Tag Archives: #OilPricing

Gigantic U.S. Crude Oil Inventory Plunge

cushingoilinventory

Cushing, OK Inventory 

Oil inventories plunge…more than 14.5 million barrels for week ended September 2nd.  This was the greatest weekly plunge in 17 years attributed to Tropical Storm Hermine.  The U.S. Energy Information Administration said expectations were for an increase of 225,000 barrels.

The price of oil jumped $1 to $47.25 a barrel from the news.  “I think you need to see more than one week of this to get worries about oversupply out of the market,” said Gene McGillian, senior analyst at Tradition Energy of Stamford, Connecticut.

Tropical Storm Hermine interrupted shipping routes and production last week, even though the storm eventually turned to the northeast and did not harm key facilities in the Gulf.

In conclusion…this report is a minor tremor in oil supply and pricing contrasted to the impact of oil inventory shortfall due to  the $1 trillion slash in new oil field investments from 2015 to 2026.  This was reported last week in the Oil And Gas Insider article Oil Price Spike Inescapable. Click here to read last weeks report.  

Reference: UPDATE 1: Biggest weekly U.S. Crude Inventory Drop, By David Gaffen, Reuters, September 8, 2016; Oil Price Spike Inescapable, By Bill Moist, Oil And Gas Insider, September 5, 2016

Oil Price Spike Inescapable

offshorerig

Bill’s note: We’ve been reporting in the oilandgasinsider.com since the beginning of 2016, that the massive cuts in new capital expenditiures for oil and gas exploration would lead to oil price hikes.  Now the results of those expenditiure cuts are appearing in new oil discoveries.

 CASUAL ATTIRE

Oil price spike inescapable and here’s the facts…

  • 2015 new oil discoveries are 1/10th annual average dating all the way back to 1947
  • 2015 Oil industry new discoveries are only 2.7 billion barrels
  • 2015 worldwide oil consumption at 35 billion barrels

Click here to watch the 3 minute video Oil Price Spike Inescapable.

Why do we have the largest oil consumption deficit in 69 years?

  1. Oil at less than $50 a barrel makes many fields around the world uneconomical to explore
  2. The oil industry has slashed $1 trillion in new investment from 2015 to 2026
  3. EIA expects oil demand to expand to 105 million barrels per day by 2026 up from the current demand of 94 mb/d
  4. Large scale high volume drilling like deepwater projects have been scraped
  5. Large scale projects take years to be productive

In conclusion…Supply could  fall 1.5 billion barrels short per year by 2018 to 2020.  If this does play out, then…

Oil Price Spike Is Inescapable

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References; Wood Mckeszie, Energy Information Agency, , Oil Price Spike Inevitable, By Nick Cunningham, OilPrice.com, August 30, 2016

Click here to watch the 3 minute video Oil Price Spike Inescapable.

Possible OPEC Production Freeze

OPEC Counries

Oil prices enjoyed a bump last week,…thanks in part to a weakened dollar and some geopolitical tensions in the Persian Gulf. But a large factor in the recent rally has been the return of a possible OPEC production freeze, a subject that was last tossed around before the organization’s much-publicized, and ultimately unproductive, meeting in Doha last April. The likelihood of a freeze sent markets up on Thursday, though some less-than-confident comments from the Saudi oil minister sent them dropping back on Friday.

Whether a freeze occurs or not is likely to be the trending gossip among speculators for the next month, at a time when such talk is exerting greater-than-average pull on the crude price. But a question worth asking is whether a freeze is even possible, given the state of OPEC and the increasingly divergent interests of its fourteen members.

This new attempt at a production freeze comes as Saudi Arabia, OPEC’s largest producer and de facto leader, reaches a new production record of 10.67 million barrels, more than 400,000 more than when the last freeze was discussed, while its oil revenues continue to plummet. OPEC profits have fallen 55 percent since 2014, according to the EIA. Ecuador, Kuwait and other Gulf producers want the price to recover past $50 a barrel. If a production freeze is on the cards, it will be discussed in late September during an informal meeting of the OPEC states at the International Energy Forum in Algeria.

Iraq and Iran, OPEC’s number two and three producers, respectively, have offered tacit acceptance of a production freeze, with important caveats. S

Conclusion…So, if there is a freeze, where will production be “frozen,” exactly?  What is possible, however, is that continued talk of a freeze will continue to exert influence over the market, which has see-sawed between bearish and bullish for weeks now.

Reference: Is An Oil Production Freeze Even Remotely Possible, Oil Price, by Gregory Brew, August 29, 2016

Saudi Arabia – A Kingdom In Retreat

SaudiKingdomKingdom Tower

The Kingdom is struggling with weak GDP growth, higher fees and taxes, and an economy that is unable to pay the dues to its workers, leaving thousands of workers from South Asia with an uncertain future.

When a nation is unable to provide food to its migrant workers, it says a lot about their financial condition.

The oil price crash has forced the oil-rich Kingdom to introduce austerity measures, and delay payments to already cash-strapped contractors.

“It looks like austerity has hit hard and more than we had anticipated, halting construction projects and stopping hiring,” said Jason Tuvey, Middle East economist at Capital Economics, reports the Financial Times.

Who is the Hardest Hit?…Construction laborers from India and Pakistan are most affected by the Kingdom’s hardships. This group of workers are left without a job, and without basic amenities such as insurance coverage, food, shelter and medical facilities—a situation that has improved after respective consulates stepped in to offer their own citizens aid.

Saudi’s Empty Pockets…Setting aside the Kingdom’s positive outlook, until the Saudi economy reduces its reliance on oil, the situation is likely to get worse before it gets any better. With oil prices reeling close to $42 a barrel, the Saudi economy is likely to run out of cash, according to the International Monetary Fund.

“All oil exporters will need to adjust to the new low oil price,” the IMF warned, reports the Independent. “All” in this case, includes, probably most importantly, Saudi Arabia.

Meanwhile, Saudi Arabia continues its record oil production, reaching 10.67 million barrels per day, up about 120,000 bpd on the prior month—with no signs of slowing. Although this will allow Saudi Arabia to hold onto its marketshare, which they can hardly be blamed for trying to cling to, it will no doubt add to the supply glut, and certainly will not bode well for oil prices in the short term.

In conclusion…And if oil prices continue to languish near today’s lows, it will be years before Saudi Arabia can regain its erstwhile glory.

 Source: Oil Price.com, Is Saudi Arabia About To Cry Uncle In the Oil Price War, By Rakesh Upadhyay – Aug 11, 2016

Crude Prices Rise On OPEC Statement

Barrels of Oiloil-workers

OPEC Commnets...While the Organization of the Petroleum Exporting Countries (OPEC) no longer wields the same power over global oil markets it had 40 years ago, it can still make some noise when it wants to. And Monday, OPEC wanted to.

The cartel’s new president, Mohammed Bin Saleh Al-Sada, who is also Qatar’s oil minister, said in a statement that he expects higher oil demand in the second half of 2016. These words tacked a gain of around 3% onto crude prices.

Al-Sada added that prices have experienced “steady improvement” since February following “a decline in crude oil production, supply outages and a decrease in oil inventories, while global demand for oil improved.” He also added that the recent (current?) decline in prices and higher volatility is “only temporary,” according to the press release:

These are more of an outcome resulting from weaker refinery margins, inventory overhang – particularly of product stocks, timing of Brexit and its impact on the financial futures markets, including that of crude oil.

Since June 1, the price for an OPEC reference basket barrel has dropped from $44.68 to $40.08, more than 10%. The reference basket price rose by nearly $1 as of July 1, but it’s been steadily downhill since then.

In Conclusion...Is OPEC just talking its book, hoping to push up the price? While it wouldn’t be the first time that has happened, it is more probable that the cartel, like the International Energy Agency (IEA) and the U.S. Energy Information Administration (EIA), really believes that global demand will rise, global inventories of oil and refined products will fall and production will continue to slow down, especially in North America.

Serious Oil Field Worker Shortage…Soon?

oil-workers

Goldman Sachs believes the American oil industry is about to stage a big comeback from the painful downturn and big job losses caused by oversupply.  A projected 100,000 oil jobs could be coming back.

The estimate is based on Goldman’s forecast for U.S. oil production to resume growing next year after the recent drop to two-year lows. That growth would require some 700 oil rigs to be added — and each one supports an average of 120 to 150 employees.

As more oil fields come on line and America’s oil boom gets back on track, there simply won’t be enough people to do the required drilling, well completion and other logistical work. Cheap oil wiped out nearly 170,000 oil and gas jobs since late 2014 as desperate companies scrambled to cut costs and avoid bankruptcy. This downturn was far worse than the 87,000 jobs wiped out during the last downturn in the middle of the Great Recession.

Jeff Bush, president of oil and gas recruiting firm CSI Recruiting, agrees that a “worker shortage” is coming.

“When we get back to a reasonable level of activity, there’s going to be a supply crisis of experienced personnel. I just don’t see any way around that,” said Bush.

In conclusion…Last week in this publication we discussed  “U.S. Now The Largest Global Oil Reserve.”  Somehow the industry will need to take better care of those skilled workers if they want to keep them over the long-term. The drastic swing in oil prices has extremely painful for those workers who grow accustomed to the high salaries.  Every downturn flushes out a large number of highly skilled workers.

U.S. Now Largest Global Oil Reserve

 The United States has surpassed Saudi Arabia and Russia as the global leader in oil reserves.  This from a Norwegian consultancy firm report.

“We have done this benchmarking every year, and this is the first year we’ve seen that the US is above Saudi Arabia and Russia,” Per Magnus Nysveen, head of analysis at Rystad Energy, said. He credited the rise to a sharp increase in the number of discoveries in the Permian basin in Texas over the past two years.

The report found that many, especially members of the Organization of Petroleum Exporting Countries, exaggerated the size of their reserves in self-reported surveys. Rystad Energy came to the conclusion by only recording each country’s economically viable reserves.

American oil reserves have grown dramatically in the past two years due to improvements in technology for extracting shale called fracking. Increased productivity has cut the cost of extracting oil in half in the past two years, when compared to the price per barrel.

Nysveen is forecasting the price of the barrel to bottom out soon as supply is beginning to rebalance. “At the end of the year, we will see increases again in US oil production,” he said.

In summary…The future implications of the larger reserves as positive for the US economy. As the world’s largest consumer of oil, the reserves will help cut America’s trade deficit and strengthen the dollar. Geopolitically speaking, the large reserves will prevent oil from being used as a political tool against the United States as it can remain self-sufficient.

The last eight American Presidents have promised independence from foreign oil.  In spite of much opposition, the U.S. oil and gas industry has been using innovation to change the balance of geopolitical power in our favor.

Shale Oil Shifting Balance Of Power

Crude Oil OutagesBalancing Oil Supply…The Organization of Petroleum Exporting Countries’ abiility to balance global supply (and prices) now limited by shale oil production, a former Qatari energy minister said.

OPEC was able to balance the market in the past because because shale oil deposits and other non-OPEC nations output was insignificant, Abdullah bin Hamad told reports at the industry even in Doha.

“OPEC can’t act as swing producer because it will lose market share,” said Al-Attihay former Qatar energy minister.

Crude prices tumbled more than 75% from the 2014 peak due to the global glut in part due to U.S. shale oil production.

Market Forces…“Frankly, I don’t expect anything from the next OPEC meeting because OPEC decided not to play against the market,” IEA former executive.  “Market forces are too strong now, and you can’t play against those forces whey they are strong.”

“Just cut production by 1.5 million barrels a day and the next day the prices goes up and the other oil producers will take the whole share–there is no benefit for OPEC in that,” Al-Attiyah.

Crude Oil Outages Soaring…Escalations in sabotage, tech problems, and natural disasters are impacting world crude oil supply as documented by the EIA in the above diagram for the last 12 months.  This increase in outages most likely are a factor in the recent oil price increases to $50 a barrel.

In Summary…The closer a market looks and acts like an oligopoly (a state of limited competition,) the greater the pricing power those producers have by limiting production.  The good news is the pricing power has shifted away from OPEC to where now the market as a whole is determining pricing.  From a U.S. national security perspective, we are more secure now due to this shifting of market pricing power.

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Source: “Shale Oil Seen Stifling OPEC’s Classic Market-Balancing Act,” Wael Mahdi, Bloomberg, May 256 2016

Oil Price Spike Close?

WTI Crude Pricing

We are beginning to see the first real signs of the global oil markets moving rapidly back into balance. OPEC, which produces approximately 40 percent of the world’s oil supply, cannot meet future oil demand on their own.

Supporting data follows that supports the analysis that oil price spike may be close:

  • On May 11th the U.S. Energy Information Administration (EIA) reported that U.S. crude oil production declined by 206,000 barrels per day over the six weeks ending May 5, 2016.
  • U.S. crude oil inventories unexpectedly fell by 3.41 million barrels during the week ending May 6, 2016
  • Gasoline inventories declined by 1.231 million barrels’=
  • Distillate stockpiles fell by 1.647 million barrels
  • The International Energy Agency (IEA) say the annual summer spike in demand for transportation fuels has begun.
  • On Friday, May 13 an explosion closed a second Chevron facility in Nigeria, Africa’s biggest oil producer
  • Exxon Mobil also reported on May 13 that a drilling rig damaged a pipeline, shutting off more production of crude. Nigeria’s oil production was already down 600,000 barrels per day before these two incidents, primarily the result of militant attacks.
  • Latin American oil production is now down close to 500,000 bpd from year ago levels.

In conclusion…If history repeats itself, the demand spike will be even larger. In 2010, the final year of the last major oil price cycle, the IEA began the year forecasting a 1.0 million barrel per day increase that year. Actual demand growth was 3.3 million barrels per day. The forecast error made in 2010 was that IEA’s formula for calculating demand, did not consider the impact of lower fuel prices on demand. IEA may have made the same mistake this time around.

What’s Driving Oil Price Rally?

internatioanlrigcount

Oil prices plunged to their lowest levels in more than a decade earlier this year, but have since rallied by more than 70 percent from their February lows. Now oil is at a crossroads: the market is balancing, but not quickly enough. Oil traders are gaining confidence, but with oil trading at $45 per barrel, is the risk more to the upside or downside? Will the rally continue or will prices fall back again? And what about the long-term? Will today’s investment cuts lead to future shortages?

Brent crude oil for July delivery traded as high as $48.29 on Friday before dropping to below $47 a barrel on various reports that OPEC production had increased in April. The December futures contract traded as high as $49.65 on Friday, not a large spread, but as close as Brent futures have been to $50 a barrel in some time.

Part of the reason for that is that Brent prices well above $50 a barrel are not in Saudi Arabia’s interest. The kingdom has invested tens of billions of dollars in driving high-cost producers (mostly in the United States) to shut down production, and the effort has paid off. But if Brent rises much past $50 a barrel, the Saudis’ leverage diminishes, unless it also raises production to drive prices down again.

Neil Atkinson,  the Head of the Oil Markets Division at the International Energy Agency based in Paris responded recently to questions asked by oilprice.com: It can be argued that the sell-off to below $30/bbl was an over-reaction to the downside. The bounce bck to $45/bbl is partly explained by the strike in Kuwait, production interruptions in Nigeria, UAE and Iraq, and the growing perception that US shale oil production is declining. The bounce back is also due to the fact that investors are more forward looking than they used to be and the possibility of the market returning to balance around the turn of the year is a supportive factor.

He continues: The IEA has warned consistently that inadequate investment today could sow the seeds of a price shock tomorrow if there is a major change to the expected supply/demand balance. Towards 2020 there is the possibility that, if annual global oil demand growth were to exceed the 1.2 mb/d level forecast by the IEA and there was a geo-political event leading to a major supply shortfall, there could be insufficient spare production capacity to fill the gap. The resultant price spike would be detrimental for the world economy.

In conclusion… Current demand supply curve is not the only factor in oil pricing.  The decline in world rig count, the cancelation of many billion dollar plus projects by the majors, and the expected growth in future oil demand are all impacting the futures markets.  Maybe Mr. Atkinson is correct in his analysis that the $30/bbl pricing was an over-reaction to the downside.