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THE Price of Crude pt 14

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

THE Price of Crude pt 14

Unread postby Outcast_Searcher » Thu 09 Nov 2017, 00:50:43

GHung wrote:
Outcast_Searcher wrote:
GoghGoner wrote:I still predict that prices are going to run away and crash the economy before too long.

And roughly how high do you believe those prices are?

Clearly near $100 didn't do it 2010 - 2014.

Clearly near $150 didn't do it in 2008, though it did begin to apply some stress. Though, given all the problems caused by the real estate crash, it's hard to evaluate that. Also, 2008 was the culmination of a big spike -- not sustained prices near $150 (which inflation adjusted would be roughly 18% higher, or about $177 today).

....

Since a strong global economy drives higher oil demand, wouldn't such a "crash" be self-correcting? Or do you see this crash as "the big one" that essentially destroys the global economy?


Clearly you continue to conveniently ignore the $trillions in funny money pumped into economies after 2008.

So I ask simple questions about your prediction. Not tricky questions. Not sarcastic questions. All I do is throw a bit of pricing context in.

And you can't even try to answer them, just throw out FUD about "funny money". OK. So why should anyone even consider taking your prediction seriously?
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Re: THE Price of Crude pt 14

Unread postby Outcast_Searcher » Thu 09 Nov 2017, 00:53:24

Subjectivist wrote:If it wasn't steady before any arrests were made why in the world would it be steady afterwards?

At the time I saw this, I assumed it was meant in the context that it wouldn't cause a large immediate price move, in and of itself.

Of course, I saw other predictions of big price changes from it, and my assumption could certainly be wrong.
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Re: THE Price of Crude pt 13

Unread postby tita » Thu 09 Nov 2017, 10:50:51

I was looking at data (bp statistics and world bank) about what represent the oil expenses (consumption x oil price) against the nominal global GDP between 1965 and today all in US$. It's a bit the same as looking the inflation-adapted crude oil price, but doesn't tell the same story. It is more direct.

Between 1965 and 1970 (and probably prior to that, but no data), the price was stable... And oil costs represented a steady 1% of the GDP... But then, things became different. The US bailed the Bretton-Woods system while US$ stayed the trading currency for oil, although a floating currency. IMHO, this is the main cause of the two oil shocks of the seventies.

On average, between 1970 and 2016, the oil costs represented 3.24% of the GDP.

Between 1974 and 1985, they represented 5.29% of the GDP on average. This was a fast change (1.46% to 4.38% between 1973 and 1974), which resulted in a slower growth for two years. The economy just adapted to these costs and growth returned in 1976. But in 1979-1980, this was even 7.5%. This led to another slower growth... And another adaptation in 1983. These two oil shocks economic consequences were mixed, some countries entering recession while others took advantage. This triggered also debates about energy efficiency and new sources of energy.

Between 1986 and 2004, oil prices returned to low level, and oil costs represented 1.83% of GDP on average. The consequences were again mixed... Growth didn't returned to its pre-70 level, and a few crisis happened (fall of USSR, asian crisis, internet bubble). In 1998, oil costs represented 1.1% of GDP, which is the lowest seen since 1970.

Between 2005 and 2014, oil costs represented 4.24% on average (max 5% in 2011). This is less than what happened in the 70's, but more than the 1986-2004 era.

Oil costs returned to 2% of GDP in 2015-2016, similar to the 1986-2004 period.

There is a correlation between oil consumption and growth, but not with the costs. Low oil prices didn't make growth increase, and high prices didn't cut growth in the last decade. A fast change in oil prices can affect growth and consumption for a few years, but a slow increase don't. We were also far from the costs spike of 1979-1980. We would need something like 170$ on two years average for oil costs to be at 7-8% of GDP.

So, in conclusion, the risk of oil on economic growth is supply disruptions (which of course end up with price increase). A slow increase of the price, even at 100-120$ won't affect growth if supply follows. This feels a bit obvious, but... not so much for everybody.
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Re: THE Price of Crude pt 13

Unread postby ROCKMAN » Thu 09 Nov 2017, 12:20:26

tita - "Between 1965 and 1970 (and probably prior to that, but no data), the price was stable...". Actually the price was stable throughout the 50's. This was due to the Texas Rail Road Commission controlling our oil output with its proration regulations to force price stability. And as THE global exporter during that period the TRRC was the only truly effective oil production "cartel" that has ever consisted. And ignoring a couple of peaks relatively stable since the late 1800's. US 155 year oil price trends adjusted for inflation:

http://www.businessinsider.com/timeline ... es-2016-12
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Re: THE Price of Crude pt 13

Unread postby Outcast_Searcher » Thu 09 Nov 2017, 12:30:11

tita wrote:I was looking at data (bp statistics and world bank) about what represent the oil expenses (consumption x oil price) against the nominal global GDP between 1965 and today all in US$. It's a bit the same as looking the inflation-adapted crude oil price, but doesn't tell the same story. It is more direct.

...

So, in conclusion, the risk of oil on economic growth is supply disruptions (which of course end up with price increase). A slow increase of the price, even at 100-120$ won't affect growth if supply follows. This feels a bit obvious, but... not so much for everybody.

Nicely done. Objective, data based, and as you say, more direct than merely looking at the oil price, as far as overall economic impact.

Given the experience of 2010-2014, your conclusion seems a bit obvious, but as you imply, for some folks (who ignore real world economics) -- the obvious is ignored.

The point about the 2015-2016 percentage being on the low end of the range for the past several decades SHOULD be an OBVIOUS flag to those who claim "people can't afford oil based products at current oil prices". But again, the intersection of economic reality (real world data) and impacting such folks' beliefs is pretty much an empty set.
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Re: THE Price of Crude pt 14

Unread postby Subjectivist » Thu 09 Nov 2017, 13:13:20

Outcast_Searcher wrote:
Subjectivist wrote:If it wasn't steady before any arrests were made why in the world would it be steady afterwards?

At the time I saw this, I assumed it was meant in the context that it wouldn't cause a large immediate price move, in and of itself.

Of course, I saw other predictions of big price changes from it, and my assumption could certainly be wrong.


You are correct sir, that is exactly what I was trying to say.
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Re: THE Price of Crude pt 14

Unread postby Tanada » Thu 09 Nov 2017, 15:16:06

The price of US crude oil futures are selling at $57.17 per barrel. The contract was higher by $.36 or 0.63%.
The high price extended to the $57.53 while the low reached $56.69.

Saudi political shakeup is being cited as the reason for the rise.

Of note was that the DOE reported yesterday that US production surpassed 2015 high production levels. That ran counter to the rig count last week that saw a dip in rigs.

Higher supply should mean lower prices, but remember it is only one producer and the talk out of the Saudi's is they want to keep a lid on the production going forward.

For today, the buyers won and keep control.


Article
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Re: THE Price of Crude pt 14

Unread postby GoghGoner » Sat 11 Nov 2017, 07:26:12

Oil at $70/barrel already a reality for some as Asian premium bites

Demand for short-haul grades has increased after the Brent oil market structure (LCOc1-LCOc2) flipped into backwardation, when prompt prices are more than later prices. That means the value of the crude drops over the course of the voyage.

The refiners are willing to pay up for the Australian and Malaysian crudes rather than incur the additional time and cost of shipping Brent supplies from the North Sea, the traders said.
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Re: THE Price of Crude pt 14

Unread postby Tanada » Sat 11 Nov 2017, 10:55:48

GoghGoner wrote:Oil at $70/barrel already a reality for some as Asian premium bites

Demand for short-haul grades has increased after the Brent oil market structure (LCOc1-LCOc2) flipped into backwardation, when prompt prices are more than later prices. That means the value of the crude drops over the course of the voyage.

The refiners are willing to pay up for the Australian and Malaysian crudes rather than incur the additional time and cost of shipping Brent supplies from the North Sea, the traders said.


There is an additional factor in that calculation. While the futures market says those Brent prices will still be lower after shipping the buyers may believe that with current trends those Brent prices will have risen during the time span of the journey. Shipping oil from Europe to Asia is not a trivial distance, you are talking at least a couple weeks and more likely three or four with five or six not being an unheard of outcome. In the mean time they can buy more locally produced crude at a premium and get the oil quickly before the price shifts. Over time this will put pressure on shippers to either greatly discount long haul contracts to ensure a price advantage, or shift as much as possible to local production so that shipping delays are not a factor.

In a relatively stable price regime like the 2010-2014 period shipping is just a cost added to the crude price, but in volatile situations it adds a serious financial risk.
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Re: THE Price of Crude pt 14

Unread postby vtsnowedin » Sat 11 Nov 2017, 23:08:11

You mean to tell me these guys load up two million barrels of oil in a super tanker and ship it half way around the world without having agreed to the price on delivery and having a firm contract that keeps the shipper whole if the price drops during transit and the buyer whole if the price rises?
Hell of a way to run a business.
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Re: THE Price of Crude pt 14

Unread postby Tanada » Sun 12 Nov 2017, 07:50:32

vtsnowedin wrote:You mean to tell me these guys load up two million barrels of oil in a super tanker and ship it half way around the world without having agreed to the price on delivery and having a firm contract that keeps the shipper whole if the price drops during transit and the buyer whole if the price rises?
Hell of a way to run a business.


No, but the shipper and the refiner are not the same person in most cases. If the shipper gets a Brent Contract and the price rises substantially during transit they can then jack up the delivery price to the refiner as pure profit. From the POV of the refiner contracting for oil that is only in transit a short time at a known price means they probably pay what they expected to pay on delivery, but if they contract for oil far away but of the same API their refinery is tuned for they might get caught in the greed loop of the shipping agent.
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Re: THE Price of Crude pt 14

Unread postby ROCKMAN » Sun 12 Nov 2017, 12:37:37

Far from my end of the business but I do know the vast majority of oil sold in the international market is done via long term contracts. Contracts that are indexed to some benchmarked price. Spot oil sales are structured anyway the two sides of the trade agree. If an oil owner (a producer or new buyer) hauls 2 million bbls of spot market oil half way around the world it doesn't mean he's doing so without a contract in place. Just means it was an unscheduled sale. He and the next buyer may also have the sale price adjustable to some index price when the oil reaches the delivery point.

Just like long term sales contracts I doubt we would ever see the details of those spot market sales. Both are considered trade secrets. In fact I would be suspicious of any such details offered by anyone involved in the process.

And I think most understand but for those how done: a far amount of physical oil buyers use the futures market to buffer volatile markets. The goal isn't to make a profit on those futures contracts but to minimize any loss potential. Just my guess but I suspect many buyers from the spot markets who ARE NOT end users take advantage of changes in the futures market to lock smaller but guaranteed profits.

This conversation takes me back to the days decades ago when the govt tried to fix the price of imported oil: a buyer shipping oil to the US could only mark it up X%. I forget the actual amount. As a result "daisey chains" were created: while in transit a load of oil might change hands 6 or 7 times. And each time the price was marked up X%. One Houston oil trader for a oil company quit his $25,000/yr job and became an international oil broker. Made countless $millions and started his own domestic exploration company. But eventually the feds caught up with him. A friend was working as his Chief Geophysicist at the time so I accept his story as true. The feds offered him a deal: pay a $120 million fine and they would drop all charges. The story: he wrote them a draft for $120 million that day and continued BAU. Just an indication of how much money someone that has never produced or refined a bbl of oil can make in the oil "marketing" business.
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Re: THE Price of Crude pt 14

Unread postby GoghGoner » Wed 22 Nov 2017, 06:29:57

Well, looks like the WTI just hit $58 in intraday trading. See what the EIA reports but I think we will close at a new high today.

Meanwhile, my fellow consumers are grumbling a bit around me already.

Thanksgiving Gas Prices At 3-Year High

GasBuddy’s newest report pegs gas prices at their highest average since 2014, the year oil prices crashed from their highs of over $100 per barrel.

Gasoline prices are up a full 20 percent compared to last year, just in time for the busiest driving weekend of the year in the United States – Thanksgiving weekend.

On Thursday, as families dig into their turkey, gas prices should reach an average of $2.53 per gallon. In 2012, the Thanksgiving-weekend national average cost of a gallon of gas was $3.44.
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Re: THE Price of Crude pt 14

Unread postby kublikhan » Wed 22 Nov 2017, 11:07:49

Outcast_Searcher wrote:
tita wrote:I was looking at data (bp statistics and world bank) about what represent the oil expenses (consumption x oil price) against the nominal global GDP between 1965 and today all in US$. It's a bit the same as looking the inflation-adapted crude oil price, but doesn't tell the same story. It is more direct.
...
So, in conclusion, the risk of oil on economic growth is supply disruptions (which of course end up with price increase). A slow increase of the price, even at 100-120$ won't affect growth if supply follows. This feels a bit obvious, but... not so much for everybody.
Nicely done. Objective, data based, and as you say, more direct than merely looking at the oil price, as far as overall economic impact.

Given the experience of 2010-2014, your conclusion seems a bit obvious, but as you imply, for some folks (who ignore real world economics) -- the obvious is ignored.

The point about the 2015-2016 percentage being on the low end of the range for the past several decades SHOULD be an OBVIOUS flag to those who claim "people can't afford oil based products at current oil prices". But again, the intersection of economic reality (real world data) and impacting such folks' beliefs is pretty much an empty set.
Indeed. nice post Tita. It's always refreshing to find someone who can look at the data with an objective eye and come to an informed opinion. We were talking about how much more damaging oil volatility was earlier in the thread:

kublikhan wrote:
ROCKMAN wrote:Even within segments of an economy the impact is time dependent. In the US high oil prices initially seemed rather positive for our oil patch. Now obviously low prices are inflicting much pain. But imagine if those earlier high oil prices had not developed and led the shale players to take on so much debt. Debt servicing which is now eating disproportional large portions of surviving companies and completely destroying many others. Which leads to a somewhat philosophical question: did the higher oil prices and boom in drilling activity help or hurt the oil patch? IOW pick your time frame.
Seems like you are saying it was more the volatility that screwed over the oil patch. The extreme swings from high to low and vice versa(a few years of high oil prices not worth the bubble mentality that later leads to bankruptcies). I think this applies to the consumer side of the equation as well. Consumers suddenly seeing their fuel bill double is much more damaging than a gradual increase that gives consumers time to adapt. Or a sudden plunge in prices deludes consumers to thinking low prices are here to stay and they splurge on new gas guzzlers. An earlier post I made:
kublikhan wrote:The absolute price of oil is only one factor the determines the impact of oil on the economy. Other factors are:
1. The magnitude and direction of the price swing.
2. The oil intensity of the economy.
3. Monetary and fiscal response.
4. Duration of oil price spike/plunge.
Absolute oil prices today are slightly cheaper than they were during the first oil crisis in the 70s. However back then the world was looking at a 210% magnitude increase in the price of oil. Today, we are looking at a 60% decrease in price. Today's environment is stimulatory for oil importers and harmful for oil exporters. The opposite of the first oil crisis.

ROCKMAN wrote:"Seems like you are saying it was more the volatility that screwed over the oil patch."Exactly. A very long time ago I pointed out that such up swings in oil prices gain much less for the GENERAL INDUSTRY then we lose from the price collapse.
THE Price of Crude pt 12
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Re: THE Price of Crude pt 14

Unread postby Tanada » Wed 22 Nov 2017, 11:23:18

GoghGoner wrote:Well, looks like the WTI just hit $58 in intraday trading. See what the EIA reports but I think we will close at a new high today.

Meanwhile, my fellow consumers are grumbling a bit around me already.

Thanksgiving Gas Prices At 3-Year High

GasBuddy’s newest report pegs gas prices at their highest average since 2014, the year oil prices crashed from their highs of over $100 per barrel.

Gasoline prices are up a full 20 percent compared to last year, just in time for the busiest driving weekend of the year in the United States – Thanksgiving weekend.

On Thursday, as families dig into their turkey, gas prices should reach an average of $2.53 per gallon. In 2012, the Thanksgiving-weekend national average cost of a gallon of gas was $3.44.



Given that WTI contracts were selling for a little over $60/bbl at Thanksgiving 2014 it does seem 'interesting' that gas prices are not extremely dissimilar today. I think it is telling they point out prices had crashed from over $100/bbl but leave out the fact that the peak price was hit in July 2014 and this was five months after peak and after the KSA declared they would defend market share and not price.

They then go on to talk about the OPEC cut of fall 2016 without mentioning the fact that world wide demand has grown by a substantial quantity over the last three years while supply since Iran came bak online in January 2016 has been pretty static.
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Re: THE Price of Crude pt 14

Unread postby Outcast_Searcher » Wed 22 Nov 2017, 12:07:16

GoghGoner wrote:Well, looks like the WTI just hit $58 in intraday trading. See what the EIA reports but I think we will close at a new high today.

Meanwhile, my fellow consumers are grumbling a bit around me already.

Thanksgiving Gas Prices At 3-Year High

Good. If prices are high enough for people to grumble about, then MAYBE they'll stop switching in huge numbers to giant SUV's and pickup trucks that get (compared to efficient cars) terrible gas mileage.

Maybe while they're at it, if a 5 passenger car would do it for them, they could get a good, efficient midsized HEV sedan, and basically TRIPLE their gas mileage in the city. Oh, and likely save $10 to $20+ grand on the vehicle if they shop prudently.

Doomers should note that a bit of grumbling does NOT mean people "can't afford" oil based products like gasoline, and certainly not that the economic crash is due in 5 minutes, days, weeks, etc.

It really is too bad that the vast majority of people can't seem to plan decently a few years out (like, maybe plummeting gasoline prices won't last forever), much less over several decades, like to financially plan for their retirement via adequate savings.
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