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THE Price of Crude pt 14

General discussions of the systemic, societal and civilisational effects of depletion.

Re: THE Price of Crude pt 14

Unread postby GoghGoner » Sun 07 Jan 2018, 08:04:42

On the inventory subject, it is still valid to use the five-year average even though it includes the glut. What you are not considering is that storage capacity has increased because of the glut and now (since oil inventories have fallen significantly the past year) there is a bunch of empty space where it didn't exist before. This means that if some buyer at Cushing wants to fill up wasted space now, that buyer could go on a spree whereas a couple of years ago that buyer didn't such a large capacity.

The farther that inventories fall, the further they will be from their storage limit so there will be more pressure upward on prices than in the past. When analyzing markets, using statistics, and comparing trends, I have found that nothing is directly comparable since we are always in a state of flux. We will always be mislead since we are linear thinkers in a non-linear world.
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Re: THE Price of Crude pt 14

Unread postby vtsnowedin » Sun 07 Jan 2018, 08:56:06

I like to look at storage levels in terms of days of supply at current consumption rates. Products supplied have been averaging 20 million barrels a day over all of last year so today we have a 94 day supply (crude plus finished products) and a year ago we had a 101 day supply a seven day 140 million barrel decline. We are back into normal supply to usage ranges but the question is will supply continue to decline or stabilize. Considering the weather in the Eastern US and the news from the middle East I expect the decline to continue and prices to rise steadily up to the $70's range.
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Re: THE Price of Crude pt 14

Unread postby Tanada » Sun 07 Jan 2018, 09:52:39

vtsnowedin wrote:Having lost a chainsaw and a couple of other small engines to ethanol poisoned fuel I am far from unbiased on the subject but let me try this exercise.
Take one gallon of pure gas pre tax at $1.60 per gallon. in your car it gets 35mpg so cost 4.571 cents per mile. Now take nine tenths of a gallon of gas $1.44 and add one tenth gallon of ethanol at $2.10 a gallon (subsidized 51 cents a gallon) so 1.44+0.21=1.65/ gallon of E10. Now E10 has 5 percent less energy so your gas mileage drops to 33.25 MPG so 1.65/33.25=4.962 cents per mile. 4.962-4.571=0.39 cents per mile which doesn't seem like much but when you multiply it by the 3.22 Trillion miles Americans drove last year it comes out to 12.5 Billion dollars wasted. Then consider that the fleet average for US cars is not 35mpg but 23.6 using E10.


Sure, by multiplying in all the drivers in North America you get a huge number, this is not surprising to anyone. On the other side of the coin the E-10 is in there by government fiat and the same government could easily require all new cars sold in America have a higher compression ratio, which would back out the energy issue from the other side. The reason Ethanol provides lower fuel mileage is twofold, first as already stated smaller molecules have inherently less energy by unit volume than larger molecules. Secondly, Ethanol is 110 octane more or less and burning it in a low compression engine designed for 87 octane fuel is incredibly inefficient. See we have this government run by politicians instead of engineers and in some ways they are like ADD afflicted ten year olds. They never look at an issue and carry it through to the logical conclusion, they just take the sounds good step and move on. Most auto manufacturers aimed for 87 octane for the USA market because that level of fuel is relatively cheap to produce and most people want a car that burns the cheapest fuel. Then in the 1970's during the phase out of tetraethyl lead to boost fuel octane ratings the refiners looked for a cheap alternative octane booster and an excuse to use it in their fuel products. They came up with two, MTBE (Methyl tert-butyl ether) and ethanol. In the midwest the Corn Growers Association jumped in with both feet and got their lobbyists in Washington to mandate E-10 as an 'oxygenate' to clean up exhaust by supercharging the catalytic converters. The Californians and some other states where Ethanol was not an abundant local product got permission to use cheap MTBE instead that they could easily manufacture locally. But the Corn Growers Association was never satisfied with the smaller midwestern market and have spent the last 40 years spreading their E-10 mandate to as many states as they could culminating in studies of the horrors of MTBE spills a decade ago and its general discontinuation in most fuel in the USA.
The Corn Growers Association also got commitments from various Presidential candidates because Iowa remains the first state primary for the quadrennial presidential election cycle so that commitment to E-10 and pushes for E-15 have become baked into American politics. Fuel blenders don't mind cheap subsidized ethanol because it lets them use some really cheap low octane fuel components and compensate with the high octane ethanol to get an 87 blend. Car manufacturers on the other hand despise it because the lower energy makes it hard to match fuel efficiency requirements without increasing compression, but increasing compression means labeling the vehicle as 89 octane or even 91/93 octane and that is about a 30 cent a gallon price difference which consumers hate. The simple answer is for the government to get rid of the E-10 mandate, or issue an adjoining mandate that all American sold new vehicles must have a compression ratio that is more efficient for ethanol fuel blends like 10:1 instead of the 6.5:1 which is commonly in use. With that kind of mandate 87 octane fuel would slowly disappear the same way leaded gas faded away in the 1980's until about 1995 when it was banned. The system we use now is clearly not very efficient. Heck in China most vehicles are required to be M/E-85 compliant so they are built in the factory with high compression engines to take advantage of the Methanol/Ethanol fuel high octane. Even more converting Natural Gas aka Methane into Methanol liquid fuel is a pretty simple step and would allow cheap Natural Gas to massively replace much of the gasoline demand in the USA. But it takes political leadership for these things to happen.
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Re: THE Price of Crude pt 14

Unread postby vtsnowedin » Sun 07 Jan 2018, 16:39:25

Tanada wrote: The simple answer is for the government to get rid of the E-10 mandate,

Yes on that we agree! :-D :)
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Re: THE Price of Crude pt 14

Unread postby kublikhan » Sun 07 Jan 2018, 18:15:48

GoghGoner wrote:On the inventory subject, it is still valid to use the five-year average even though it includes the glut. What you are not considering is that storage capacity has increased because of the glut and now (since oil inventories have fallen significantly the past year) there is a bunch of empty space where it didn't exist before. This means that if some buyer at Cushing wants to fill up wasted space now, that buyer could go on a spree whereas a couple of years ago that buyer didn't such a large capacity.

The farther that inventories fall, the further they will be from their storage limit so there will be more pressure upward on prices than in the past. When analyzing markets, using statistics, and comparing trends, I have found that nothing is directly comparable since we are always in a state of flux. We will always be mislead since we are linear thinkers in a non-linear world.
If some buyer in Cushing decides to utilize this wasted space, that is going to put downward pressure on prices. Anytime inventory grows oil prices fall. Adding more storage capacity doesn't cause prices to rise. Draining inventory causes prices to rise.

Investors must note that oil prices can increase in a sustained manner only if the global crude oil inventories are reduced in a substantial way. Global crude oil inventories are not reducing the way they should.
Why Oil Prices May Remain Under Pressure From Supply Side In The Near Future

Oil Prices Slip After API Reports Small Build In Crude Inventories

Oil Prices Fall After API Reports Huge Build In Gasoline Inventories

Growing global liquids inventories reflect lower crude oil prices

vtsnowedin wrote:I like to look at storage levels in terms of days of supply at current consumption rates. Products supplied have been averaging 20 million barrels a day over all of last year so today we have a 94 day supply (crude plus finished products) and a year ago we had a 101 day supply a seven day 140 million barrel decline. We are back into normal supply to usage ranges but the question is will supply continue to decline or stabilize.
In terms of days of supply, we are still abnormally high as well:

Image

The blue line is where we are. The colored band represents the highest and lowest ever for that time of year. We are still near the maximum.
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Re: THE Price of Crude pt 14

Unread postby vtsnowedin » Sun 07 Jan 2018, 19:30:45

You are mixing OECD statistics with USA statistics which are apples to tangerines. Not totally different but not exactly the same.
That the total OECD numbers are a lot less USA numbers tells you how big a chunk of the world supply the USA chews up.
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Re: THE Price of Crude pt 14

Unread postby Tanada » Sun 07 Jan 2018, 21:44:12

The OECD graph makes it pretty clear they were bumping along at the bottom of the range while prices were in the $80-$110/bbl window back in 2012-13. The logical reason for this was they kept stocks low because prices were high and tying up so much capital in expensive feedstocks would limit their ability to do other things with their capital funds. Now prices are heading back much closer to those prices with Brent already significantly higher than WTI for the first time in several years. This would lead me to expect OECD stocks to decline somewhat, perhaps not to the bottom where they sat in 2012-13, but much closer to the middle of the range.
I should be able to change a diaper, plan an invasion, butcher a hog, design a building, write, balance accounts, build a wall, comfort the dying, take orders, give orders, cooperate, act alone, solve equations, pitch manure, program a computer, cook, fight efficiently, die gallantly. Specialization is for insects.
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Re: THE Price of Crude pt 14

Unread postby kublikhan » Mon 08 Jan 2018, 09:53:23

vtsnowedin wrote:You are mixing OECD statistics with USA statistics which are apples to tangerines. Not totally different but not exactly the same.
That the total OECD numbers are a lot less USA numbers tells you how big a chunk of the world supply the USA chews up.
That's not the reason the numbers are different. The OECD data is for commercial inventory only. You were including the SPR(strategic petroleum reserve) in your data. Commercial inventory does not include strategic petroleum reserves. Apples and tangerines as you might say. Once you exclude that data from the US numbers the OECD statistics and the USA statistics match up very closely. OECD stocks(Fig12) comes out to 61.7 days supply as of Novemeber 2017(latest data) and the US stocks comes out to 61.3 days supply(latest data).

vtsnowedin wrote:We are back into normal supply to usage ranges
No we aren't. The US had around 53 days supply(excluding SPR) at the start of 2014. Today we have around a 61 day supply. We still have an abnormal amount of supply.

Tanada wrote:The OECD graph makes it pretty clear they were bumping along at the bottom of the range while prices were in the $80-$110/bbl window back in 2012-13. The logical reason for this was they kept stocks low because prices were high and tying up so much capital in expensive feedstocks would limit their ability to do other things with their capital funds. Now prices are heading back much closer to those prices with Brent already significantly higher than WTI for the first time in several years. This would lead me to expect OECD stocks to decline somewhat, perhaps not to the bottom where they sat in 2012-13, but much closer to the middle of the range.
I suspect this will happen as well. But not this year. Both the EIA and IEA are projecting the inventory drain to slow down in 2018. Perhaps even reverse to a slight inventory build.

Our current outlook 2018 may not necessarily be a happy New Year for those who would like to see a tighter market. Total supply growth could exceed demand growth: indeed, in the first half the surplus could be 200 kb/d before reverting to a deficit of about 200 kb/d in the second half, leaving 2018 as a whole showing a closely balanced market. A lot could change in the next few months but it looks as if the producers' hopes for a happy New Year with de-stocking continuing into 2018 at the same 500 kb/d pace we have seen in 2017 may not be fulfilled.
Oil Market Report

Demand growth is not forecast to keep pace with supply growth resulting in global liquids inventories increasing modestly in 2018. With global inventories expected to increase in 2018, EIA forecasts Brent crude oil prices will decline from current levels to an average of $57/b in 2018.
EIA: SHORT-TERM ENERGY OUTLOOK

Edit: fixed 2014 days of supply to reflect 2014 consumption levels.
Last edited by kublikhan on Mon 08 Jan 2018, 11:52:18, edited 1 time in total.
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Re: THE Price of Crude pt 14

Unread postby GoghGoner » Mon 08 Jan 2018, 10:40:03

The US crude stocks are counter-seasonally declining. They are quite a bit below where they were at last year. If you had good numbers, you would find this same trend in floating storage and most other countries inventories. China was building inventory last year.

The reason prices are in backwardation is because the market expects more supply in the future. What the market expects and what it gets doesn't have to match at all. The EIA has had a very poor track record of predicting prices, you can go back thru the archives here and elsewhere for the actual numbers. Maybe they have done well since 2015 but that doesn't mean they have it figured out -- they are just always bullish on supply and predict things to be mostly stable. Like most of us are always bearish.

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Re: THE Price of Crude pt 14

Unread postby Tanada » Mon 08 Jan 2018, 11:17:12

As we do get past the storage issue whether that is 2018 or 2019 I will find it interesting to see these 5 year trend graphs gradually morph more and more to showing the high fill status as the average.

What I mean is, starting in mid 2014 the stocks began to build and they kept building right through 2015. For 2016 they slowly built for the first few months and slowly declined for the last few month ending the year at virtually the same high level they began with. 2017 just passed the stocks seasonally built some in the start of the year but the overall trend was a decline over the course of the year to end around the middle of where we were in 2015 on the building side of the glut. Now the 5 year averages the IEA and other organizations use for placing the grey 'zone' on these graphs was 2010-2014 for the 2015 rapid building phase so if you go back and look at a say June 2015 graph the trend line is way high above the grey zone on the graph because the build was rapid and large scale. But if you look at that same graph plotted in June 2018 the five year grey zone will be based on 2013-2017 inventories and because that includes the start of the build in 2014 all the way through the current still high levels this will skew the grey zone higher than the 50 day commercial inventories average kublikahn is pointing to. This in turn may mislead people into thinking those high levels are what we should be aiming for in 2018 and 2020 and for several years beyond simply because they use a short five year cycle of data and the glut has lasted over 60% of the cycle and is still in process. IMO it would be useful if they would include a graph with the 10 year average zone and the 20 year average zone as options to clear out or smooth over rather these short term fluctuations.

Kublikhan do you have data on how many days of working storage the USA/OECD kept on hand in say 2005? Was it generally kept to 50 days or was it higher before prices started expanding in the Aughties?
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Re: THE Price of Crude pt 14

Unread postby kublikhan » Mon 08 Jan 2018, 11:34:33

The draw in crude oil is offset by a build in refined products.

Inventories of U.S. crude fell by roughly 7.4 million barrels for the week ended Dec. 29. Crude stockpiles fell for the seventh-straight week offset a larger than expected build in product inventories. Gasoline inventories – one of the products that crude is refined into – rose by 4.8 million barrels, well above expectations for a rise of 2 million barrels, while supplies of distillate – the class of fuels that includes diesel and heating oil – rose by 8.9 million barrels, confounding expectations for a rise of just 500,000 barrels. US distillate supplies are 20 million barrels below 2016 levels but just one million barrels shy of the ten-year seasonal average.

Crude production, however, continued to advance toward 10 million barrels per day. Total weekly U.S. production jumped by 28,000 barrels a day to nearly 9.8 million barrels a day.
Crude Prices Settle Higher, Shrugs Off Huge Gasoline, Distillates Build

U.S. crude stocks fell last week as refiners boosted activity to the highest rate since 2005, while stocks of distillates, which include diesel and jet fuel, rose by the most in a year.

Refinery activity hit its highest utilization rate since 2005 as refiners kept processing heavy volumes of crude into products, and due in part to year-end tax concerns. “Refineries have the incentive to run down stocks to avoid tax payments, which are based on the level of crude oil stocks at the year-end.”

Crude inventories fell by 7.4 million barrels in the week to Dec. 29. Distillate stockpiles, which include diesel and heating oil, rose by 8.9 million barrels. Gasoline stocks rose by 4.8 million barrels.
U.S. oil stocks down, fuel inventories up sharply

Another big dip in the nation's crude oil stockpiles was offset for the second week in a row with an even larger build in gasoline inventory levels. The country's falling oil glut saw its commercial crude stocks decline by 5.1 million barrels last week. However, gasoline inventories grew by 5.7 million barrels.
Big oil inventories draw again offset by fuels build

Tanada wrote:Kublikhan do you have data on how many days of working storage the USA/OECD kept on hand in say 2005? Was it generally kept to 50 days or was it higher before prices started expanding in the Aughties?
There's a graph here that gives US storage levels that far back:
Weekly U.S. Ending Stocks excluding SPR of Crude Oil and Petroleum Products

You can do a little math to translate that into days of supply. 947,390,000 barrels / 20,802,000 bpd = 46 days of supply in Jan 2005. If I am remembering this correctly, reported US storage levels increased a bit even before the glut. This is because we have higher domestic oil production and more domestic oil in transit. Domestic oil in transit(ex: oil in pipelines, railroad cars, etc) is counted as storage however foreign oil in transit(ex: oil in tankers) is not. IE, 46 days of storage in 2005 might in reality be similar to 53 days of supply in 2014 once you even out the transit factor.
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Re: THE Price of Crude pt 14

Unread postby GoghGoner » Mon 08 Jan 2018, 13:19:22

Let's say you has a safety net of $10,000 in a savings account for an emergency in 2014. Then you inherited some money and decided to keep $20,000 in the account. Now, after some unexpected expenses the account is down to $15,000.

It doesn't matter what you had in the account five years ago, it matters how much your balance has fallen. You are going to feel impelled to keep your balance up.
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Re: THE Price of Crude pt 14

Unread postby GoghGoner » Tue 09 Jan 2018, 13:24:53

WTI at $63. Brent close to $69.

Last time we saw WTI prices this high was in December, 2014. This bull will keep running until crude inventory draws stop.

Supply reports this week from industry group the American Petroleum Institute and the U.S. government’s Energy Information Administration are expected to show U.S. crude stocks fell 3.9 million barrels, an eighth week of decline.
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Re: THE Price of Crude pt 14

Unread postby Tanada » Tue 09 Jan 2018, 15:59:39

GoghGoner wrote:WTI at $63. Brent close to $69.

Last time we saw WTI prices this high was in December, 2014. This bull will keep running until crude inventory draws stop.

Supply reports this week from industry group the American Petroleum Institute and the U.S. government’s Energy Information Administration are expected to show U.S. crude stocks fell 3.9 million barrels, an eighth week of decline.


Sure, if you have been sitting on stored oil for 18 months and bought in early to mid 2016 it is worth at least 50% more today than it was back then, depending on your timing. Selling off your commercial stocks is a good profit taking opportunity for the big scale storage companies.
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Re: THE Price of Crude pt 14

Unread postby vtsnowedin » Tue 09 Jan 2018, 16:28:56

Tanada wrote:
GoghGoner wrote:WTI at $63. Brent close to $69.

Last time we saw WTI prices this high was in December, 2014. This bull will keep running until crude inventory draws stop.

Supply reports this week from industry group the American Petroleum Institute and the U.S. government’s Energy Information Administration are expected to show U.S. crude stocks fell 3.9 million barrels, an eighth week of decline.


Sure, if you have been sitting on stored oil for 18 months and bought in early to mid 2016 it is worth at least 50% more today than it was back then, depending on your timing. Selling off your commercial stocks is a good profit taking opportunity for the big scale storage companies.
What does it cost to store a million gallons of crude for eighteen months?
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Re: THE Price of Crude pt 14

Unread postby Sys1 » Tue 09 Jan 2018, 16:45:53

I hope this year we will be hit by subprime crisis 2.0. At least, it will be more fun than watching Starwars 24 or reading Fox news.
All we need is oil getting up to a hundred box and all debt morons playing monopoly at FED and BCE in Europe will start to freak out considering those two marvellous choices beside them :
- Hey, guys, let's put down (again!) interest rates to save a slowing economy. Oh shit! inflation skyrocket up to the Moon.
GAME OVER!
- Hey, guys, let's put up interest rates to cool down inflation. Oh shit! All our FUCK'N assets are collapsing again! GAME OVER!

Nobody at the top of the pyramid gets our civilisation is doomed. They are spoiled by their beloved money they call God. The richest in the Titanic were the last to get the boat was sinking.
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Re: THE Price of Crude pt 14

Unread postby kublikhan » Tue 09 Jan 2018, 17:32:34

vtsnowedin wrote:What does it cost to store a million gallons of crude for eighteen months?
Current rates are around 35-50 cents per barrel per month. $1.20 per barrel per month if you bought in when it was most expensive(2015-2016, when tanks were filling up). So a million barrels for 18 months at current rates would be around $7 million. Triple that if you are talking the most expensive rates from around 2015-2016.

In the Houston area, traders that took out storage at the height of capacity issues in 2015 at around $1.20 a barrel are finding it no longer economical. The futures contract for oil storage there LOSc1 has fallen to around 40 cents per barrel, down about half in a month.

The going rate for putting oil in tanks in Cushing is around 35-50 cents per barrel per month, though some secured cheaper space still considered profitable before the oil price rout began in mid-2014.

One of the most expensive storage options is to hold oil on tankers at sea. During the massive build up in inventory through 2015 and 2016, even some of that was profitable.
Traders drain pricey U.S. oil storage as OPEC deal bites
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Re: THE Price of Crude pt 14

Unread postby vtsnowedin » Tue 09 Jan 2018, 20:44:15

kublikhan wrote:
vtsnowedin wrote:What does it cost to store a million gallons of crude for eighteen months?
Current rates are around 35-50 cents per barrel per month. $1.20 per barrel per month if you bought in when it was most expensive(2015-2016, when tanks were filling up). So a million barrels for 18 months at current rates would be around $7 million. Triple that if you are talking the most expensive rates from around 2015-2016.

In the Houston area, traders that took out storage at the height of capacity issues in 2015 at around $1.20 a barrel are finding it no longer economical. The futures contract for oil storage there LOSc1 has fallen to around 40 cents per barrel, down about half in a month.

The going rate for putting oil in tanks in Cushing is around 35-50 cents per barrel per month, though some secured cheaper space still considered profitable before the oil price rout began in mid-2014.

One of the most expensive storage options is to hold oil on tankers at sea. During the massive build up in inventory through 2015 and 2016, even some of that was profitable.
Traders drain pricey U.S. oil storage as OPEC deal bites

I have read elsewhere that the number of storage tankers anchored at Singapore is declining. It looks like world wide the supply situation is getting tighter.
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Re: THE Price of Crude pt 14

Unread postby Tanada » Tue 09 Jan 2018, 23:11:19

vtsnowedin wrote:I have read elsewhere that the number of storage tankers anchored at Singapore is declining. It looks like world wide the supply situation is getting tighter.


Based on this Reuters article at sea tanker storage off Singapore had already fallen 2/3rds from 30 MM/bbl to 8.1 MM/bbl between June and September 30 of 2017. Given where prices were in November and December last year I presume that remaining 8.1 MM/bbl has since entered the market as well. Put simply, OPEC/Russia and their allied exporting nations may have lost a few sales with their quotas, but the increase in prices has more than compensated for that effect so far. Once all the floating storage is effectively emptied out it becomes a race between the oil exporters willingness to maintain cuts to maintain prices and increases in USA shale oil production.


By Serene Cheong (Bloomberg) — One of the biggest stores of oil at sea is showing signs of emptying out.

The volume of supplies held on tankers in the Strait of Malacca in September dropped to the lowest level since August 2016, according to data from cargo-tracking and intelligence company Kpler. The waters off Singapore, Malaysia and Indonesia — one of the world’s busiest shipping channels and a major hub for what’s known as floating storage — held 8.1 million barrels late last month on a 10-day moving average basis, compared with about 30 million in May.

Some traders are giving up on ships they chartered for storing oil as potential profits from future sales no longer justify the cost of hiring the vessels. That’s after the market’s structure has flipped to backwardation, where crude for later delivery is cheaper than near-term shipments, as demand improves and OPEC-led output curbs contribute to a supply squeeze. Not all are abandoning the strategy, though, with some traders still finding ways to benefit by offering tailor-made cargoes put together at sea.

Kpler defines floating storage as the volume of oil on tankers that are idled offshore for 15 or more days. The Strait of Malacca consists of anchorage areas including Pelepas, Linggi, Batu Pahat and Tanjung Bruas.

© 2017 Bloomberg L.P


On the other side of the coin in order to make best use of the shale oil being produced at its prevalent API weight at some point the USA market is saturated and overseas markets are the only option left besides storage. It certainly isn't in the interest of the shale companies to push us back into a glut when they are just starting to recover from the prices of 2016, but on the other hand they are all independent and act in their own perceived best interests which in 2014 meant completing and pumping just as fast as they could until the glut economics forced prices down and bankrupted a good number of those same companies.

ROCKMAN likes to tell stories about how less than angelic company owner/leaders can ride the boom to the top and bail out as the company goes bankrupt selling off the completed wells to other companies as producing assets and leaving the financial institutions that put up the capital with pennies on the dollar returns. My question as always is, will the financial institutes make the same mistake this time around that they made in 2013-14 of throwing money at every fracking company? Or will they exercise much tighter due diligence and only loan capital to companies with proven track records that made it through the glut? IIUC the Federal Regulators can have a big impact on how easy or difficult it is to get a loan to frack for oil/gas once you have a lease.
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Re: THE Price of Crude pt 14

Unread postby kublikhan » Wed 10 Jan 2018, 00:41:14

Tanada wrote:My question as always is, will the financial institutes make the same mistake this time around that they made in 2013-14 of throwing money at every fracking company? Or will they exercise much tighter due diligence and only loan capital to companies with proven track records that made it through the glut?
Banks have tightened their spigots to shale companies but that just left a void that others were eager to fill. Private equity funds, hedge funds, oil hedges, SPACS, etc are all part of the new picture of growing financing options for shale drillers.

DECEMBER 14, 2017 - Financiers keep pouring cash into the shale oil sector, providing producers with a path to keep U.S. output rising through the middle of the next decade. The United States is on track to deliver up to 80 percent of the world’s oil production gains through 2025, the International Energy Agency estimates, increases fueled in part by easy access to capital. Rising U.S. production is undermining OPEC’s attempts to curb global supply and boost prices, forcing the oil cartel to continue restraining output through the end of 2018.

Hedge funds and private equity firms have given producers a range of new and traditional financial levers they can pull as needed to keep shale rigs drilling. The money continues to flow despite rising pressure from some investors for drillers to prioritize better profit margins over expanded production. Producers holding land in prime fields with oil trapped in shale rock are having little trouble financing their fracking projects. “If you’ve got the rocks, you can get the money.”

Through the third quarter of this year, private equity firms have put $20.26 billion into energy-related deals, 36 percent more than all of last year. Initial stock offerings for U.S.-listed oil and gas firms raised $2.93 billion this year, up from $1.52 billion in 2016.

Another way to finance drilling - production hedging, or contracts producers use to lock in prices on future output - also is on the rise this year. Hedging acts as insurance against price drops, letting producers drill with more certainty they can earn a profit. Forty midsize producers tracked by researcher PetroNerds LLC hedged 45 percent of their production in the third quarter, up from 36.5 percent a year earlier. Those same companies boosted capital spending by nearly two-thirds this year.

RISING OUTPUT, SPENDING
In response to investor pressure for better profits, producers are touting efficiencies from newer well designs and their efforts to shed less productive shale acreage as evidence that they can lift returns and output at the same time. A 39 percent increase in crude prices since June also has helped shale producers deliver better returns while boosting spending. ConocoPhillips - which has sold properties in the Canadian oil sands, along with less profitable shale holdings - recently said that its capital budgets from 2018 to 2020 will average $5.5 billion annually, up from about $4.5 billion this year, because of higher production and cash flow.

The rising investment marks a reversal from the period following the 2014 oil price collapse, which triggered scores of oil-firm bankruptcies and caused banks to abruptly pull back on lending to oil and gas producers. In their place, private equity firms, hedge funds and others have added to investments and unleashed new ways to finance drilling. “You’ve seen this marriage of necessity between private equity and independent producers needing to drill acreage.” The retreat of banks and other lenders opened “a finance vacuum that we’re looking to fill,” said Mark Stoner, a partner at Houston private equity fund Bayou City Energy. “Folks are dying for yield. They are doing what it takes to find that yield.”
Investors pour cash into U.S. shale despite questions on returns
The oil barrel is half-full.
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