I think something else that is missing from this discussion is what is the real price needed to avoid the collapse of the industry. If you believe anything Simmons, Hirsch, Deffeyes et al says, then we have some significant problems looming and they aren't completely tied just to production. it's across the board with the oil service companies too. It's Rust.

At some point it doesnt matter what the cost of a barrel goes for on the market. In order to keep the industry from an outright collapse crude prices need to be above some range. I believe that is more of what your seeing at the moment. I also tend to believe that we got an education last year and Peak Oil is much closer to everyones lips than we think.

My present fear is that we fail to avoid a collapse in price which will be devastating to the industry in the immediate future. Since I believe we are very near or past peak things are going to be different from the perspective of how the markets work and what the producers do in light of the market. You cant equate what is happening to historic oil price fluctuations because this time, near to or post peak, its fundamentally different from what went on climbing the up slope of the production curve.

I also believe there is something fishy going on with the inventory numbers. Demand is not off that much to suggest the builds as memmel seems to be discovering lately.

Very valid points. My big picture concept is that right now across the world have have done a good job of pretty much exploiting most of the production basins.
I think the combination of the rust effect and relatively low prices is causing a lot of marginal production to shut down. On top of this I think we really pushed production hard when the price was sky high. My best guess right now is all of these effects are leading to a lot of marginal production to be shut down.

Now the bulk of this is I think in small fields under 1000 barrels a day so its for the most part flying under the radar in the sense that its a large number of small events that total to a big effect but its so diffuse its hard to see.

In the GOM for example I've been reading about the costs of shutting down platforms and also that insurance is now effectively impossible to get. In general most of the shallow gulf production simply no longer makes economic sense one hurricane and you have lost your butt shutting in a damaged platform. And of course with the old infrastructure one big problem and it makes more sense to just shut it down.

It may be hard to see the actual changes but this would explain the demand for oil from larger producers and go a long way to explaining the current price.

Since I think a lot of it is offshore once its shut down we probably won't go back to these areas again basically no matter what the price of oil is. Its just not worth it.
On land I think its horizontal drilling thats grabbed the last bits of oil worth taking.

And your I think 100% right the "rust" factor is probably driving a lot of this. Every aspect of the situation is old from the fields to the equipment.

Sure it was worth one last big push when oil was over 100 a barrel but now thats behind us and the strain is taking its toll.

Given that all of this small production is probably estimated extensively in the official numbers they probably can't deal with a fast change in production from the small fields easily. It will take time before it makes it into the official numbers and even then they probably will lag the real situation by up to a year. I suspect it will actually show up in the tax data and after a while people will finally realize that its not just low price and a temporary slow down from these smaller fields but a real end of production.

Given various demand estimates and taking into account production declines from the large fields and OPEC cut backs you still really need and additional 3mbd decline to get supply and demand to balance.

Ignoring for now some of the claimed storage levels it looks like global demand is down about 6mbd but production looks like it has declined by about that much or more. Give OPEC 4mbd of decline or shut in production leaves at least 2-3mbd of declines and it makes sense that this could be coming from small/old/rusty fields.

Figuring at least 15mbd from small fields and a decline of 3 mbd gives a decline rate of 20% the underlying reason for this large decline would primarily be fields taken off line not production decline rates in producing fields although those probably have a 8-10% decline production decline rate.

A large amount of the production brought online since the 1990's was from smaller fields that had a production lifetime of 5-15 years most of it is simply at the end of its useful production life. The old equipment is closely related to these fields simply reaching the end of their useful production lifetimes. And since this production is primarily work overs of existing formerly large fields on land and in shallow offshore and the regions are well past being fully explored its simply going offline without replacement.

If I'm right about the nature of the problem then its only going to get worse every year with the effective decline rate increasing steadily. My best guess is its been going up about 5% a year since 2005. So its been 5, 10, 15, 20 and this year should be 25% esp with the relatively low price of oil but the high price could have worked to delay the onset of this as people pushed their fields for a bit longer.

For the US even with the addition of the deepwater production I was estimating a loss of about 2mbd starting in 2008 so we should see US production begin to fall off rapidly. If this concept is right we should see the official numbers finally catching up with the underlying situation and US production numbers head down rapidly. Say maybe about 30-50k barrels a month enough that it should be obvious after 3 months that production has declined quite a bit from the preceding three months. For the US a 150k barrel decline over 3-4 months will register.

So all you need to do is watch US production and if it starts doing something like this and your right about the underlying cause the problem is the same in many parts of the world and the behavior will be similar. Worldwide it could mean we are now losing 100-200k worth of production every single month and probably have been since sometime in 2007-2008.

In any case bottom line is if this idea is correct then it should become painfully obvious in 2009 the rate at which its working now should bring production well below demand as near as I can figure back in Jan-March i.e its already happened.

I've never said we did not have at least 50-100 million excess barrels in storage so this probably hid the situation for a bit. But now if I'm correct and the speculators are trying to maintain a sort of oil bank every time they sell a barrel they are buying one on the futures market at a higher price if they want to keep their bank going.

As long as they see a 5 dollar or so monthly increase in price and they locked in there purchases at least 3 months in advance then they will keep running the oil bank since they are setting on at least a 10 dollar profit when they finally sell the oil. And of course they can play the natural market swings.

This suggest that you will seldom see oil fall more than five or six dollars off of its most recent high before heading upwards in price again more often than not to a new high.

Whatever the price is if I'm right I really suspect what we will see is the market make a new high pull back by 5-6 dollars hit a hard floor then up again eventually making a new high.

Rinse and repeat with a three month average increase of 15 dollars or about 5 dollars a month. So every month will average about 5 dollars higher and within a given month you will never see the futures price for the near six months or even the front month fall by more than about 5 before rebounding. This is sort of a minimum scenario it can of course go higher than this but If I'm right it will seldom move less than this esp on the downside.

As time goes on the non-speculative inventories will slowly drain down and more and more oil will pass through this new oil bank before being refined.

The loss of all this small production is a big part of it since its forcing people onto the spot market which is being controlled by the storage speculators so these events are tightly interrelated as the precentage of production from the smaller producers declines. You have no choice but to play with the big boys.

Thank you sir can I have another

Monday, holy cow. I need a few days off....

Here's the situation:

Unleaded demand is within about a percent or two of what it was last year. Distillate demand is down a lot more, maybe 12-15% year on year, jet fuel demand is consistently down in the teens.

Refinery utilization has averaged 83% for months. Probably that is just about the break even point for this business... any lower than this, and people start to go out of business. It shot up to 86% the week before last, and then last week, down to 83%. The refinery business usually increases during this time of year to build a supply for summer....

Crude oil imports have been highly variable, and last week, maybe 4.5 or 5 million barrels vanished from the weekly calculation. The calculation we did a week or two ago suggested that some of this stuff is going to the SPR and not being reported weekly, but some of it is not being accounted for somehow (yet).

If you guess some moderate refinery usage like 83%, and demand to behave like it has been for the last two weeks, and and some plausible refinery inputs, it will come down to imports, like it always does, and because of the variability in imports, this could be literally anything. We do know that the inventory in Cushing is still near record highs, but we also know that the contango situation is still in effect, so it is anybody's guess which tankers will unload this week, and which will not. If you had a tanker of oil sitting in the gulf, which you were paying for, would you have unloaded last week when the price was high, or waited? If you waited, you probably did not like the price correction which happened late in the week last week.... so, if you are one of those people, what do you do this week? Offload your oil, or sit on it?

We will see what happens. I find it hard to believe the analysts have any better answers than I do, therefore I would like to renew my annual call for a team of bikini-clad interns to go and stake out the ports, and tell us how many tankers unloaded this week. The PO.com budget, being what it is, will not be able to finance this. Perhaps I can take up donations.

Pup, I need some advice.

I've been trying to buy crude options calls at 200 dollars for December 2013 for the past two months but there has been no activity.

I'm wondering whether it's worth betting lower over, say, a six month time frame. What would you bet on?

One part of the drop in distillate demand is a good bit of the nations cropland is currently underwater or by now very soggy

Given that the rest of the economy is flat to even still declining we can expect distillate demand to increase later this year than last year and the bulk of the increase to be from agricultural demand.

This will give us a fairly good idea how big distillate demand is for agriculture for planting season.

I'm guessing anywhere from a 3-6% increase in distillate demand in the coming weeks and the late planting season finally kicks off.

I've been unable to find any decent official number for agricultural related demand in the spring but we should get a good guess as distillate demand changes this spring.

Next the US has become a fairly large exporter of diesel as far as I can tell this is generally for agricultural use in South America. Harvest season in Argentina is March to May from one source. So as the Southern hemisphere harvests season overlaps with the planting season this should also put some pressure on distillate inventories. So overall I'm expecting to see the distillate inventory start to draw down.

http://article.wn.com/view/2009/04/19/Wet_fields_delay_start_of_planting/

Well, first, let me say the following: Warning: I am not an expert on this, I am just some guy on the internet. Do not take investment advice from anybody who has a job, especially about the commodities. This post, like all of my posts, is for entertainment purposes only, any action or inaction you take on the basis of anything posted on any website, especially this one, is strictly up to you.

But after having said that, let's look at the four things we always look at when we ask questions like this:

a. Are we still using just as much oil as we ever did? I have to say no, we are using about 5-6% less oil than we did a year ago. Now, to be sure, the peakers can and will say that the global supply decreased by this much during that time frame, and this may be a compelling excuse to go long, but I have to say, if the supply side situation is anywhere close to normal, there is a lot of oil around. The citizens of Cushing, Oklahoma are about ankle deep in inventory right now.

b. Is there any headline in the paper that can come out to make the oil price go down? I have to say at this point the market has regularly been taking a day off on the basis of some doomer headline, so that is not at all out of the question.

c. China: Is that story still going on the way it was? Well, the evidence is that it is not. Container shipping rates have dropped to pretty close to zero, all major cities have a place where empty shipping containers are being stacked up from disuse, there is evidence that we are no longer buying a lot of their stuff, they have shut down X number of their factories, their oil import demand is way off, and the whole US consumer thing that was driving their economy has come to a screeching halt. Now, to be sure, they will never admit to the fact that they are in a depression, but that's what it is. Their export business has contracted at least 15%.

d. Economic Armageddon: A quick browse through the news stories: Two of the three US auto manufacturing companies, the second largest shopping mall operator, many of the big retailers and a lot of the citizens of the country have gone bankrupt. Toyota, previously thought to have cornered the market on automotive brillance, is a money-losing company. I believe based on our little bit of research that we posted in OF2's oil demand thread the other day that there is at least another 5% decline in distillate use still in front of us, which means that the bottoming still has not quite happened yet. Many of the nation's banks and insurance companies have been effectively taken over by the government, who hopes to convince everyone that the system going forward will resemble in some way the system of past.

The one question mark out there at the moment is the prospect of hyperinflation/dollar collapse, caused by all of this government money floating around in the economy...which would cause the oil price to skyrocket (in dollar terms) as people look at alternative ways to turn those green pieces of paper in their pockets into something that someone would actually want.....but perhaps this is over-thinking.....

You have to wonder, on balance, why the oil is as high as it is.... The contango situation looks like the only compelling excuse for this to be the case, and I would be delighted to listen to arguments pro and con as to why the traders will not capitulate at some point and have the market flip at any moment....

You probably do not want to be selling naked $100 calls or anything, because you never really will know what will happen....Israel attacks, another 1973 OPEC shutoff, any of a dozen things....

but you have to say, maybe short is where you want to be at the current moment.

Remember what I said above about taking investment advice.....

Excellent points pup, but I still return to the obvious fact that producers may or may not be able to influence the price. My gut instinct right now is that what memmel has been researching and discussing here is a key part of this. If oil falls due to economic contraction its a bad thing for the industry. Very bad. I believe that is already taking place right in front of our eyes, but it's insidious. It happens like its in slow motion and those who are not thinking like we do here do not attribute it to the correct cause.

We are pushing ourselves off the slope/plateau for whatever reason you choose, but it IS happening. My guess is that if you can hold on over the longer term, say a year or two, maybe three, than your going to be rewarded well. There are too many things on the world's plate right now which point to prices rising. Even if global demand stays low, at some point 6,9, or even 10% YOY decline catches up with all the problems we have quickly.

Inventories will get worked through and the decline will outpace any global demand fall off. We may smooth the slope of the curve a bit short term, but we'll still get there. If demand falls off more than that than we have much much larger issues from an economic standpoint to deal with IMHO.

The reasons why traditional investing techniques may not work over the short term is directly becasue the folks who populate those markets, like shorts, and options traders dont share our opinions of what is going on, at least the majority of them I think. So investing in something you think makes sense because your here may not be the right tactic. I'm long USO for several reasons even though its a leveraged ETF. Long term it WILL make me a boatload of money I think, just like it did last price spike

You just need patience is all.

Bottom line is this is all a crapshoot, but you must educate yourself and make your own decisions.

I fly airplanes for a living and do quite well at it, but I've learned an awful lot about oil markets, how they work, and what influences them. I'm banking on this to make myself some long term money for my retirement.

Be very careful taking advice from anyone around here who does not do financial or market analysis for a living. On the other hand I know a lot of folks who actually do that for a living and i've gotten my calls for the energy market far more "right" than they have!

i think unless you are talking about tar sands or super deep wells
since the price plunge, the drillers would probably try and ramp up production to cut losses, or at least keep cash flow. Rather than shut the rigs down.

Oh, you are quite right on this, these guys are influenced by groupthink, what their bosses are telling them, and a lot of other information.... limited information set.

I do get out of the office a bit, and no one I see regards this as anything but a more severe than normal recession. They still expect that we will go back to something that approaches the previous conditions. I suppose it is human nature, silly humans. Perhaps the jury is still out as to whether this is a tectonic shift, as Kunstler says, or whether in a year or two we will get back to 2006 and reset the whole thing.

If the traders are like that, and it is my theory that they are, they will, on the short term, expect the market to back off if the economy gets weaker....and over the short term, it would not be surprising to see a fairly normal reaction to the potential for reduced demand.

If the world has indeed changed and we will never again see 86 mbpd for a variety of reasons, then 10 or five or three years from now we will be living in a radically different world...

We will see.

Thats rather the point increasingly I don't think they can. Its really a been there done that type of problem.

If you look at US production around peak you had a similar thing happen the US peaked all controls where lifted you had a drilling boom and production fell anyway.

If we are post peak then there is a tremendous about of rusted infrastructure hooked up to marginal production that has to be decommissioned at great cost.

I think the oil industry will see this second price increase as a gift from god but they are going to use this money to start the big clean up. I'm sure many expect this to probably be a brief price surge and they will be very very conservative.

Smaller independents that bough old fields and produced the hell out of them during the last price runnup are going to have to seriously face the decommissioning issue. I'd not be surprised to see some play the bankruptcy game but these legacy decommissioning costs will put a big damper of funding for rework of old fields by independents.

Investing in companies that specialize in decommissioning of oil infrastructure may be a very safe play.

So I think this is going to play a big role in the oil industry in 2009 many producers are going to be reinvesting the profits into shutting down and cleaning up fields not into expanding production or upgrading equipment.

Among a million other bits of interesting info in Morgan Downey's must-own book Oil 101 is that new storage is constructed as an antidote to contango, thus the prevalence of backwardation historically. How to keep track of that I couldn't tell you - certainly don't think it's available at the EIA. Perhaps I'll pose the question to Morgan personally at his Scarce Whales blog.

Perhaps just a marginal build is enough. But the only evidence of a change in storage capacity I've heard about lately is Enbridge scrapping some of their tanks at Cushing.

Well, hang on, here's India Oil storage : Govt to offer space



COLUMN-Recession delivers boom in commodity storage: John Kemp



Nothing about building storage though.

Wow, have a gander at the map of vessels parked outside Singapore harbor they provide. Data from vesseltracker.com.

Damn, registered at vesseltracker and that is one impressive resource. Will compile an .xls of all tankers listed therein, looks to be a simple enough job.

Hey, that really is impressive. I used to like Vesseltrax but I think this one is even better!

I'm still in favor of hiring the bikini-interns to check out the ports in person though.

Well, I suppose the moral of the story on this is, for a lot of energetic, well educated, industrious people, such as those trying to make a living in the oil industry, if you do not pay them for what they do, they will stop doing it. If you do not pay them for extracting crude oil from dangerous places, such as offshore in the gulf, the production will decrease from 5.4 mbpd to a bit over 5.2. If you do not pay them to run the refineries, they will cut production from 90-plus % utilization, which is what it was last year at about this time, to about 82%, and they will not care if the unleaded production falls to only 8.7 mbpd.... which is lower than it has been in May for the past 3 years since I have been keeping track, and probably a whole lot longer than that. Same with distillates. Same with the rest of the system as it currently is.

Note that we only imported about 8.8 mbpd.... I guess spring break is over, so the tanker captains must be doing something else with their spare time. Golf, perhaps. Maybe Cancun. I hear that it's practically deserted down there, what with the swine flu scare.....

Of course, people just do not want the oil right now.... the distillate users (off 15%) the jet fuel users (off 9%) and the people that decided to stay at home last week, thinking they would take a car trip for Memorial Day instead. (unleaded demand was down about 2% vs. the previous year).

More fun.

There were some reports last week to the effect that the Chinese are starting to import more crude oil right now.... what that suggests is that they are filling up their strategic reserve, and getting some money out of dollars and into oil....Maybe someone will pay them after all....