Oil Prices are Starting to Rise Too High

Oil prices are starting to rise too high in my opinion.  $80 oil (as forecasted for later) is simply not sustainable.

I really wish KSA and MbS would shut the heck up about $80 to $100 oil, which they want in order to artificially jack up the potential cash windfall for their supposedly impending Aramco IPO.

I have my doubts that an Aramco IPO will actually happen.  You can read my recent opinion piece about that here:

Saudi Aramco IPO Seems Unlikely

Anyway, Goldman seems to politely agree with my sentiments that $80 oil is not sustainable.  Here is the last sentence of the Zero Hedge article:

Goldman's Clients Are Getting Concerned About Rising Oil Prices
===============================

Goldman's conclusion is that while "current crude oil price dynamics and recent stock momentum create an appealing shorter-term opportunity for tactical investors", those looking for sustainable, longer-term price appreciation should look elsewhere.

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You are not alone in that skepticism. The bulls will learn it the hard way if the easy way doesn't work.

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6 hours ago, TomTom said:

I guess $65 - $70 is good enough for oil companies and a decent compromise for the consumer.

Bingo.  Agreed.  Oil prices too high will crash global economies, resulting in a crash in oil prices.

Currently, $65 seems reasonable to me.

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note price rise against strengthening USD - it may have legs. Part may be geopolitics (namely Iran's supply) but I wouldn't be surprised if market started to realize shale oil can't be ramped up with ease, too light to be refined in US/have to be mixed with Canadian or Venezuelan (another can of worms) heavy crude and overall not that profitable to justify ever-increasing (~50% production decline a year) drilling cycle.

Demand was increasing ~1M bbl/day each year while production expenditures kept to bare minimum during downturn. Storage getting worked and spare capacity running thin. World use to panic when it was at ~4MM bbl/day level; all sanguine at <2MM now. I'm betting for >$100/bbl crude.

 

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A lot of people and companies seem to be hoping for $80 to $100 oil.  I'm not.

Here's one of my comments from a different thread:

"My view on oil prices are pretty clear.  I've been pretty consistent about my views on oil prices since 2015.

But since I'm new to this forum, guess I need to reiterate.

In 2015 and 2016 I commented ad nauseum (mostly on the new defunct Oilpro forum) that I would be happy if oil was a stable average around $50 to $60, but closer to $50.  

In 2017, I changed my view and comments to I would be happy if oil was a stable average around $50 to $60, but closer to $60.  

This year, I changed my view and comments to I would be happy if oil was a stable average around $65.

And I would be happy if oil was a stable average around $70 for 2019.

Note that I think the value of the US Dollar will be devalued a bit later this year and early next year as the PetroYuan starts gaining international acceptance.

So in real terms, I'm actually hoping for oil prices to average $65 for 2018 and 2019.

$100 oil is not sustainable long term.  $300 oil is just nuts.

Excessively high oil prices would kill global economies, and crash oil prices all over again.

Here is one of my old articles from 3 years ago.  Seems like it is still relevant today.  (This was one of my articles for the old Oilpro forum, which I also posted to LinkedIn... All my old Oilpro articles are gone : (

Why Oil is Unlikely to Hit $200 in the Next Decade

https://www.linkedin.com/pulse/why-oil-unlikely-hit-200-next-decade-tom-kirkman

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(edited)

don't disagree with you on $100 oil killing global economies - just on a part it won't happen... Debt-fueled crash can't be avoided, it will happen with or without high crude price. But $300 oil will certainly trigger it in no time.

Edited by DanilKa
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4 hours ago, DanilKa said:

note price rise against strengthening USD - it may have legs. Part may be geopolitics (namely Iran's supply) but I wouldn't be surprised if market started to realize shale oil can't be ramped up with ease, too light to be refined in US/have to be mixed with Canadian or Venezuelan (another can of worms) heavy crude and overall not that profitable to justify ever-increasing (~50% production decline a year) drilling cycle.

Demand was increasing ~1M bbl/day each year while production expenditures kept to bare minimum during downturn. Storage getting worked and spare capacity running thin. World use to panic when it was at ~4MM bbl/day level; all sanguine at <2MM now. I'm betting for >$100/bbl crude.

 

 

On 4/30/2018 at 6:06 AM, Tom Kirkman said:

Oil prices are starting to rise too high in my opinion.  $80 oil (as forecasted for later) is simply not sustainable.

I really wish KSA and MbS would shut the heck up about $80 to $100 oil, which they want in order to artificially jack up the potential cash windfall for their supposedly impending Aramco IPO.

I have my doubts that an Aramco IPO will actually happen.  You can read my recent opinion piece about that here:

Saudi Aramco IPO Seems Unlikely

Anyway, Goldman seems to politely agree with my sentiments that $80 oil is not sustainable.  Here is the last sentence of the Zero Hedge article:

Goldman's Clients Are Getting Concerned About Rising Oil Prices
===============================

Goldman's conclusion is that while "current crude oil price dynamics and recent stock momentum create an appealing shorter-term opportunity for tactical investors", those looking for sustainable, longer-term price appreciation should look elsewhere.

 

This appears like a deliberate move by Arabs to make west crash. With increasing oil price, the excessively import oriented economies that export useless things like services will be hit very hard. The idea on which western economies ran was that technology was too precious and the raw materials were too cheap. So, by selling high technology goods like arms, planes, semiconductors and other luxury goods at exorbitant price by quoting high standard of living and labour cost, they used to exploit countries with natural resources.

 

The move of increasing raw material cost appears to be deliberate and with the intention of cutting down western economies. China will survive easily as they actually export goods and have trade surplus. Some of the surplus will reduce but they will still remain stable. India holds 200million muslims and hence massive bargaining power and may attract subsidies from Arabs to avoid antagonising India. But countries in Europe and USA don't have much of a leverage with Arabs except for food supply which again can be obtained from other sources like Brazil, Africa etc.

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As the oil price increases look for production cost to increase faster. Here in the Permian, lodging is at a premium in a area of long commutes. There is a huge demand for lower skilled workers and truck drivers. Offering field workers $18-20 gets nothing. Even $25 jobs working 60+ are going begging because everyone who is worth anything is already working and the ones not usually cannot pass a wiz test. Touted technology is slowly being recognized as only cheap prices for equipment and labor due to the last downturn. Granted there is a ability to achieve more with less, that hits a wall at some point.

Roads and traffic have to be experienced to really understand how bad things are out here. DPS is pretty much useless because of the sheer volume of traffic. After yesterday afternoon on 1FM 788 and the stupidity of a moron in a Range Rover DPS cannot hand out enough tickets. This jerk is living today because two of us hit the shoulder instead of this moron having a head on. Then he was three cars backed up at 176! If you talk to those driving 349, 158 302 and 285 this is normal. Some I have talked with say it is worse here than what went on in NoDak a few years back.

If oil hits $90 the greed factor will hit high gear. Those with the skills to fleece the willing greedy will be coming out of the woodwork. I could see a investor fueled craze pushing it to and over $150. But it will be short lived. And the companies who have been hiding their debt when the boom fizzes out will be in deep kim che.

With all the new investor money, what I call stupid money, still available, there is such a chance this will boom, it scares me. Because the inevitable crash could cripple the US oil industry. And I think that is what our friends in the middle east are wanting.

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17 hours ago, Carlos Luis Bravo F said:

With respect to Venezuela, my country, like José, I have to say about it.
As a Philosopher, the center of all human activity, it is political
Politics Venezuela, which is a Communism disguised as Democracy, carried severely by a partisan Buro, always against the United States and Capitalism.
To think that Nicolas Maduro, Diosdado Cabello, Tarek Al Isami, Jorge Rodriguez, among others (Directors of the Buro) are going to try to privatize PDVSA, is simply a dream; what they would do, in the case of a total collapse, is to deliver to Russia, or China, or to the 2, for the giant debts, the company
Remember, that exchange control generates a large amount of Inorganic Money, which when washed by the Boliburgueses that are in PDVSA, generates a millionaire business that they can not dismantle because they need to pay the supporters of the Rebolución; on the other hand, if it is true that they are exploiting other mineral alternatives, such as gold deposits, to obtain dollars; this diversity of exploitation of incredibly large resources, makes the Venezuelan politicians strong to establish some negotiation for the recovery of PDVSA, and remember that the country, of China, has been the largest buyer of gold (mimeral) in the last 10 years
The Venezuelan politicians, will seek the way to maintain their status quo, created by Chavez, whatever the cost, because between the Economy of Goods and the Economy of Males, the levels and qualities of life is these (politicians and supporters) are better, In addition to Diplomatic Immunity
Thinking about Privatization ... is a scenario that Venezuelan Politicians will not raise

 

2 minutes ago, Curtis Stewart said:

As the oil price increases look for production cost to increase faster. Here in the Permian, lodging is at a premium in a area of long commutes. There is a huge demand for lower skilled workers and truck drivers. Offering field workers $18-20 gets nothing. Even $25 jobs working 60+ are going begging because everyone who is worth anything is already working and the ones not usually cannot pass a wiz test. Touted technology is slowly being recognized as only cheap prices for equipment and labor due to the last downturn. Granted there is a ability to achieve more with less, that hits a wall at some point.

Roads and traffic have to be experienced to really understand how bad things are out here. DPS is pretty much useless because of the sheer volume of traffic. After yesterday afternoon on 1FM 788 and the stupidity of a moron in a Range Rover DPS cannot hand out enough tickets. This jerk is living today because two of us hit the shoulder instead of this moron having a head on. Then he was three cars backed up at 176! If you talk to those driving 349, 158 302 and 285 this is normal. Some I have talked with say it is worse here than what went on in NoDak a few years back.

If oil hits $90 the greed factor will hit high gear. Those with the skills to fleece the willing greedy will be coming out of the woodwork. I could see a investor fueled craze pushing it to and over $150. But it will be short lived. And the companies who have been hiding their debt when the boom fizzes out will be in deep kim che.

With all the new investor money, what I call stupid money, still available, there is such a chance this will boom, it scares me. Because the inevitable crash could cripple the US oil industry. And I think that is what our friends in the middle east are wanting.

And investors LOVE the Permian plays for sure. According to new EIA report, well productivity is up up up. Investors dig that. I agree that the US shale boom is far from over.

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Quote

Many Mickles make a Muckle

There are so many geopolitical, political, technological and environmental factors making up the supply and demand price point; prediction is far from certain. With China and India increasing demand slightly while the world goes increasingly renewable. You are looking at a moderately increasing oil demand versus a moderately decreasing oil supply the difference being taken up by renewable. It isn't just about electric cars its about ALL oil related industries.

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11 minutes ago, Curtis Stewart said:

With all the new investor money, what I call stupid money, still available, there is such a chance this will boom, it scares me. Because the inevitable crash could cripple the US oil industry. And I think that is what our friends in the middle east are wanting.

Curtis, I recall back a few years ago when you used the same term, stupid money, to describe what is once again starting up now.  Resulting from greed.

The higher the oil prices jump, the harder the later crash.

And yes, KSA is pushing for $80 to $100 oil.  Agreed, if oil goes to triple digits again, a lot of U.S. shale oil companies will likely go bankrupt when oil prices crash again.

Wait for it ... some fool is going to say yet again...

"But this time it's different ... "

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1 hour ago, Tom Kirkman said:

Curtis, I recall back a few years ago when you used the same term, stupid money, to describe what is once again starting up now.  Resulting from greed.

The higher the oil prices jump, the harder the later crash.

And yes, KSA is pushing for $80 to $100 oil.  Agreed, if oil goes to triple digits again, a lot of U.S. shale oil companies will likely go bankrupt when oil prices crash again.

Wait for it ... some fool is going to say yet again...

"But this time it's different ... "

 

The oil price is never about market but politics. Petroleum is a non renewable commodity and once used, it is over. I don't understand why would you consider bringing unnecessary economics like bankruptcy here.

USA always had the shale oil and it was even attempted to be drilled in 1980s but stopped by political decisions. USA wanted to hide its oil reserves so as to keep them reserved for difficult times. When USA realised that the energy dependency has become critical, the oil fields were released to be drilled. Now, as the pressure for oil price goes higher and higher, the USA is trying get self reliance in the petroleum as to protect its economy.

The developed nations have a disadvantage that they can only go down and not up as the resources even out with developing countries. To avoid that, USA is increasing oil production and propping keeping the debt from ballooning.

The Arabs, however, are angry at the NATO for meddling in the affairs of middle east and are now deliberately cutting down oil production to keep the pressure on the NATO countries.

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Not sure I'm buying this bit about the 'Arabs' being angry at 'NATO' for meddling in the Middle East. The whole game is to get Trump to do exactly that. The Saudis are begging for it, of course. 

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(edited)

Low oil prices are increasing demand.  For example Ford announced that it will no longer manufacture sedans except for the iconic Mustang.  Instead they are concentrating on less fuel efficient but more profitable SUVs, crossovers and pickups.

The Saudi's still have a lot of oil and this increase in demand would help them in the long run.  A short term price increase may help Saudi short term and with their Aramco IPO (assuming they have an IPO) but hurt them in the longer term by reducing demand and encouraging electric and hybrid vehicle development.

Edited by PeterfromCalgary
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9 hours ago, Bhimsen Pachawry said:

USA always had the shale oil and it was even attempted to be drilled in 1980s but stopped by political decisions. USA wanted to hide its oil reserves so as to keep them reserved for difficult times. When USA realised that the energy dependency has become critical, the oil fields were released to be drilled. Now, as the pressure for oil price goes higher and higher, the USA is trying get self reliance in the petroleum as to protect its economy.

Nope.  U.S. Shale Oil industry is pretty much an uncontrollable herd of cats, and each individual cat is trying to earn a buck.  

U.S. Shale oil is not - and never will be - a collective or a Union or a Cartel like OPEC.

U.S. Shale Oil is independent, and does not "report" to the government like a National Oil Company does.

If you have ever been to Texas, you might have a better idea of the fiercely independent streak that many small, independent oil companies have.

The amount of drilling that the U.S. Shale oil industry does is generally driven by oil prices - the higher the price of oil, the more drilling rigs are added.  Conversely, the lower the price of oil, the number of drilling rigs drop.

I daresay that most independent oil producers in the U.S. don't care so much about OPEC's politics; their main concern is probably the daily price of oil and the day rate cost of the labor, rigs and equipment needed to extract their oil.

The U.S. government does not control the U.S. independent oil producers in the same way that a National Oil Company can be controlled by a government - no comparison between, say, PDVSA (the National Oil Company of Venezuela) and "John Smith's Independent Oil Company" in Texas.

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This is the one element that most people forget: State-run companies have far different goals than independent companies in this industry. Consider China for instance, which cares less about making money than it does in gaining a foothold strategically somewhere through its natural resources companies. It's impossible to compare OPEC to the US oil industry in any way. 

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(edited)

On 2/5/2018 at 1:50 PM, Rodent said:

 

And investors LOVE the Permian plays for sure. According to new EIA report, well productivity is up up up. Investors dig that. I agree that the US shale boom is far from over.

Interesting what you refer me.
and I think that things can also reach dangerous levels
There is a Venezuelan Public Character with strong ties in the Middle East, which according to CNNE was denounced by the traffic of Venezuelan passports; Alcaeda has been making a somewhat dangerous silence in recent years, leaving all the noise to ISIS and I am concerned about what was referred to as the Latent threat to the USA.
I told you the true possibility, since it has been negotiating for more than a year (between ministers) the way that China and Russia can handle the PDVSA, what the Venezuelan military does not care for, because they want to direct it, which It would be the biggest disaster of the Administration of Maduro, but the Muslims, in this some conversations that I heard in Kubai, about the possibility of Managing the Venezuelan Petroleum Industry, but both you and everyone, we know that the Islamic externism, is nourished by Oil Trade, and through them, access the arms market.
It is not crazy to think, that the Extremist Muslims can enter PDVSA's management, since this would give them a very solid commercial point, besides that the Venezuelan Political System, could concretize one more help in its utopian war with the USA Empire.
Do you understand what I'm saying.
It could be that the lack of decisions and of emphasizing a serious policy of the USA against Venezuela, make another pressure like the missiles of Cuba, which consolidates the United Socialist Party of Venezuela and its Buro, as a political egemony like that of fidel
It is very dangerous for the USA that the oil industry falls with China or Russia (which would be the least of the problems) but the one that can enter the Muslims would be terrible

Edited by Carlos Luis Bravo F

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(edited)

On 5/3/2018 at 4:51 AM, Tom Kirkman said:

Nope.  U.S. Shale Oil industry is pretty much an uncontrollable herd of cats, and each individual cat is trying to earn a buck.  

U.S. Shale oil is not - and never will be - a collective or a Union or a Cartel like OPEC.

U.S. Shale Oil is independent, and does not "report" to the government like a National Oil Company does.

If you have ever been to Texas, you might have a better idea of the fiercely independent streak that many small, independent oil companies have.

The amount of drilling that the U.S. Shale oil industry does is generally driven by oil prices - the higher the price of oil, the more drilling rigs are added.  Conversely, the lower the price of oil, the number of drilling rigs drop.

I daresay that most independent oil producers in the U.S. don't care so much about OPEC's politics; their main concern is probably the daily price of oil and the day rate cost of the labor, rigs and equipment needed to extract their oil.

The U.S. government does not control the U.S. independent oil producers in the same way that a National Oil Company can be controlled by a government - no comparison between, say, PDVSA (the National Oil Company of Venezuela) and "John Smith's Independent Oil Company" in Texas.

 

Government will find ways to ensure that oil production is controlled. Things like leasing rights and their price, environmental clearance etc are controlled by government to ensure oil is not drilled out wantonly. There is a reason the shale oil which was first drilled in 1980s was kept hidden till the 2008 crash. It was after the 2008 crash due to spike in oil prices that USA started to produce shale oil. If it was really just about private companies without control, the oil production from shale oil would not have been stopped in 1980 when prices were still high and would have already started to produce by 2003-4.

I have attached charts of crude oil prices and USA oil productions. You will notice how they are more related to politics rather than price. The important events to be noted are: 

1)1973 oil embargo

2) USSR dependency on Western agriculture and hence USA lowered oil prices artificially to make USSR collapse in 1980s

3) Oil related crash of 2008 and extortion from Arabs for supplying oil using the newfound powers due to oil scarcity

 

 

USA_Oil_Production.PNG

OIL_Price.PNG

Edited by Bhimsen Pachawry
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Hmm... I think what you're saying is that oil price doesn't determine US oil production. And I think you have something there. No matter the whys or the hows, US oil production absolutely correlates to WTI. But from the study below, it looks like oil production determines price, not price determining oil production, but this is a particularly tricky web to untangle--why it works the way it works, and why it shifted in 2009 to be correlated different is unknown, because I don't want to pay for the full study :) 

"Using wavelet methodologies, we observe a shift to higher frequencies of the wavelet coherency for the time period 2003–2009 and lower frequencies for the period 2009–2014. The results also indicate that during the period 2003–2009 the U.S. oil production and WTI oil prices time series are in phase; they move together, with total United States oil production leading. During the period 2009–2014 oil production and WTI oil prices time series are out of phase (negatively correlated), suggesting that oil production increases precede a decrease in WTI oil prices."

from here (paid study): https://www.sciencedirect.com/science/article/pii/S0360544217315803#abs0015

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(edited)

9 hours ago, Bhimsen Pachawry said:

There is a reason the shale oil which was first drilled in 1980s was kept hidden till the 2008 crash. It was after the 2008 crash due to spike in oil prices that USA started to produce shale oil

If i recall correctly, the U.S. Shale Oil "revolution" started once horizontal drilling was combined with hydraulic fracturing + propants.  Not because shale oil was "kept hidden".

I find it hard to believe that U.S. independent oil companies are controlled by much of anything besides oil prices. Indie oil producers in general are very much a fiercely independent herd of cats.  Try herding them, get scratched.

Edited by Tom Kirkman
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Hi oil prices in Australia have bee hidden by the media for a long time 

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1 minute ago, Douglas Don said:

Hi oil prices in Australia have bee hidden by the media for a long time 

Douglas, can you explain what you mean by Australian media hiding oil prices?  I don't quite understand.

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in reference to this statement by B. Pachawry: "USA always had the shale oil and it was even attempted to be drilled in 1980s but stopped by political decisions. USA wanted to hide its oil reserves so as to keep them reserved for difficult times. When USA realised that the energy dependency has become critical, the oil fields were released to be drilled"

We need to keep in mind that shale oil and gas huge deposits were always known; however  they were not economically drillable. Fracking was known since 1948, but horizontal wells were not yet a commercial reality until the early 90s

 

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