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Page added on February 22, 2015

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The oil price: The Saudi project, part two

Production

Stage one of Saudi Arabia’s plan — or perhaps hope — to restructure the oil market is taking longer than expected.

By refusing to rein in production while prices fell, the Saudis permitted a big surplus to grow and served notice on higher-cost rivals (Russia, Venezuela, American shale-oil producers) that they would not prop up other people’s profit margins at the expense of their own market share.

That signal has been weakened by the growing amount of oil in storage, which is absorbing most of the glut.

World oil stocks rose by about 265 million barrels last year and Société Générale, a French bank, reckons they will increase by a further 1.6 million – 1.8 million barrels a day (b/d) in the first six months of this year, adding roughly 300 million barrels to the total.

Oil is being stored in the hope that demand and prices will pick up later. Such restocking, plus renewed political worries (flows from Libya’s largest oilfield were disrupted again this week by apparent sabotage), have pushed the price of oil back up. After having fallen by more than 60% since June, the price of a barrel of Brent crude closed at $59.96 on February 18th.

The restocking cannot continue for long. Storage facilities in Europe and Asia are already 80-85% full. Much more and they will overflow. As it is, companies are renting tankers to keep oil in. If storage space runs out, prices could tumble again.

Whether that happens depends on how quickly phase two of the Saudi plan gets under way. This is to force high-cost producers out to increase the influence of Gulf countries. At the moment, this is happening only slowly.

Oil types have recently become obsessed with the so-called “rig count” — the number of drilling rigs operating in America and elsewhere. Analysts think that as the rig count declines, shale-oil output will fall, hurting profits and investment. That seems dubious.

Figures from Baker Hughes, an oil-services company, showed that the rig count in America in mid-February fell to its lowest since 2011, and was 35% below its peak in October 2014. That is a big fall.

oil price economistThe Economist

But most of the idled rigs are in marginal areas; the fall has been only 9% in the main shale-oil basins, in North Dakota and Texas, which accounted for four-fifths of the increase in American oil output in the past two years.

Moreover, productivity is rising in the remaining wells. Citibank reckons that even a 50% fall in the rig count would allow output to rise this year and turn the average shale firm’s cashflow positive, encouraging investment.

More broadly, says Antoine Halff of the International Energy Agency, an inter-governmental body, “The market sentiment may have changed but the fundamentals have not.”

The Organisation of the Petroleum Exporting Countries (OPEC) says its members’ output will rise by 400,000 b/d this year; others think the increase will be greater. Non-OPEC supplies are likely to rise by twice that. Thanks partly to cheaper oil, world demand is rising, but not by much.

The IEA reckons demand will be flat in the first half of 2015, before rising by 2m b/d in the second. By most estimates, the market will be oversupplied for a while.

In the long run, there are signs that oilmen believe the decline in prices will be lasting, which should prompt a broader restructuring of the industry. Large oil firms have announced cuts in capital spending of over 20% for this year.

BP, for example, will spend $20 billion in capital projects in 2015, compared with $23 billion in 2014. As it is, new discoveries are also falling precipitously. According to IHS, a research firm, new finds of oil and gas amounted to the equivalent of 16 billion barrels last year, the lowest for 60 years. That will cheer the Saudi strategists.

Business Insider


5 Comments on "The oil price: The Saudi project, part two"

  1. rockman on Mon, 23rd Feb 2015 6:33 am 

    “That signal has been weakened by the growing amount of oil in storage, which is absorbing most of the glut.” First, the amount of oil in storage today is obviously insignificant compared to total global production. Consider the dynamics going on in the US which holds the single largest oil storage facility on the planet in Cushing, OK:

    Even though the capacity of U.S. commercial oil storage tanks has expanded by a third since 2010, months of strong demand for domestic crude from North American refiners has prevented inventories from swelling too far. As a result, those onshore tanks are barely a third full, with less than 150 million barrels of the nation’s total 439 million barrels of shell storage capacity occupied as recently as October. That’s by far the highest vacancy rate since the Energy Information Administration began a bi-annual survey of tank farm capacity — which excludes refinery stocks and oil in pipelines – in 2010.

    Thus if the total amount of oil in storage were consumed it would only replace US consumption for EIGHT DAYS. But that would never happen since a fair amount of that stored oil represent the MOL for the transportation/refining dynamic. Just a guess but I would say more like 3 to 4 days of US consumption.

    And the rest of the world? Their own numbers: a total of 300 million bbls added to global storage as a result of capturing the “glut”: Damn! That’s almost 4 days of total world oil consumption. Which would also include the MOL volume.

    Folks should understand that most of the oil in storage is owned by physical oil consumers. The amount of “paper oil” traded in the US futures market (where the big bucks can be made targeting oil price movements) averages more than 3X the 300 million bbls they are projecting for future global storage. That’s 1 BILLION bbls of oil traded on a DAILY BASIS.

    Just more ridiculous MSM hype IMHO… probably because they are too ignorant to appreciate the real facts.

  2. shortonoil on Mon, 23rd Feb 2015 1:51 pm 

    Looks like sometime between June, and next December. When the storage is full prices will fall.

    http://finance.yahoo.com/news/u-oil-tanks-swell-record-050709806.html

  3. Northwest Resident on Mon, 23rd Feb 2015 2:22 pm 

    From the article posted by shortonoil above:

    “About half the surplus crude accumulating in tanks across the United States is flowing into Cushing.”

    How much do you want to bet that all of the conventional ME and other sourced “good quality” oil is being used as fast it can get to market, while all of the “crude” flowing into Cushing is that stuff that the fracking companies are producing?

    Good guess?

  4. shortonoil on Mon, 23rd Feb 2015 3:24 pm 

    How much do you want to bet that all of the conventional ME and other sourced “good quality” oil is being used as fast it can get to market, while all of the “crude” flowing into Cushing is that stuff that the fracking companies are producing?

    They are running out of places to put the stuff, and yet imports have barely moved. Maybe they are saving the “good stuff” for a rainy day?? American energy independence here we come! Just don’t forget to feed the horse – in case things don’t go quite as planned.

  5. Kenz300 on Wed, 25th Feb 2015 11:48 am 

    Quote — According to IHS, a research firm, new finds of oil and gas amounted to the equivalent of 16 billion barrels last year, the lowest for 60 years.

    Depletion continues and new finds are scarce…..

    Fracking, tar sands and deep water production are the high cost marginal producers……..

    This time of lower oil prices should be used to speed up the transition away from fossil fuels.

    It is time to end the oil monopoly on transportation fuels……. moving to the electric and hybrid vehicles of the future

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