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Oil Prices, Deja Vu all over again.

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

Oil Prices, Deja Vu all over again.

Unread postby rockdoc123 » Fri 09 Nov 2018, 12:01:30

Just thought that given the current movement in oil prices it might be worth starting a discussion on the topic. Here is my way of kicking off the discussion:

There are some interesting dynamics going on that all have to be considered. US supply has increased very quickly, largely due to the short cycle time associated with the unconventionals, high drilling activity and flush production from new wells. Iran oil is more limited on the market (although that is a tough call given all the sanction waivers that have been issued) but Russia is producing full out and Saudi Arabia has also ramped up production. That being said according to the EIA forth quarter 2018 has supply only slightly higher than demand. Their view on demand is that although it is slowing it still continue to increase year on year relatively relentlessly regardless of all the dire warnings of impending doom. But when I look back this is exactly where we were supply/demand wise in late 2013. Unconventionals were ramping up, Opec production was not reduced as they fought for market share and Russian production was increasing. Demand was increasing but not at the same rate. By mid-2014 supply was well beyond demand and then we saw the crash. There is a chance we are headed there again. The main reason is the US is very much unlike Saudi Arabia whose production they just passed. SA is a price maker…they can choose to decrease supply to raise price or increase supply to lower it. The US is made up of many independent companies. No one has enough control to move price one way or the other making them a price taker. They are all trapped in the same scenario, as price rises they need to increase activity but by all of them doing so price decreases but they are forced to continue until the point where they run out of capital that can’t be replaced by cheaper production (the same thing has happened in 2014). It’s an ugly downward spiral of a situation until someone steps up and decides to hold back on production…not surprisingly no company is stepping up to volunteer to shoot themselves in the foot.

There is only a couple of solutions for this outside of something geopolitical that is unpredicted:

1. Opec takes it on the chin, surrenders market share in order to maintain a higher price. This is mainly an SA decision which will be tempered by internal politics as well as the need to balance their healthy country budget concerns.
2. The US gov’t steps in and regulates the US oil industry. Companies can't get together on their own as an American like Opec to control production by law. Nobody likes this sort of gov't oversight but it is the only way to get a sane response from all of the players. If each of them knows their competitors are also forced to maintain a certain production level then they will fall in line, willingly as the alternative is not pretty. I can’t see this happening for political reasons but it is likely the only way out of this mess in the short term.

Of course, there are other factors that are either directly or indirectly involved. China tariffs and tariffs on steel and aluminum run the risk of increasing domestic prices on materials required in the oil and gas business. As costs rise margins decline and some of the more marginal unconventional projects will have less activity which longer term will affect production and price. The complete collapse of Venezuela and the problem Canada has with being able to send it’s heavy oil south creates pressures on refineries who are kitted out to deal with a blend of crude that has a higher API than what is being produced from the unconventionals. That could have several issues, one being higher crack spreads (less oil going through the refinery means less product and with demand increasing means product price increases) the other being increased exports of light unblended crude to Europe. The alternative is a significant investment in new distillation refineries in the US which would have a negative impact on Canadian Western Select pricing.

My view is when looking at oil prices going forward you almost have to imagine the geopolitical pressures as potential Black Swan events. Wars can break out unannounced, political turmoil in oil-producing countries can happen without much in the way of warning and the current US government seems inclined to start a “war of words” with pretty much any international jurisdiction regardless of how much oil production that country maintains, the consequences of which are unpredictable.

Just my thoughts of course. I’m sure there are more opinions based on other observations but perhaps a good place to start a discussion
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Re: Oil Prices, Deja Vu all over again.

Unread postby pstarr » Fri 09 Nov 2018, 12:21:21

You Spike and the other industry flacks have certainly circled your wagons . . . cough cough . . . Range Rovers quickly in the face of the obvious global oil production peaking lol.

Why not join us for a bet instead? Directions?
SA has peaked. OPEC has peaked. So goes the world.
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Re: Oil Prices, Deja Vu all over again.

Unread postby Outcast_Searcher » Fri 09 Nov 2018, 12:51:10

rockdoc123 wrote:There is only a couple of solutions for this outside of something geopolitical that is unpredicted:

1. Opec takes it on the chin, surrenders market share in order to maintain a higher price. This is mainly an SA decision which will be tempered by internal politics as well as the need to balance their healthy country budget concerns.
2. The US gov’t steps in and regulates the US oil industry. Companies can't get together on their own as an American like Opec to control production by law. Nobody likes this sort of gov't oversight but it is the only way to get a sane response from all of the players. If each of them knows their competitors are also forced to maintain a certain production level then they will fall in line, willingly as the alternative is not pretty. I can’t see this happening for political reasons but it is likely the only way out of this mess in the short term.

Good topic rock, and interesting observations.

I'd like to add a possible thing that could change the price scenario productively in the US -- an alternative to regulating the US oil industry. Regulating oil PRICES, re a CO2 tax on transport fossil fuels aimed at both reducing the burning of such fuels over time AND creating far more price stability.

The idea would be to have a target minimum gasoline tax by the US. It could start at, say, $3 and possibly slowly move up over time.

So if gasoline is now in the ballpark of, say, $2.40, it would be a net 60 cent a gallon tax on average, assessed at the pump. It could move up and down with the price of oil, changing weekly or at whatever frequency makes sense. People would get used to paying a price like $3 a gallon. Now, this would only help the oil industry if part of this tax were some kind of a tax break to the oil industry when prices are low.

If the tax only varied at, say, half the rate of the price of oil changing, then the US oil industry would still have an incentive to produce more as the price of oil rises. And they'd still get help, but not full compensation, when the price falls -- so they should still be incented to be efficient, productive, etc.

With a democratic congress (where liberals keep claiming they care about AGW, the climate, green tech, etc), something like this SHOULD be able to get a fair shot in congress -- IF the liberals are right. Given how few real world tax proposals become law in the US, I'll believe it when I see it, however.

Obviously, there are pros and cons to such a system, but with something as key to the economy, as key to the global climate, and as volatile as oil, some kind of stabilizer like this and a good source of revenue in a country with $21 trillion in federal debt and climbing way too fast, should be considered as a starting point for policy, IMO.
Given the track record of the perma-doomer blogs, I wouldn't bet a fast crash doomer's money on their predictions.
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Re: Oil Prices, Deja Vu all over again.

Unread postby rockdoc123 » Fri 09 Nov 2018, 15:05:57

The idea would be to have a target minimum gasoline tax by the US. It could start at, say, $3 and possibly slowly move up over time.


This is being attempted in Canada and all it is seems to be doing is hurting the economy. The provincial gov't is using it to pay for their overspending in other areas and the federal gov't has some whacky scheme by which they rob the rich and give to the poor which of course fits with their extreme socialist bent.

The big problem I have with a carbon tax is that it won't do what it purports to do....have any appreciable effect on climate. When Canada first proposed a country-wide carbon tax I did a quick calculation based on what Bjorn Lomberg had done in Europe and that showed that the maximum impact on global temperature using the direst representative concentration pathway would result in a lowering of temperature by 0.0009 C by 2100. In fact, if Canada stopped producing CO2 completely the total impact would only be 0.007 C, not even measurable by the best thermometers. The impact in the US would be slightly higher but not by all that much, the point being it is small simply because the vast majority of CO2 is coming from other places in the world who will not impose carbon taxes.

The fallout from this will also be US companies seeking to ship more oil overseas where demand will not be impacted by a North American carbon tax. And the problem is too much supply not too much demand. If suddenly the gaps opens up further (i.e. demand decrease due to carbon taxes) then the price will drop like a rock as supply far outstrips demand. At least that's my take on the dynamics.
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Re: Oil Prices, Deja Vu all over again.

Unread postby evilgenius » Sat 10 Nov 2018, 11:28:26

Don't forget that the price of oil is set by a market. Interest rates in the US are on the rise. Less money is available for speculative gain in the oil market. I know somebody will say that a lot of oil changes hands outside of that system, according to agreements between interested parties. Well, if the oil market's price is too far away from the prices in those agreements, then when the first opportunity to reset those prices comes they will be reset. One side or the other will demand it.

The greatest danger to the oil industry is debt. Debt is what causes gambler like behavior, where a gambler believes they have to play every spin or every hand when they sit at a table. Whenever I gamble and the dealer changes, I get up. Oil producers who are in debt cannot idle their production. In addition, if their debt is adjustable, or they are run such that they must always take on new debt, higher interest rates will also take more of a bite out of revenue as they go up. The only way around that is to pump more, in a falling price environment. Some companies may profit overall from that strategy, while their per unit profit shrinks. Others may not be able to make that math work. If the Fed takes the 10 year to 5% there will be a slew of bankruptcies in the oil patch. Delaying tactics such as hyper-production may help some companies get over the hump before rates either stabilize or go down, but those will probably only be the exception. The big question is who gains in the aftermath? Who owns those companies bonds? Will the bondholders get those companies, or will they be sold? Who will be in a position to acquire the weaker range of companies, their assets and their debt, when the turds hit the fan?

I just want to add that we should concern ourselves with who will profit out of curiosity and not out of a belief in conspiracy. If you are an investor, then you would definitely want to know which companies will come out on top. If they are down now, it might be a good time to invest in them. Likewise, the political power structure could be affected by this type of shakeup. Certainly, it will be locally, within the regions where the voter's livelihoods are connected to the welfare of the companies involved. I think oil is headed to $50, but it will most likely go well below that before it comes back up. As for how long it stays at $50, that is dependent upon how much scare tactic and anti-economic flailing goes on under a high interest rate regime.
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Re: Oil Prices, Deja Vu all over again.

Unread postby tita » Thu 22 Nov 2018, 16:14:01

But when I look back this is exactly where we were supply/demand wise in late 2013.

Except that the price is already at the level of late 2014, without any sign of US supply weakening. Rig count was plummeting in late 2014. Also, current US supply growth rate is stronger than in 2013/2014. They just reached the record growth of 2Mb/d yoy. It's quite obvious that if it continues, the price will continue to fall until an impact is visible on the activity of LTO. The OPEC is only able to delay it.

Of course, the "if it continues" is important. This growth rate appear difficult to maintain, but who knows?
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Re: Oil Prices, Deja Vu all over again.

Unread postby GHung » Thu 22 Nov 2018, 23:51:51

rocdoc123 said; ....

2. The US gov’t steps in and regulates the US oil industry. Companies can't get together on their own as an American like Opec to control production by law. Nobody likes this sort of gov't oversight but it is the only way to get a sane response from all of the players. ....


Sane response from all of the players? Not as long as Trump is a player. He has made it clear he wants oil prices lower and wants to keep them that way. Mandating production cuts to keep prices where the oil patch needs them is as likely as him increasing taxes to cut the deficit. Then, again, that's what I call a "sane" assessment. Who knows these days?

BTW: I saw regular unleaded today (north of Atlanta) @ $2.08, at several places. Paid $2.12 a little farther up the road.
Blessed are the Meek, for they shall inherit nothing but their Souls. - Anonymous Ghung Person
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Re: Oil Prices, Deja Vu all over again.

Unread postby evilgenius » Sat 24 Nov 2018, 12:15:59

I said I expected $50 oil, but I didn't think it would get there this fast. Overproduction makes sense as a cause. I've been wondering if there is something else going on. Simple economics seems like the best explanation, though.

How low can prices go, and how long can they stay there? The Saudi Arabian economy of largess would seem to be in danger if they are too low for too long. If Trump really does want low oil prices, probably out of pandering to his base, then his apparent moral failure in the face of what happened with Jamal Khashoggi is not what it seems. He's actually undermining the Saudis while he officially props them up. It's classic Trump. He doesn't know himself what he wants, so he does what all of the influences say he should, in order to maintain power. In the end, he may wind up making things worse, but he will still be in power and those backing him will think he is some kind of god. MBS may not think so. How far would his $110b, and more, in weapons go if he uses it against his own people in the face of world outrage? Whoever comes after him might do some Trump worshiping, though. Who would come after him, and would that order have nearly as much power in world oil markets as MBS does as he rules over the current way of doing things? Would the old men sacrifice MBS rather than see the old order go? Would that make any difference to the economics? They might save the kingdom. Of course, you need very low prices for very long to root out the old way. I'm not sure the domestic American producers could do that long enough to avoid bankruptcy.

Alternatively, MBS could ramp up domestic consumption. If he did that in order to employ more of his own people in industrial activity for which cheap oil is an advantage, so that he didn't have to fund them through largess, then he might survive. The Saudi edge as swing producer might not, but that would be up to future events, whether it was challenged in the wrong way for it to stand up. It depends if he is committed to that tough guy approach in the face of opposition, or if he is willing to change. Everybody says he is a natural born tough guy, and that is the only thing that works "over there."
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