added on May 10, 2017

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Oil Below $65 Per Barrel…For Years

Consumption

 

Recognizing that something had to be done to halt the latest crash in oil prices, Saudi Arabia’s energy minister went public with his support not only for an extension of the OPEC cuts for another six months, but he also dangled the possibility of an extension into next year.

Based on consultations that I’ve had with participating members, I am confident the agreement will be extended into the second half of the year and possibly beyond,” Khalid al-Falih said during an industry event in Kuala Lumpur, according to Reuters. At the same time he waived away the signs that the market is still woefully oversupplied, acknowledging the larger-than-expected rebound in U.S. shale, but still noting that the fundamentals are improving. “I believe the worst is now behind us with multiple leading indicators showing that supply-demand balances are in deficit and the market is moving towards rebalancing,” he said.

Up until now the decision was whether or not to extend for six months. Now, with a six-month extension looking assured, there are questions about whether even that will be enough. The oil markets no longer appear to be impressed by a six-month extension, judging by the increasingly languid price responses that have come after OPEC comments in recent weeks. OPEC was very successful at talking up oil prices last year, but the rhetorical power of al-Falih is on the wane.

With the six-month extension now baked in, OPEC is growing concerned that inventories might still be elevated by the end of the year. As a result, OPEC is starting to look at a nine-month extension, according to Reuters. “To increase production in those months may have a negative impact (on prices). So we may ask for an extension until the end of Q1 of 2018,” an OPEC source told Reuters.

However, the Saudi energy minister also cautioned that oil watchers are being myopic, becoming overly-focused on the near-term while neglecting the longer-term fundamentals. He argues that demand will continue to rise and the severe cutbacks in exploration over the last several years are sowing the seeds of a shortage by the end of the decade. The comments echo recent warnings from the IEA about the pending supply shortage because of a dearth of discoveries since 2015.

Conservative estimates predict that we will need to offset 20 million barrels per day in combined demand growth and natural decline over the next five years,” Falih said over the weekend. “That is why I fear…we are heading into a future of supply-demand imbalances.”

Many of the top energy analysts tend to agree with al-Falih’s near-term assessment – that the recent selloff might have gone a little too far due to some technical trading particulars rather than the reemergence of a supply glut. The oil market, however ploddingly, continues to adjust towards some sort of balance.

But even as he agrees with al-Falih’s characterization of what’s taking place right now, Ed Morse of Citi disagrees very much with the minister’s medium-term assessment. That is, Morse argues there will not be a supply shortage at the end of the decade.

In an FT column, Morse lays out his case, arguing that U.S. shale will add new sources of supply; other sources of supply will come from Russia, OPEC and other non-OPEC countries; demand is softening because of improved efficiency; and even oil sands and deepwater drilling have become cheaper by some 20 to 30 percent. Morse also said that natural depletion is not as much of a concern as many think, arguing that only 40 million barrels per day of non-OPEC production – rather than all of the world’s 100 mb/d – is of real concern for natural decline. That means that “only some 10 mb/d of oil requires replacement over five years and technology and capital efficiency put that easily within reach,” Morse wrote in the FT.

Ultimately, Citi does not foresee the price spike towards the end of the decade and into the 2020s that the IEA has warned about. The industry has structurally reduced costs and can grow production even with oil trading at today’s prices. That could ultimately mean that prices never go back to $100 per barrel.

Volatility could pick up, especially in the short run, but Citi is projecting oil prices to trade within the $40 to $65 per barrel range over the next five years.

By Nick Cunningham of Oilprice.com



29 Comments on "Oil Below $65 Per Barrel…For Years"

  1. Lucifer on Wed, 10th May 2017 4:49 pm 

    Holy shite, someone from the FT says there will not be an oil supply shortage at the end of the decade, you could of fooled me.

  2. Cloggie on Wed, 10th May 2017 4:50 pm 

    What do the following topics have in common:

    1. Year2000 problem
    2. Peakoil
    3. Santaclaus

  3. observerbrb on Wed, 10th May 2017 5:16 pm 

    BW Hill is right again. I’ve lost track of the number of times he has been proved right.

  4. Boat on Wed, 10th May 2017 9:38 pm 

    Observer,

    Wrong, take off your clothes. Hill promised crashing demand. Demand is doing just fine. Some argue supply can’t keep up. So far the numbers say glut. Some argue to much production. The US is adding rigs and around 100,000 bpd. Lybia and Nigeria just added somewhere around 600,000. Glut, glut, glut. Hill has no clue.

  5. GregT on Wed, 10th May 2017 10:25 pm 

    Oil glut. Oil glut. Oil glut. Oil glut. Oil glut.

    If you tell a lie big enough, often enough, the people (dumbed down) will believe it.

  6. GregT on Wed, 10th May 2017 10:32 pm 

    “What do the following topics have in common:
    1. Year2000 problem
    2. Peakoil
    3. Santaclaus”

    They are all remnants of the past.

  7. GregT on Wed, 10th May 2017 10:34 pm 

    “Observer, …….take off your clothes.”

    There are other forums for those kinds of things Boat.

  8. rockman on Wed, 10th May 2017 10:54 pm 

    Wow! Oil will be under $65/bbl for years and Hill put ass on the line and called it. What gluts…I meant guts:

    Adjusted for inflation oil has only been over $65/bbl for just 16 of the last 138 years.

    Yeah, tough call there. LOL.

  9. GregT on Wed, 10th May 2017 11:02 pm 

    “Adjusted for inflation oil has only been over $65/bbl for just 16 of the last 138 years.”

    And every single one of those 16 years was during a financial recession, or an economic depression. Coincidentally……..

  10. Green People's Media on Thu, 11th May 2017 12:42 am 

    So, the deflationary debt-default cycle should continue for a while, it seems. As we learned from 2015-2016, even hundreds of oil & gas corporation bankruptcies do not arrest the policy of U.S. oil & gas companies and the State Dept.–drowning the global market in their products. Looks like they eliminated the Venezuelan economy for the next three or four decades. Who’s next?

    But more importantly you would think…

    What is the big plan of the frackers for what comes after the U.S. oil production Twin Peak?

  11. Plantagenet on Thu, 11th May 2017 1:20 am 

    GregT has it right—we’re still in an oil glut.

    Cheers!

  12. GregT on Thu, 11th May 2017 5:15 am 

    It is long since past the point that I came to the realization that you are either unwilling, or incapable of carrying on a rational adult conversation planter.

    Cheers!

  13. Anonymouse on Thu, 11th May 2017 5:23 am 

    Plantatard has it right-we’re still in a retard glut.

  14. rockman on Thu, 11th May 2017 9:21 am 

    Greenie – “…even hundreds of oil & gas corporation bankruptcies do not arrest the policy of U.S. oil & gas companies and the State Dept. – drowning the global market in their products.”

    “…drowning the global market in their products…” Drowning the world market with oil??? LMFAO! You seem to be unaware that the US is a huge NET IMPORTER of oil. In fact the US and China are the two dominant net importers.

    “Looks like they eliminated the Venezuelan economy for the next three or four decades.”

    Were it not for our glutinous oil consumption Venezuela, Mexico, Nigeria, etc. would have never had much of an economy in the past.

    As a greenie there certainly a number valid complaints you can offer about the US oil patch. But trying to make it appear the US oil patch/feds are trying to hurt Vz et al by “flooding” the market just exposes your childish blind prejudice IMHO. If you want to point a finger at countries hurting Vz et al you might look eastwards towards Saudi Arabia and Russia. Both have been “flooding the market” with oil for many years.

  15. bobinget on Thu, 11th May 2017 9:48 am 

    Sixty five bucks, a Goldilocks price, if there ever was one. This morning profit takers are testing lower prices as we watch.

    If we are talking decades, several obvious problems come to mind. I’ll keep it simple. If you are at all interested, follow-up.

    1) PetroDollar in the most serious Presidential
    Crisis in fifty years. This slow moving Coup is destabilizing US government and most of all, FAITH and TRUST in the USD. With so many Republicans supporting the sitting president, impeachment is impossible. This morning the loonie was attacked
    by US credit watchers just to make PetroDollars
    look stronger. (lose petrodollar power, game over)

    2) Demand: Most emphasis often lies with China and to a lesser degree India. By the end of next year, India could well surpass China as world’s #1 crude importer.
    Unlike China, India has not spent the last 16 years cultivating every singe crude oil exporter with loans,
    cheap (affordable) consumer goods, Not military actions.

    3) Maybe Climate Change should top this list.
    Building defenses against rising sea levels, enormous
    energy requirements . Concrete (surprise) tops the list of CO/2 emitters and general energy hog. Nevertheless, cements will be our material of choice.

    Melting permafrost turn Siberian and Alaskan pipelines into scrap. Entire villages, towns, cities, will need to move.

    Florida one of the fastest growing states, will, in fewer than 20 years will be underwater. Millions of Canadians will be forced to return home.

  16. joe on Thu, 11th May 2017 10:03 am 

    All things being equal predicting oil would be a sinch. However nothing ever stays the same. We cant know with high confidence what the world will be like, thats the problem with predictions, its the same as those hurricane tracks you see on the weather.
    Systems are unpredictable as time moves forward, even current conditions are open questions and our assumptions and biases skew things badly. One thing is sure, that whats burned today cannot be deburned tomorrow without throwing our way of life out the window. Even to recover naturally now the Earth needs millions of years, we want to burn more oil. Is there enough to go round? Yes and no. The answer lies in how we monetize our resources and incur debt. The perennialially ignored national debt spike seems to be the place where all our efforts are being dumped into this hole that we think is going to save us. As long as government’s keep footing the bill in the form of the fiat currency magic trick (not very halal or kosher) then people will continue to work, paint, grow, learn etc until they dont.
    Peak oil is almost an irrelevant question when you realise that people will find the tools they need as long as they think theres a benefit in it for themselves or their kids. Its just sad that in doing so they extinguish their efforts in the long term by altering the chemistry of the earths atmosphere and thus the physics of earths surface to a point of intolerance to human life.

  17. Sissyfuss on Thu, 11th May 2017 10:26 am 

    “This morning the loonie was attacked.” Thought you were talking about our fearless leader, Bobinanet.

  18. bobinget on Thu, 11th May 2017 10:53 am 

    Looks like force madjure is behaving, normally. IOWs in sync.
    with commodity prices. (in this case crude oil)

    Look at this morning’s early action— http://www.livecharts.co.uk/ForexCharts/usdcad.php

    Note: the Australian dollar reacts in the same fashion.
    http://www.livecharts.co.uk/ForexCharts/audusd.php

    In a side note, Looks like Nigeria will forego crude oil exports till further notice. Oil workers strike. It seems oil workers are not being paid.

  19. twocats on Thu, 11th May 2017 1:39 pm 

    average yearly oil prices below $65 until 2022? seems unlikely. 3 years of (somewhat) low oil prices has obliterated exploration and new field development. to think the permian etc can cover mega-field depletion for another 5 years, i’m skeptical. I don’t think you make it to 2020 below $65 without a major recession.

  20. Davy on Thu, 11th May 2017 3:05 pm 

    The global economy is juggling depletion but also economic demand destruction. China’s credit fueld growth is stalling. The US Trump reflation is a fizzle. Europe is back to a deflationary outlook with the issuance of long bonds. Combine the two trends of deflation and depletion and the outlook for healthy growth looks dim. How that exercise in juggling ends up may be what influences prices. A shock from shortages or a demand destruction driven glut or both in succession. Stagflation, depletion, and debt deflation what part of that indicates price direction? It don’t unless you can put the puzzle together.

  21. Boat on Thu, 11th May 2017 3:46 pm 

    Davy,

    Electricity prices in Texas have stagnated even though ther is growth in btu sales. Why? Wind is cheaper than than coal which is being replaced. This may make the economy look deflationary and weaker but the benefits of the growing btu use is still there. Efficiency over the last 30 years like Windows, led lighting, heat pumps, insulation, appliances have made huge cuts in the amount of energy needed. I don’t buy the theory deflation or stagnation is bad. Just more value from a btu and the actual btu is cheaper if you factor in health. All brought to you by tech.
    It is early to add electric cars to the better for less category but the future treand is easy to see. When the EV breaks through like wind has you will see the efficiency scale break. At that point where EV is cheaper than FF cars it will also cause deflationary trends and stagnation but the miles driven will continue to grow/value to society.

  22. Apneaman on Thu, 11th May 2017 3:57 pm 

    “For oil companies who heed Helm’s advice, the route ahead is a ruthless harvest-and-exit strategy. This would mean an aggressive slashing of capital expenditure, pumping of remaining oil reserves while keeping costs to the floor and paying out very high dividends.

    “They’d never do it because no company board would contemplate running a smaller company tomorrow than today. It’s not in the zeitgeist of the corporate world we’re in, but that’s what they should do,” Helm says.”

    https://srsroccoreport.com/oil-price-collapse-is-permanent-analyst-says-fossil-fuel-has-had-its-day/

  23. deadlykillerbeaz on Thu, 11th May 2017 4:21 pm 

    Anybody want to buy a covered wagon built by Studebaker and four horses teamed to pull the covered wagon?

    Anyone? Bueller? You’ll need a barrel for water, gotta buy one of those too. You’ll need grease for the wagon wheels, you’ll need tools.

    At ten miles. per day, you should reach Oregon in about 200 days, maybe less, starting from somewhere west of the Mississippi. Have to stop for rest and relaxation, horses need to graze and rest too.

    Anyone wanna buy a brand new car that will take you from Houston to Seattle in about 35 hours? You’ll need 2300 miles of paved road, but that is there now.

    A hundred gallons of gas will cost aproximately 230.00 usd.

    65 dollar oil is the bargain of the century, strike that, the millenium.

    45 dollar oil is highway robbery.

  24. rockman on Thu, 11th May 2017 4:30 pm 

    twocats – “…average yearly oil prices below $65 until 2022? seems unlikely. 3 years of (somewhat) low oil prices has obliterated exploration and new field development.”. Maybe. Not that history always repeats it self low oil prices in the late 90’s (such as under $20/bbl in 1998) kept the rig count down around 200 for 7 years.

    http://www.businessinsider.com/baker-hughes-us-oil-and-gas-rig-count-july-10-2015-7

    And the took 4 years to inch it up to 400 with the help of $80+/bbl by the end of 2008. But then oil under $60/bbl in 2009 knocked it back down to 200 rigs drilling for oil. But the prices shot back up and the count hit 1,400 in just 3 years. But good to remember that rig count boomed thanks to pubcos desperate to increase reserves and borrowed many tens of $billions to pay for those rigs.

    Oil prices are so tied to economic activity that if you can’t accurately predict the status of the economy in 2022 I don’t know much confidence one can have with a oil price prediction.

  25. rockman on Thu, 11th May 2017 5:02 pm 

    “They’d never do it because no company board would contemplate running a smaller company tomorrow than today.” The hell they wouldn’t. A “smaller company”? How about a no longer existent company. I’ve seen many companies formed with the specific goal of flipping to a bigger company down the road. And that includes the Rockman’s company. What of the most profitable efforts was done by Petrohawk: spent a couple of $hundred $million putting cheap Eagle Ford acreage together, drilled some seed wells and then sold the company to BHP Billiton for $12 BILLION. POOF!!! No more Petrohawk…just as the business plan was designed. Premature move by the Petrohawk…gave up on the play too soon? From the very day the deal closed the BHP Billiton stock stated sliding down. And started to do so long before oil prices crashed. Eventually it lost $90 billion in market cap.

    And then there were many companies that didn’t have liquidation as part of their long term business plan. And then TSHTF. IOW tapping out with some salvage $’s in their pocket.

    This has been so common since the 70’s the Houston Geologic Society published a reference guide showing that Company A was now owned by Company X. Critical because often we have to go directly to the original company to acquire data that hasn’t been publicly released. If sold had to find the new owner that has the old files.

    But one problem: by the time they compiled the list and published it was badly out of date. How common? Just a guess but maybe 70% or more of the companies I could list in 1980 no longer exist. But many of the fields they owned are still producing.

    If many economists haven’t taking into account this dynamic then no wonder some analysis misses the mark.

  26. twocats on Thu, 11th May 2017 5:57 pm 

    rockman – during the late 90’s there weren’t as many countries in terminal / near terminal decline. its possible enough countries can turn it around or halt decline temporarily. then add in LTO. also add in Davy’s demand destruction forces. also add in Boat’s efficiency. Add in trump sale of prime public lands.

    Maybe you have a perfect wonderful storm that keeps production ahead of demand (despite lack of major investment in conventional) for what would amount to a total of 8 years of low oil price (relative of what spurred the LTO boom to begin with). But we are talking over a decade where hardly a single energy company is making money and where hardly a single oil exporter is balancing its budget. that’s a lot of pain.

  27. twocats on Thu, 11th May 2017 6:08 pm 

    http://www.zerohedge.com/news/2017-01-04/global-debt-hits-325-world-gdp-rises-record-217-trillion

    scenario B: ka-ppom cycle: initial deflation followed by fairly massive inflation as the dollar-train derails off the track.

    so zombie economy (option a) or ka-poom explosion (option b), both lead to high oil prices for at least one year in the next five. but then again, zombies are notoriously long-lived.

  28. Boat on Thu, 11th May 2017 6:32 pm 

    Two cats,

    Let’s look at some what ifs. Iran claims wants to add 3 Mbpd. UEI wants to add 1 Mbpd per day over the next few years. Both Nigeria and Lybia could add 2 Mbpd if peace broke out. At $65 other tight oil would be economical to drill. At $65 tar sands could resume growth. Iraq is also growing capacity and could easily grow more production even at $45. How long can the Saudi and Russia keep the cuts going without adding that 1.8 Mbpd bac.k to the market. I can easily see a secenerio of $40-65 oil through 2025. By 2025 demand may come under pressure on the demand side due to electric cars, efficiency, switching more to nat gas etc.

  29. Davy on Fri, 12th May 2017 5:54 am 

    Demand destruction indicator just flashed. No, we are still growing but stagflation and commodity pressures are flashing a warning light. What goes for China and the US goes for the world and both don’t look good. A recession is likely ahead. They always happen and the next one is going to be a friggen doosie.

    “Is A Chinese Recession Imminent? Yield Curve Inverts For First Time Ever”
    http://tinyurl.com/mm9gjat

    “While China growth has been slowing, and monetary conditions tightening, few (if any) have predicted any prolonged deflation (let alone a recession), yet overnight – for the first time ever – the $1.7 trillion Chinese bond market inverted, flashing a warning signal to the world that something is wrong.”

    “But, as The Wall Street Journal writes, such a “yield-curve inversion” defies normal market logic that bonds requiring a longer commitment should compensate investors with a higher return. It usually reflects investor pessimism about a country’s long-term growth and inflation prospects.”

    “But of course, the reality is – without massive and continued credit creation, there are very large questions about just how ‘dynamic’ Chinese growth could be and while technical flows are certainly part of the reasoning for 5Y yields rising, the question is, why wouldn’t the rest of the world pile in to ‘reach for yield’… unless the fundamentals really did have them worried?”

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