BahamasEd wrote:Yes, and by the EIA we are still producing more then we are using so we can't start working off the glut until then balance.
So by their forecast it should balance sometime next year and I would think it would take another year to work down the glut so prices can start to rise again, maybe sometime in 2018.
But the EIA predicts the future about as well as I do.
So I stand by my statement, Oil is not cheap yet, it needs do drop back down into the $20s to clear the market. I think that if the price stays between $45 to $60 then production will continue to out pace consumption
https://www.eia.gov/forecasts/steo/repo ... al_oil.cfm
The USA has somewhere between 500 MM/bbl and 750 MM/bbl in storage today over the working storage level we had in June 2014. We are by far the largest holder of stored oil on the planet from everything I have read, but just to be conservative say the world has 3000 MM/bbl in storage counting all the tanks in the USA, at sea and in foreign countries.
Say the EIA has the timing exactly right and the supply-demand balance hits perfection February 15, 2017 smack in the middle of the first quarter. That means starting February 16, 2017 there is a tiny shortfall between production and consumption.
No sweat you say, we just take it out of storage.
Great, but how long does 3 Billion barrels of crude oil last when the shortfall is on an increasing slope over time? Well in 2011 at around $90/bbl the world was consuming just over 88 MM/bbl/d. By 2015 that number was 92.6 MM/bbl/d despite recessions, very high oil prices for the 2011-2014 period and whatever other factors you want to throw into the mix.
Just to play conservative lets just use 2011-2014 when prices were steady in the upper double digits mostly between $80/bbl and $95/bbl. Over that three year period world oil consumption grew at just over 1 MM/bbl/d per year. So being very conservative we will estimate demand will grow 1 MM/bbl/d next year despite the behavior over the last two years being somewhat higher.
But that is only one side of the equation isn't it? From the other side investment in future production has collapsed from early 2015, crushed by low prices. Nobody wants to spend money looking for oil when they are taking a loss or barely breaking even on the oil they are already producing.
As of March 2016 the USA had already lost half 500 M/bbl/d of production. More has been lost since then but this was the handy graph I found.
Meanwhile starting in late 2014 OPEC declared they were defending market share, not price and in January 2016 Iran sanctions were lifted. Six months later they were ready to start negotiating because they have just about everything back online for export. What did this mean for world oil supply? See for yourself, OPEC added just 1 MM/bbl/d to the world market in the last 24 months, with everyone pumping pretty hard to capture and hold market share. Countries like Venezuela and Mexico that badly mismanaged their oil resources have been badly hurt by prices, but they are doing their darnedest to pump every barrel they can to make any money they can at these prices. With all that OPEC world supply is a measly 1 MM/bbl/d higher than 24 months ago.
So there you have it, production in the USA (and Russia) is falling, not off a cliff but at a pretty noticeable rate. At the same time OPEC has been pumping hard to try and make what money they could at these relatively low prices compared to what it was 24 months ago. Result of all that OPEC effort? Barely up 1 MM/bbl/d from 2014 and struggling to hold that level. On top of all that 'great' news world oil demand has increased from just 88.1 MM/bbl/d in 2011 to 92.6 MM/bbl/d 2015 average. In just the last two years world demand grew 2.6 MM/bbl/d despite all the nattering about slow downs in the world economy and some actual evidence the world economy has slown somewhat from its 2013-2014 pace.
So here is your scenario, the world supply/demand balances on the knife edge in February 217 and tips over into deficit. By the end of the year (conservatively) the deficit has grown to 1 MM/bbl/d. If there is a war or major event that disrupts supply from the Persian Gulf region the deficit is much higher much sooner, but we are playing conservative numbers here. How long does your 3000/bbl of excess storage last? Simple division says 8 years, but that presumes no interruptions and smooth growth in world demand. Neither of those is remotely realistic. If we are a bit more realistic we have to acknowledge nobody is likely to start big exploration and development until the stockpiles start to get drawn down, i.e. until at least February 2017 not much exploration or development. It takes years to identify, prove and put new fields into full production.
But we have all those idle shale fields just sitting there you say? No not really, the main players have continued drilling the sweet spots this entire time and making modest profits doing so, at least we presume so. But nearly all of those shale beds in the USA that were being drilled like mad from 2009-2014 have had enough holes poked in them to identify the production rates for many different areas. After all that is how the main players are able to keep drilling the sweet spots today.
From what the oil folks around here have told us repeatedly right now the service companies are working on razor thin margins just to stay in business, so the price to hire a rig, drill and frack a hole is as cheap as it gets today. With the start of the draw down from stockpiles in February there will be an increased interest in drilling and those service companies will be more in demand, which means their fees will be going up. Higher fees mean fewer sweet spots, not more.
It was widely believed around here that Fracking in the USA was losing money on the average well at $75/bbl oil. Even if the service companies have come up with a few innovations in the last 24-36 months it is unlikely the number is greatly lower than that, or there would be more drilling going on in this $40-$50/bbl band we have been in since MARCH! Think about it for a moment, prices have not been below $40/bbl for 5 months in a row, and from mid April to mid July they were over $45/bbl. So if fracking is now so much cheaper than it was why hasn't the drilling boom reignited? The real answer is, the price is not that much lower fundamentally from what it was in 2014.
The only thing that WAG 3000 MM/bbl in storage will do is buy us a little time. Once OPEC or the international oil traders believe the market will be in supply/demand balance in 1Q 2017 they will have an incentive to charge more for the oil they are producing that day and every day after. When that happens prices will increase and be sustained at a higher level. BUT, when prices are higher that creates a greater incentive to pull oil out of storage and use the stored oil to reduce effective costs of end products by refineries. Thus even if the notional shortfall is only 1 MM/bbl/d the storage consumption rate is liable to be much more than that. Storage is not free, it costs money to maintain the oil in those tanks and is mostly being done right now to hedge against the price rise when it sets in not too far in the future.
So looking at it less conservatively there is more likely 2000/bbl in storage than 3000. As soon as demand exceeds production prices will start climbing and every dollar they climb makes it cheaper to use stored oil than newly produced oil. In fact if the pattern holds the companies with storage will buy some oil on the market but use cheaper stored oil and place the newly purchased oil in storage for when prices are even higher. The effect is buffering the price increase to the refiners. Some of them however will go for the big quarterly profit by not buying much and selling more, drawing down their total but profiting short term in the process. All together this means if for example prices hit $60/bbl by February, which does not seem unreasonable, a lot of oil that was stored while prices were in that less than $40/bbl range January and February 2016 will be taken out of storage, if it has not already been sold off and refined. The $45/bbl range covers December 2015, March and April 2016 and about three weeks in July-August 2016 and this last week. From the way things turn over it is highly likely the oil bought last December was already consumed or will have been by February 2017.
At end of August 2015 active storage USA stood at Total US Petroleum Inventory +5.7 to 1,984.0
weekly-petroleum-supply-reports-2015-t70770-40.htmlAt end of August 2016 active storage USA stood at Total US Petroleum Inventory +4.5 to 2099.8
weekly-petroleum-supply-reports-2016-t72195-60.htmlTotal increase YOY 115.8 MM/bbl or about 5 weeks of supply. Just for fun,
At end of August 2014 active storage USA stood at Total US Petroleum Inventory +1.4 to 1,813.9, so in two full years of "glut cheap" oil prices storage only increased by 285.9 MM/bbl. Who are all these people who honestly believe that a measly increase in USA storage that would supply oil for 1 lousy month without additional production is so significant? At a draw down rate of 1 MM/bbl/d by the end of 2017 that oil will be long since burned into CO2 and H2O.
So for whatever its worth (not much I know) the oil price plateau we are currently on will not last another six months baring a nuclear war or other civilization crashing event. Will we spike back over $100/bbl? Heck I dunno, maybe? When the supply is lower than demand either supply has to grow or demand has to shrink. I don't think total supply has much if any growth left in it. Some, in some places certainly, but will that even offset declines in older fields? Nobody knows for certain and if they claim they do they are trying to sell you something.
The future is uncertain, no two ways about that, but I was not expecting this two year reprieve we got from November 2014 to November 2016. If anyone had told me that OPEC was going to defend market share without regard to prices in 2014 I would have believed, and said loudly, that they were off their rocker. I still believe that ultimately KSA shot themselves in the foot with little gain by pumping flat out to try and hold market share, but its their oil and their choice, not mine. All the old economic projections from people like Steve Kopits were based on them defending price as they had stated that was their goal for decades. The sudden change certainly caught me off guard, and a whole lot of other people as well.