Saudi Arabia Ready to Start Pumping More Oil

[Dennis Coyne + 82]

2 minutes ago, Rodent said:

I must admit, my head is spinning a little bit from this oil price discussion. I LIKE IT!!! 

Someone mentioned above about Saudi Arabia's reserves being tied to oil prices (or dependent on, rather). While I can't speak to all the ins and outs of what went into establishing Saudi Arabia's recoverable reserves, it would logically follow that "recoverable" is conditional on the price of oil. More oil is recoverable at $120 a barrel than at $10 per barrel. That said, I do find it particularly odd that Aramco has, year after year, reported the same level of reserves. I would understand that if the price continued to increase (or costs continued to decrease) at a steady rate, but I don't believe that to be true.

Normally I would say Aramco is fully of hooey, but this time their reserves were independently audited. It's like the loaves and the fishes. They just never run out, it seems. MAGIC! 

Yep, Albus Dumbledore is the oil minister. 

[William Edwards + 708]

1 hour ago, Dennis Coyne said:

Hi William,

Yes the World inventory levels are not known, but each individual business knows how much oil they own and how much they would like to own, yes?

There's a long term contract you say, so price doesn't matter.  How are the prices set in those long term contracts?  What about smaller producers that may sell some of their oil on the spot market?

Although for the market as a whole price discovery is a complex process (there is not really a single World oil price there are many different grades of oil and many different markets and prices), for any single business whose tanks are full and no place to put today's oil output, if they cannot sell their oil at x, they will offer it for sale at y<x because their actual inventory is above their desired inventory level.

I am talking about the microeconomics level, the macroeconomics is just the sum of all the microeconomic transactions.

Dennis, I attempted to mitigate your lack of actual experience by suggesting that you engage in a thought process as a partial substitute. Instead of accepting my helpful suggestion you continue in the "argument" mode. While I am willing to use some of my time to be helpful, I have no interest in arguing with someone who only has a partial picture of the subject. When you learn more, let me know. In the meantime you might find comfort in reading Matt Simmons "Twilight in the Desert", a flawed assessment forecasting the Saudis running out of oil and  $300 oil by now, based upon the same blind spot of price vs supply. 

[William Edwards + 708]

1 hour ago, Anas bahmed said:

 Is not possible $50/b  and stay long  because it would not be not good for investing and for the company so some companies will be bankruptcy. And if the supply become less then demand the price will be  above them $300. Until investing come back.

Possibly you have not seen or have forgotten the 150-year price history of oil, expressed in today's dollars. Check out the time spent below $50.

[William Edwards + 708]

1 hour ago, Tom Kirkman said:

History.  What goes up eventually comes down.

Also, here is part of one of my replies on LinkedIn to @Mahyar Emani (who is also here on Oil Price forum)

"Oil trading seems to be based on both supply and demand, and geopolitics, as well as what the market will bear.  If oil prices increase drastically, then demand will reduce, increasing supply, and lowering prices.  At least that is my general understanding - I'm not an oil trader."

But you possess common wisdom, Tom. That is good enough for this exercise. I have enough trading experience to apply the validation that you need from that area.

[William Edwards + 708]

1 hour ago, Dennis Coyne said:

William,

So your thesis is that prices do not affect supply?  Why did the rate of increase in World oil output change in 2015?  Over the long term it is increased World real GDP that drives oil output, over the short term price will affect both demand and supply.  

Maybe your one of those one bladed scissors folks.  You want to focus on demand, that's fine I agree demand drives things, but supply adjusts to demand in response to prices, that's the signal that tells suppliers more output is needed and the profit motive helps this to occur.

No, Dennis, my thesis is NOT that prices do not affect supply. My position is quite the reverse! If you are unable to properly understand what I write, then one of us is deficient in communication. I will not engage further with you in that ineffective activity. I will keep my one-blade scissor to myself. 

 

[Dennis Coyne + 82]

21 minutes ago, William Edwards said:

Dennis, I attempted to mitigate your lack of actual experience by suggesting that you engage in a thought process as a partial substitute. Instead of accepting my helpful suggestion you continue in the "argument" mode. While I am willing to use some of my time to be helpful, I have no interest in arguing with someone who only has a partial picture of the subject. When you learn more, let me know. In the meantime you might find comfort in reading Matt Simmons "Twilight in the Desert", a flawed assessment forecasting the Saudis running out of oil and  $300 oil by now, based upon the same blind spot of price vs supply. 

William,

Can you use your experience to explain what happened in 2015, do you believe there was a large drop in the demand for oil?  You seem to claim demand is the driving force (which I tend to agree with over the long term, output of oil correlates quite strongly with World real GDP,which is a fairly good proxy for oil demand.)

It seems to me that at times supply grows faster than demand for oil (such as over the 2011-2014 period) and an excess inventory builds (actual inventory grows to a level that is higher than desired inventory). I realize that this does not determine prices in real time as the inventory level at the World level is not very clear.  Eventually the high stock levels will influence the price of oil and I believe this is what was seen in 2015-2017, and was the reason for low oil prices.

Are you suggesting the level of demand crashed?  I don't really understand your argument.  So you believe prices affect supply, as do I, but remember that supply is a rate of flow.  Determined by the number of producing wells and the level of investment, where reserves are a stock and while oil prices may increase the proportion of that stock that can profitably be produced, to suggest a doubling of the oil price would double the level of 2P reserves seems incorrect.  Reserves might increase by 10% with a doubling of price, though there are technological limits to how much oil from a reservoir can be profitably produced based on physics.  Sometimes economists miss this point.  ( I have degrees in both physics and economics).

Edited May 18, 2018 by Dennis Coyne

[Tomasz + 1,608]

21 minutes ago, William Edwards said:

Possibly you have not seen or have forgotten the 150-year price history of oil, expressed in today's dollars. Check out the time spent below $50.

Yes you are right. We are exploring oil for more than 150 years. So do you think that in 2018 we explore easier and lower cost fields than lets say 30 years ago or rather more expensive unconventional oil like shale, oil from sands, deep sea oil and even arctic oil?

I really think that if US would still have a plenty of low cost conventional oil and gas no one would ever invent shale. It's because conventional fields in US are declining in fast way. And shale oil for me is rather like short period of 10-15 year boom in us oil production history  that will be much more moderate in some moment in next decade. I think Saudi and Opec bet on it.

Edited May 18, 2018 by Tomasz

[William Edwards + 708]

2 minutes ago, Tomasz said:

We are exploring oil for more than 100 years. Do you think that in 2018 we explore easier and lower cost fields than lets say 30 years ago or rather more expensive unconventional oil like shale, oil from sands, deep sea oil and even arctic oil?

I really think that if US would still have a plenty of low cost conventional oil and gas no one would invent shale. It's because conventional fields in US are declining in fast way.

I think that you have misinterpreted my point, Sergey. We are not finding lower cost fields -- they already exist. The fact is that production from the lower cost fields is not being fully utilized, thereby allowing higher cost fields to be produced. How long will the owners of the loser cost fields allow that to continue?

[Tomasz + 1,608]

2 minutes ago, William Edwards said:

I think that you have misinterpreted my point, Sergey. We are not finding lower cost fields -- they already exist. The fact is that production from the lower cost fields is not being fully utilized, thereby allowing higher cost fields to be produced. How long will the owners of the loser cost fields allow that to continue?

So for example why US produces 5 milion barrels of shale and shale gas and not 5 milion more barrels of conventional oil or gas? 

Conventional oil may have break even lets say below 10-20 $  in Russia, in Saudi Arabia rather about 5 $ shale  I think about 45-50 $.

Why we also produce a lot oil from sands in Canada - its very expensive oil?

Why Russia, US Norway and Canada and even China has a conflict of interest who will use a oil resources of Arctic? Its even more expensive.

Can you tell me?

[William Edwards + 708]

11 minutes ago, Dennis Coyne said:

William,

Can you use your experience to explain what happened in 2015, do you believe there was a large drop in the demand for oil?  You seem to claim demand is the driving force (which I tend to agree with over the long term, output of oil correlates quite strongly with World real GDP,which is a fairly good proxy for oil demand.)

It seems to me that at times supply grows faster than demand for oil (such as over the 2011-2014 period) and an excess inventory builds (actual inventory grows to a level that is higher than desired inventory). I realize that this does not determine prices in real time as the inventory level at the World level is not very clear.  Eventually the high stock levels will influence the price of oil and I believe this is what was seen in 2015-2017, and was the reason for low oil prices.

Are you suggesting the level of demand crashed?  I don't really understand your argument.

Of course I can explain what happened in late 2014 and early 2015. I not only have explained it, I successfully warned that it was approaching, before the fact.

The main reason why you do not understand my argument is that you have not taken the time nor expended the effort to acquire the necessary background of data and to apply the necessary logic to that data. Once you have gotten up to speed on my earlier suggestions to enhance your background knowledge, then we might have an effective conversation.

[Anas bahmed 0]

39 minutes ago, William Edwards said:

Possibly you have not seen or have forgotten the 150-year price history of oil, expressed in today's dollars. Check out the time spent below $50.

Also don’t  Forget the time value of money 

[William Edwards + 708]

5 minutes ago, Tomasz said:

So for example why US produces 5 milion barrels of shale and shale gas and not 5 milion more barrels of conventional oil or gas? 

Conventional oil may have break even lets say below 10-20 $  in Russia, in Saudi Arabia rather about 5 $ shale  I think about 45-50 $.

Why we also produce a lot oil from sands in Canada - its very expensive oil?

Why Russia, US Norway and Canada and even China has a conflict of interest who will use a oil resources of Arctic? Its even more expensive.

Can you tell me?

Hint -- Think Middle Eastern reserves.

[Tomasz + 1,608]

Well I read of course annual BP report about that.

I agree we could produce oil in Venezuela, Iran and Iraq on full speed.  But its not possible at least during last 30 years in Iraq and Iran and after Chavez election in Venezuela. Its f course potential spare capacity because of political situation but I really dont see when the situation may change in this 3 countries for much better production numbers.  I would rather suspect worse numbers in near future.

 

And I also dont bet that Middle East countries in near future will produce oil like mad to monetize their assets as fast as they can whatever the price is because of peak demand. 

Edited May 18, 2018 by Tomasz

[Tomasz + 1,608]

Can I have one question? One person mentioned Russia Today - it is state media so the situation is clear they present russian point of view.

But  from time to time I check their bussiness news. The best are from oilprice.com - quite often I see your articles there. Do you have some partnership or something like that? Because I'm also always get informed at the end of article that the source is  oilprice.com?

[Dennis Coyne + 82]

5 minutes ago, William Edwards said:

I think that you have misinterpreted my point, Sergey. We are not finding lower cost fields -- they already exist. The fact is that production from the lower cost fields is not being fully utilized, thereby allowing higher cost fields to be produced. How long will the owners of the loser cost fields allow that to continue?

William,

I guess we will find out, it seems these very low cost producers need prices well above $50/b.

Why is it that they didn't just produce this lower cost oil from 2011 to 2014 to keep oil prices from rising to over $100/b?

How many years from 1973-2016 was the annual oil price over $50/b (in 2016$) ?  Answer: 23 of 44 years.  Average price was $57.67/b (2016$).  The average price weighted by C+C output from 1973 to 2016 was $58.92/b in 2016$.  For the past 20 years (1997-2016) the weighted average oil price in 2016$ was $66.41/b and the 20 years before that (1977-1996) the average weighted oil price in 2016$ was $52.28/b.  So it seems the price needed to balance the market has been increasing.

 

[Dennis Coyne + 82]

32 minutes ago, William Edwards said:

Of course I can explain what happened in late 2014 and early 2015. I not only have explained it, I successfully warned that it was approaching, before the fact.

The main reason why you do not understand my argument is that you have not taken the time nor expended the effort to acquire the necessary background of data and to apply the necessary logic to that data. Once you have gotten up to speed on my earlier suggestions to enhance your background knowledge, then we might have an effective conversation.

Could you provide a link to an earlier explanation.  I think you assume I have read every comment you have ever written.  That is not the case.

[William Edwards + 708]

12 minutes ago, Dennis Coyne said:

William,

I guess we will find out, it seems these very low cost producers need prices well above $50/b.

Why is it that they didn't just produce this lower cost oil from 2011 to 2014 to keep oil prices from rising to over $100/b?

How many years from 1973-2016 was the annual oil price over $50/b (in 2016$) ?  Answer: 23 of 44 years.  Average price was $57.67/b (2016$).  The average price weighted by C+C output from 1973 to 2016 was $58.92/b in 2016$.  For the past 20 years (1997-2016) the weighted average oil price in 2016$ was $66.41/b and the 20 years before that (1977-1996) the average weighted oil price in 2016$ was $52.28/b.  So it seems the price needed to balance the market has been increasing.

 

 

19 minutes ago, Tomasz said:

Can I have one question? One person mentioned Russia Today - it is state media so the situation is clear they present russian point of view.

But  from time to time I check their bussiness news. The best are from oilprice.com - quite often I see your articles there. Do you have some partnership or something like that? Because I'm also always get informed at the end of article that the source is  oilprice.com?

No partnership, Sergey. I did not even know that they exist.

[Dennis Coyne + 82]

32 minutes ago, William Edwards said:

Hint -- Think Middle Eastern reserves.

William,

According to IHS in 2010 World conventional 2P reserves were about 1250 Gb, possibly about half of these reserves are OPEC conventional reserves, the fact is we don't know much about OPEC reserves since 1980, the reserves reported in the BP Statistical review by OPEC nations are likely to be 3P reserves and possibly include contingent resources as well.  Perhaps you have access to IHS data,  I do not, I am relying on published research such as

http://rsta.royalsocietypublishing.org/content/372/2006

[Dennis Coyne + 82]

William,

I found this older piece by you, which may not reflect your current views.

http://www.iaee.org/documents/newsletterarticles/109edwards.pdf

Nice article.

Can't find your take on the 2014 price crash, but it would seem your thinking in the 2008 piece would not be quite right, or the "lag" between the increase in oil price and the demand response would need to be lengthened from your 2008 analysis.

So in the fall of 2014 when many expected there might be an OPEC cut to balance the market, I assume you foresaw that this would not be the case.

Also wouldn't you want to consider World demand for oil rather than just US demand as the fact that oil is easily traded across the World makes World demand for oil the more relevant metric?

Edited May 18, 2018 by Dennis Coyne

[Guest]

5 hours ago, Dennis Coyne said:

Tom and William,

The difference this time is that the increase in World LTO output is limited to about a 3 Mb/d increase over the next 4 to 5 years, almost all of this will be US LTO output.  Many other nations are declining (UK, Norway, Mexico, and China), most other non-OPEC nations besides the US such as Canada and Brazil will just barely be able to match the decreases from other non-OPEC producers (excluding US),  OPEC will struggle to keep output flat due to declines in Iran and Venezuela.  This leaves only the US to increase output to attempt to satisfy increased World demand for oil.

Long term (1982-2017) World C+C output growth has been about 800 kb/d each year on average, let's assume supply is equal to demand over the long term so this is consumption growth as well.

If that continues over the next 5 years that would be an increased C+C output of 4000 kb/d needed, which will not be satisfied by the increase in US LTO growth of about 3000 kb/d, so higher oil prices may continue.  Also discoveries have not been good over the past 5 years and that is likely to continue.

So a "glut" of oil similar to 2014 is unlikely.

Below is my most recent model for future US LTO output, for some background see

http://peakoilbarrel.com/?s=US+LTO

in this recent model I have done an estimate for North Dakota Bakken, Eagle Ford, Permian, Niobrara, and other US LTO plays using well profile data at Enno Peters' shaleprofile.com and fitting hyperbolic well profiles to the data and using well completion rates to fit output data.  USGS estimates for Bakken and Permian and Drilling Deeper (David Hughes) for Eagle Ford are used to guide the URR, the weakest part of the analysis is Niobrara and US other LTO where I needed to guess at future URR.

The model URR (in Gb) of the Permian, Bakken, Eagle Ford, Niobrara, and other LTO until 2040 respectively are 29.1, 10.3, 8.2, 2.8, and 3.3.

Your assessments are much more in line with the prevailing opinions on the situation.

Essentially what we have is a "perfect storm" brewing. Extremely healthy world demand increases are combining with the record lack of investment over the last few years, depleting existing sources, and geo political uncertainty. 

Most of the "lower for longer" forecasts were depending on American shale being able to satisfy world demand increases virtually on it own. I think that it's clearly evident at this point that is going to be extremely difficult, as the Permian is already facing bottlenecks, labour shortages, material shortages, and the perception that many of the "sweet spots" have already been tapped. How long can the shale industry continue ramping up production by over a million barrels per day? I have my doubts, and as you've pointed out in any case it still won't be enough barring a massive global recession. 

I see oil going a lot higher before it goes down any. The fundamentals are there, it's a simple supply/demand issue where the producers are going to struggle mightily to meet increasing demand. Couple that with production in Venezuela dropping off dramatically, places like Libya and Nigeria struggling to maintain output, and the fact that decline rates alone require the development of around 5 million new barrels per day of production, just to maintain the status quo. 

I think that $100 oil will likely look like a bargain in 2020, barring any major global economic calamities. 

[Tomasz + 1,608]

I can tell you Mr Alexander Novak Russian oil minister think more or less like you. Im using phone but I will paste here his interview for russian goverment agency Tass why Russia is not affraid in long term of shale flooding the market I would add that Eia and Iea think in this qay when they were warning of high prices because of underinvestment.  In our slavic language there is a a well-know statement that there is time to plant fruit tree and after some time a moment that you get fruits for free. In 2015-2016 Opec planted a tree now they will get fruits.

Edited May 18, 2018 by Tomasz

[Dennis Coyne + 82]

1 hour ago, Fulcaneli said:

Your assessments are much more in line with the prevailing opinions on the situation.

Essentially what we have is a "perfect storm" brewing. Extremely healthy world demand increases are combining with the record lack of investment over the last few years, depleting existing sources, and geo political uncertainty. 

Most of the "lower for longer" forecasts were depending on American shale being able to satisfy world demand increases virtually on it own. I think that it's clearly evident at this point that is going to be extremely difficult, as the Permian is already facing bottlenecks, labour shortages, material shortages, and the perception that many of the "sweet spots" have already been tapped. How long can the shale industry continue ramping up production by over a million barrels per day? I have my doubts, and as you've pointed out in any case it still won't be enough barring a massive global recession. 

I see oil going a lot higher before it goes down any. The fundamentals are there, it's a simple supply/demand issue where the producers are going to struggle mightily to meet increasing demand. Couple that with production in Venezuela dropping off dramatically, places like Libya and Nigeria struggling to maintain output, and the fact that decline rates alone require the development of around 5 million new barrels per day of production, just to maintain the status quo. 

I think that $100 oil will likely look like a bargain in 2020, barring any major global economic calamities. 

Thanks.  I agree oil prices will rise, though it's not clear how quickly, they may stabilize in 2019 around $85/b, but I think they might gradually rise from 2020 to 2025, maybe by $5 to $10/b each year, reaching about $122/b (2017$) in 2025.  If peak oil hits about that time(as I suspect) the increase in oil price may accelerate to $15/b increase annually until 2030 ($197/b in 2017$), either the World begins a serious transition to plug in vehicles over the next 12 years, or we see a severe economic recession in 2030-2035, it may be both as EV output might not ramp quickly enough to avoid a crisis.

Edited May 18, 2018 by Dennis Coyne

[Guest]

31 minutes ago, Dennis Coyne said:

Thanks.  I agree oil prices will rise, though it's not clear how quickly, they may stabilize in 2019 around $85/b, but I think they might gradually rise from 2020 to 2025, maybe by $5 to $10/b each year, reaching about $122/b (2017$) in 2025.  If peak oil hits about that time(as I suspect) the increase in oil price may accelerate to $15/b increase annually until 2030 ($197/b in 2017$), either the World begins a serious transition to plug in vehicles over the next 12 years, or we see a severe economic recession in 2030-2035, it may be both as EV output might not ramp quickly enough to avoid a crisis.

This looks very reasonable to me.

It seems as though American shale production quickly made everyone forget the situation the world was facing 10 years ago, when the notion of peak oil and depleted traditional sources were spurring the development of things such as bitumen. Producers didn't choose to develop high cost resources because they wanted to, they started developing those resources because they had to. 

In my view the only thing that prevented sustained prices in excess of $100 was the dramatic increase in American production, coupled with OPECs initial refusal to cut production to support prices. If the shale revolution had not happened, the bottom never would have fallen out of prices. So when shale gets depleted, or when/if it becomes even more obvious that shale in its own can't meet world demand, then what? I don't think that day is very far away from happening.

At that point, how will we meet demand? I saw it theorized that Saudi Arabia will potentially increase its production capacity, but to be completely honest I don't see that happening because they have no real incentive to do so. If they already refused to do so previously, which spurred the development of high cost sources such as oil sands and shale, why would they start now? Not to mention that Saudi reserves are seemingly shrouded in a degree of uncertainty, and have been questioned by numerous people. 

[Guillaume Albasini + 851]

Higher oil price will accelerate the demand for electric cars. But EV offer could have some difficulties to adjust to a higher demand. Today demand is already higher than the EV output. Tesla has 500'000 reservations for the Model 3 but can't ramp up production fast enough and customer are facing long delays. The Volkswagen GTE was delayed due to high demand.  Opel asked last year the retailers to stop taking order for the Ampera-e (european rebranding of the Chevy Bolt) as they had already too many reservations. And batteries producers could face shortages of lithium and cobalt in the coming years if mining companies can't ramp up production enough to meet demand.

I think that by 2025 the new mines projects that are launched now will  be operational. Battery and EV producer would have adjusted the industrial capacity and the price of EV cars will be paired or lower than ICE cars. So the sales of EV vehicle will massively ramp up and we could reach peak demand for oil.

So I agree with Dennis. We could have a 7 years cycle of high prices for oil followed by a cycle of declining prices.

[Dennis Coyne + 82]

Guilluame,

We are roughly on the same page, except I expect high prices for about 9 years at least, and prices may remain high for another 5 to 10 years depending upon the speed of the transition to plugin vehicles and hybrids, it will take quite a bit of time to turn over a fleet of 1 to 2 billion ice vehicles, though potentially self driving cars and ridesharing may reduce the number of vehicles that need to be produced  (the Tony Seba vision which seems overly optimistic in my view).  If Seba is correct then maybe only 7-12 years of high (over $100/b oil prices).  Otherwise it may be 15 to 20 years or an economic crash may bring prices down.