[ROCKMAN]

H2 – Always enjoy Ron’s chart and appreciate the work he puts into them. But I’ll toss some numbers in regarding one statement from his report. I only jump on this now because I just had to go thru the same process this morning on the front page.

“When the price collapsed in 1985 the decline was rather dramatic. However the price collapse in 2008 led to no noticeable decline in either US or other non-OPEC production. There was a huge decline in OPEC production in 08 and 09 but that was a deliberate cut.” Here are some numbers from the IEA and OPEC itself to put that comment into context:

According to the IEA, the KSA cut production from 9.5 mmbopd to 7.9 mmbopd for the first two months of 2009 and then increased to 8.2 mmbopd for the rest of the year. And OPEC production? According to OPEC itself, in its annual report, they averaged 31.9 mmbopd in the 4Q 2008 and 28.5 mmbopd in 1Q 2009. So yes a cut…but a huge decline”? A subjective term, of course. So that’s just an 11% cut. And the difference between the average yearly production between ‘08 and ’09 was even smaller. And prices during this period? Set aside the monthly numbers and look at the bigger picture as we just did with production volume: the average yearly price, adjusted for inflation, dropped from $99.06/bbl in 2008 to $58.20/bbl in 2009. And guess what: according to the EIA thru the first 3 quarters of 2014 the average price of oil was $99.96/bbl. Which is the highest average price we’ve seen since 2008 when it reached essentially the same price…right before the price collapsed 40% for the entire year of 2009. And now we’ve just seen prices collapse how much? Oh, yeah, about 40%.

We don’t know yet how OPEC/KSA will respond in the coming months: big production cut, small production cut, no production cut or small production increase. But if the oil price crash is primarily due to demand destruction (as I think it has) that has finally caught up to the high price of oil production then cuts by the exporters, even if fairly large, might not push oil prices back up very quickly: after reaching a peak of 10 mmbopd in the 70’s the KSA cut their production 40% by 1985. And prices still kept falling. So they cut their production by another 10% in 1985. The result: the 1986 oil price was even lower than 1985.

So to recap more recent history: the average price of oil during 2008 was $99.06/bbl and oil prices crashed at the end of the year and averaged 40% less for the following year despite OPEC cutting production 11%. And the average price for most of 2014 was $99.96/bbl and oil prices crashed about 40% by the end of that year. And now we’re waiting to see how much OPEC might cut production and the effect that will have on prices during 2015.

IMHO what economic ills the global economy suffers at oil prices around $100/bbl it isn’t as bad as what it went through in the 80’s. It took 27 years (1981 – 2008) for the world to be able to afford $90+/bbl oil. Then again, it didn’t handle $99/bbl oil very well in 2008. Of course, the growth of China et al might be masking some of that global damage. This time it took only 5 years (2009 – 14) for oil to reach that $100/bbl mark. Which, again, appears to be more than it can affectively deal with IMHO.

Just my wild ass guess but it looks like if oil had stayed around $90/bbl for the last 6 or 7 years the system would have been fairly stable. Some pain for the economy but no big slow down. And some profit for producers, including US shale players, but not too much. They wouldn’t not have made those extra $BILLIONS they got with $100/bbl oil but then they wouldn’t be losing the $BILLIONS they are now with $60/bbl oil.

[h2]

The graphs I found useful were the present global production, then non opec with and without US increases, which are mostly tight oil I believe. I am not a huge ron fan, but as long as he sticks to oil production and avoids speculating on economics, which he doesn't have a great grasp of, I tend to trust his work, re oil production only.

The scenario that is getting more interesting is:

Given the very fast decline rate of each tight well drilled, and that you have to keep drilling new ones all the time to keep even, and even more to increase overall numbers, if the price the market will pay today is 60 a barrel or so, will this result in no more drilling, or vastly decreased, tight oil drilling in the US? If it does, then I believe we'd see a very fast decline in US production numbers, right?

If there's such a decline over the next year, then the global overall peak ron's charts show underlying the boost in tight US oil production will be exposed. At that point, a reduction in opec production (though keeping mind that both Libya and Iraq are near failed states at this juncture) would be very revealing in terms of what the market will pay and can pay in a tight market.

In other words, two outcomes could happen: 1: the overall weakness of the global economies in fact currently just cannot do higher priced oil, no matter what the supply factors would suggest re pricing. 2: they can try to absorb those losses again, then shudder, again, and then try, again, to release new floods of debt to stave off reality for a year or two more.

Looking at non US players, I doubt much of the world can handle oil priced at 90 a barrel consistently, particularly ones with weak export markets. But that demand destruction may have already happened in this current round.

It's worth remembering that when oil hit > 100 barrel levels, there was a good interview with a ceo of an airline, who noted a simple fact that his industry cannot function with oil prices over 100 a barrel, period. And that industry has now switched to efficient engines, has consolidated, and packs its flights, ie, avoids all empty seats, and charges for everything it can charge for. The idea was simple: you buy planes, then pay costs on those planes, fuel, everything, if the costs get too high, ticket prices must rise, but as they rise, the marginal traveler decides not to fly, ticket sales drop, and you lose money. Back in high school calculus, this was a standard problem we were given (find the point where the curve zeroes out, ie, the max ticket price, before dropping again), so there's nothing new about it. Given that a round trip I used to take before 2008 that cost usually between 2 and 3 hundred dollars, now costs 500-600+ (and that's using a small tight noisy turboprop now instead of a full jet) a price that makes it usually not worth it to me so I don't do it. I assume that with oil over 100 a barrel, the ticket prices must rise enough to knock out the next level of buyer, and at that point, the entire business model fails. That is, the airline does not buy big orders of planes, they don't get the big order discount, the airplane builder sells fewer planes, has less money to develop new stuff, number of flights drops, etc, costs rise as economies of scale fail to happen, and so on) As a microcosm case of what buyers can pay being a major factor I think this one is pretty good, since it represent an entire global industry.

[ROCKMAN]

h2 - IMHO what you say seems very plausible. And yes: within 12 months we'll clearly see if the situation is driven by demand destruction vs too much oil on the market. But as I just explained to my geophysicist we can't look at the production numbers in absolute terms to see the DD. As I pointed put: the world was buying X million of bopd 6 months ago when it was priced near $100/bbl. So in the next month are we going to see the world buy less than X million bopd when it's selling for $60/bbl? Some might think the obvious answer is no but that’s not necessarily true. The consumers are going to buy the amount of oil they can afford when it’s priced at $60/bbl. But if the world is really slipping into a significant recession it might not be able to buy as much in the next 12 months as when oil was priced above $90/bbl.

A silly thing to say? Well, according to the IEA in 2008 when the average oil price for the year was $99/bbl the world consumed 31.303 billion bbls of oil. And in 2009 when the average price of oil for the year was $58/bbl the world consumed 31.007 billion bbls of oil. So the world consumed about 300 million bbls of oil less over a 12 month period when it sold for $40/bbl less than it did during the previous 12 month period.

I bet the reality of those indisputable numbers don’t match the perception most here have of those events that occurred just 5 years ago. Again, I’m not predicting oil will stay around $60/bbl for the next 12 months nor that the world will consume less oil in 2015 than it did in 2014: I know what I don’t know. LOL. But I also know what others don’t know even if they think they know it.

[Withnail]

The simple version is, we are short on cheap oil.

To try and fill the gap expensive oil was produced.

It seemed like a solution, but it turned out it didn't work because what people really needed was cheap oil.

Thus the price plummetted and those producers got screwed.

The End.

[ennui2]

The simple version is, we are short on cheap oil.

To try and fill the gap expensive oil was produced.

It seemed like a solution, but it turned out it didn't work because what people really needed was cheap oil.

Thus the price plummetted and those producers got screwed.

The End.

We HAVE the cheap oil that we seek. In other words, oil once thought "expensive" has become cheap oil, at least in the short-term.

[h2]

In other words, oil once thought "expensive" has become cheap oil, at least in the short-term.

This has to be one of the most convoluted uses of logic and the english language I've ever seen. Cheap oil is cheap, what we have now is expensive oil, period. It's not relative, it's absolute, the society pays x billions per year to buy oil, the more it costs, the more society pays, and no longer has available for other purposes. Expensive oil, what we currently are seeing being sold at probably close to the minimum price it can go for short term, is expensive, and costs you more money, yet yields not a cent more value than cheap oil. If this is too hard to understand, cheap oil costs say, $20 a barrel in today's dollars. We have no 20 a barrel oil. What we can buy today is 60 a barrel oil. That is not cheap. It can cost more, like, 90 or 100 a barrel, but costing more does not make the lesser priced stuff cheap. Clearly the ongoing assault on American education is working out very well in terms of ruining critical thinking skills in the population if your post is any indication of what you actually believe.

You might be able to fix this glitch in your thinking by switching to billions dollars per year spent on oil over time, per country, actually oil/gas/coal to be more accurate, start with the last 10 years. The more billions spent, the less left for other stuff. Then you'd have to start looking at the other stuff you are pretending doesn't exist, like ongoing economic contractions globally, and realizing there is in fact a connection, at which point you'd probably fade into the woodwork and do whatever you are going to do, since it's unlikely you'd admit to misunderstanding things this badly in public.

[kildred590]

Production rates are superfluous as at no point has the world ever had an actual shortage of oil. The price spikes were simply caused by an increase in demand for oil contracts and speculation.

What is amazing about oil is that unlike every other commodity the price of oil has always been miles beyond its production cost. It defies economic expectations. Generally, price and cost should be very close in an open market.

[Tanada]

h2 - IMHO what you say seems very plausible. And yes: within 12 months we'll clearly see if the situation is driven by demand destruction vs too much oil on the market. But as I just explained to my geophysicist we can't look at the production numbers in absolute terms to see the DD. As I pointed put: the world was buying X million of bopd 6 months ago when it was priced near $100/bbl. So in the next month are we going to see the world buy less than X million bopd when it's selling for $60/bbl? Some might think the obvious answer is no but that’s not necessarily true. The consumers are going to buy the amount of oil they can afford when it’s priced at $60/bbl. But if the world is really slipping into a significant recession it might not be able to buy as much in the next 12 months as when oil was priced above $90/bbl.

A silly thing to say? Well, according to the IEA in 2008 when the average oil price for the year was $99/bbl the world consumed 31.303 billion bbls of oil. And in 2009 when the average price of oil for the year was $58/bbl the world consumed 31.007 billion bbls of oil. So the world consumed about 300 million bbls of oil less over a 12 month period when it sold for $40/bbl less than it did during the previous 12 month period.

I bet the reality of those indisputable numbers don’t match the perception most here have of those events that occurred just 5 years ago. Again, I’m not predicting oil will stay around $60/bbl for the next 12 months nor that the world will consume less oil in 2015 than it did in 2014: I know what I don’t know. LOL. But I also know what others don’t know even if they think they know it.

Au Contrair around these parts the economy stunk on ice in 2009. The value of my house dropped 20%, new construction projects dried up, my former employer cut staff, every third house in my neighborhood was on the market for sale as people tried to bail out of their mortgages. The amazing thing to me is demand was only down 300 MM/bbl over the course of the year. Heck even this website took the hit, between 2008 and 2010 half the old timey posters on here left, some with statements about how PO was over and others just quietly stopped coming around as their lives moved in different directions.

If the world economy is tanking again as some pundits proclaim we could easily reduce consumption by 1 or even 5 MMbbl/d. The real question to ask is, is that number significant in the grand scheme of things? Several people pointed out back in 2010 when we were debating the concept of Plateau Oil that if the world was consuming 90 percent as much oil in 2010 as we consumed in 2005 then we still needed to find, produce and refine 90 percent of the oil we had used in 2005. It turned out that with increases in OPEC and the USA Shale Fracking boom we not only were able to produce the 90 percent we needed in the heart of the recession, we were also able to slightly increase world supply to meet demand at $100.00/bbl.

Millions of people in Asia and around the world who were children in 2005 are adults in 2015 because world population remains on an upward trajectory. More children have matured into young adults than elderly have died. In 2005 world population was thought to be 6,514,094,605. Next year it is projected to be 7,324,782,225. Those 810,000,000 additional people are all still 10 or younger, but their relatives born in 1997-1987 have come of age in the last decade. They have all the same aspirations your children have or had at that point in their lives and international media assures they know about private transportation, even if that means a moped with five people balancing on it. 1987 population 5,045,315,871. 1997 population 5,898,688,337. That is 854,000,000 newly minted Adults in the last decade.

IMO that is why even with the mostly stagnant economy in Europe and North America for the last 6 years we have seen world oil demand creeping upward even at or above $100.00/bbl. Young people have been told all their lives that they deserve to have a petroleum fueled private transport of some form and they believe it. Even if it means they have a super fuel efficient moped with five people clinging too it and only the males are getting them that is a demand for 400 Million mopeds more in 2015 than their were in 2005. Yeah, some of them have nothing but others of them drive mud bogging redneck dually pick up trucks so I figure it averages out. 400 Million mopeds burning a cup of fuel a day adds up to 25 Million gallons a day, about 600,000/bbl/d. That is if we have a stagnant economy, if people are doing well they buy bigger transport or drive more, or both. That is just population driven demand.

Love it or hate it, there are rare few places left on Earth where petroleum based transport is not considered normal today.

[AirlinePilot]

Overall I think that the larger oil users(economies) had adapted to 90-100$/bbl oil fairly well. It might not allow much growth (in economies), but it sure helped us go after all the more expensive oil. My guess right now is still that this is more about some back channel manipulation than all demand/supply related. I just dont see the moves in price warranted given the current picture. This is DIFFERENT than what happened in 08-09 IMHO.

We are going to find out with some surety in the next 6 months though I believe.

[ROCKMAN]

T - "The amazing thing to me is demand was only down 300 MM/bbl over the course of the year." And that's exactly why I'm going to start harassing anyone that claims the "demand for oil will be X million bopd the year 2---". I’ve finally got it thru my head that neither statement tells you anything about the state of the dynamics if one doesn’t what the price of oil is during that period of demand. Production may be up or down. Consumption may be up or down. The price of oil may be up or down. But “demand” by itself: what does that number tell you about the situation?

OK…now that I have everyone questioning my sanity what I mean can be explained with a few very simple questions that are very easy to answer:

A - What is the current demand for $100/bbl oil?
B - What is the current demand for $60/bbl oil?
C – What is the current demand for $30/bbl oil?

Answers: A: 0 bbls. B: about 91 million bbls. C: A sh*t load more than 91 million bbls.

Next questions:

What was average demand for oil and the average yearly price (adjusted for inflation) of oil in

2013? – 90.1 mmbopd @ $92/bbl
2012? – 89.8 mmbopd @ $88/bbl
2011? – 87.9 mmbopd @ $91/bbl
2010? – 87.6 mmbopd @ $76/bbl
2005? – 84.7 mmbopd @ $60/bbl
2000? – 77.7 mmbopd @ $37/bbl
1995? - 70.3 mmbopd @ $26/bbl
1990? – 66.4 mmbopd @ $35/bbl
1985? – 59.2 mmbopd @ $59/bbl
1980? – 64.0 mmbopd @ $106/bbl

So numbers don’t lie:

Demand for oil was about the same in 1980 as it was in 1990 even though oil cost about 3X as much in 1980.

Demand for oil was 50% higher in 2013 than in 1985 even though oil cost 50% more in 2013.

Demand was a little higher in 2010 than in 2005 even though oil cost 25% more in 2010.

And lastly: demand in 2008 was about the same as demand in 2009 even though the price of oil was 70% higher in 2008 than it was in 2009.

Now that I’ve made my point as clear as mud: what will be the average yearly demand for oil during 2015: More than 2008? Less than 2008? About the same as 2008?

[Keith_McClary]

How does trade in oil-future contracts affect demand for liquid and price at the point of sale?

Maybe you can make sense of this (undated) article:
Making sense of oil pricing and price manipulation
By Stefanie Heerwig

To start with, it might be important to know the Brent benchmark is not purely based on trade in the physical market, but also influenced by prices of futures and other exchange mechanisms on the financial market, which are in turn based on the physical commodity of Brent crudes (Yes, "crudes" not "crude" because Brent is not only based on one crude these days).

The prices oil companies like Shell, BP and Statoil report to Platts are based on their amount of physical trades, mostly forward contracts. And here is where one of the major loopholes in the assessment of the Brent benchmark already arises. Compared to the relative transparency in the stock market, traders are not obliged to report all transactions. They participate voluntarily and are able to selectively submit only trades that benefit their position, according to a recent report from the International Organization of Securities Commissions (Ioesco).

But this is not everything. One of the main problems with the benchmarking system of Brent is that the vulnerability for price manipulation has increased with the dwindling physical supply of Brent. This is why by 2007 Platts included three more crude streams into its benchmark, turning Brent into BFOE, which stands for Brent, Forties, Oseberg and Ekofisk. And just in March the agency reviewed its Brent pricing methodology again to increase its physical base once more. Because what can happen if the physical supply of Brent crudes is too small or not big enough is a so-called squeeze — a situation in which trades in the forward market exceed the actual amount of physical cargoes that can be loaded during that month, raising the price of that particular crude.

Yet, many think not only a lack of transparency and a physical squeeze have contributed to possible distortions of the Brent price, but also the financialization of the oil market have taken its toll on consumers at the gas pump. For instance, UNCTAD released a policy brief in 2012, in which it lays out that oil price fluctuations have not so much depended on developments in the real economy over the recent past, but the financial market (in which the volume of traded derivatives on commodity markets is on average 20 to 30 times larger than physical production).

The report shows, for example, that instead of following the fundamentals of supply and demand, oil prices coincided with the development in the European stock markets and rumors in the eurozone. As such, it concludes that:

"Due to the increased participation of financial players in those markets, the nature of information that drives commodity price formation has changed. Contrary to the assumptions of the efficient market hypothesis, the majority of market participants do not base their trading decisions purely and independently on the fundamentals of supply and demand; they also consider aspects related to other markets or to portfolio diversification to be important. This introduces spurious price signals into the market."

But there is always another side of the coin, and some experts also suggest there is a clear link between the price of futures and derivatives based on crude and its physical trade. For instance, the Oil & Gas Financial Journal says the exchange for physical mechanism (EFP) — another layer integrated into the calculation of the Brent benchmark — clearly links the Brent futures to the physical Brent trading. This is because it allows those holding futures to exchange those contracts at expiry for a cash value equivalent to physical barrels.