Is there a lack of demand for oil or just over-supply?

[Gerry Maddoux + 3,627]

^

You are totally right: this is going to happen faster than most would think (IMO). The oil market is quickly selecting out the fittest. KSA would certainly be one of the fittest were it not for their welfare state. At $40 oil they're at a 50% loss mark--just to stay even. Since it's impossible to predictably make 50% on your investments, they will lose ground slowly at first, then all at once.

The Emirates have thrown in with Israel, as has Bahrain. Following suit would stick in the old king's gullet, but the prince will likely do so at some point. As such, many of the OPEC nations may eventually become more or less Israeli protectorates. 

The other option is mass starvation and privation. KSA can hold out for some time, but Nigeria, Algeria, Iraq, etc., can't. In fact, if this ME thing isn't handled quickly, WWIII is not a crazy possibility.

[footeab@yahoo.com + 2,192]

On 10/3/2020 at 8:56 AM, BenFranklin'sSpectacles said:

The US spends around $90bn/year defending the Middle East, almost exclusively to protect the oil supply.

Where does this number come from?  I have looked from time to time regarding costs and ... de nada, zilch, zippo.

[0R0 + 6,251]

1 hour ago, footeab@yahoo.com said:

Where does this number come from?  I have looked from time to time regarding costs and ... de nada, zilch, zippo.

You can make a rough  estimate from overall budget and dividing deployments Navy AF and special forces Army into the area by overall deployments. Multiply ratio with budget.  $90B isn't a bad estimate.But add in the cost of the Indian ocean and route through the S China Sea Island belt to China S Korea and Japan that protect those sea lanes oil uses, and allocate about 30% of that to oil shipment protection and you have a more realistic and much larger figure.

1/3 of the US defense budget is allocated to protect China and it's regional trade, most of which is NOT with the US. Which is why China is diverting resources to Navy building while the people are on the verge of starvation. As Zeihan likes to point out, defeating China is a matter of the US leaving the W Pacific to its own devices, which means transit fees by Malaysia Indonesia Philippines India Thailand to assure safe passage as the combined navies are bigger than China's and with the addition of Quad members, it dwarfs China's Navy. It can hold most of China's trade for ransom well outside the S China sea's first island chain. Which is why China's activity there is futile geopolitically. Driven by paranoid delusion and internal politics of trying to keep their coast integrated into a unified China by having Beijing control the sea approaches to the big industrial cities. Same reason they installed high speed rail connections to the interior and built up new interior cities to attract industrial migration off the coast.  So far without much luck.

 

Edited October 4, 2020 by 0R0

[0R0 + 6,251]

Another sad report of China's state of food security and a real possibility of famine as they are fast approaching the point where there will not be enough time to import food to replace the losses from flooding swine and bird flu and losses from the lockdown. Meaning that their political action has endangered the survival of their people (again) - even if the volumes of food they need would be available with current migrant farm labor restrictions in US Australia and elsewhere.

https://thehill.com/opinion/international/516607-another-famine-coming-china-struggles-to-meet-basic-food-demands

If they don't get it on a boat now, there will not be enough to get through to the winter crop. They appear to be closing in on the point of assured famine. Their fall planting season is threatened by the flooding as well. Significant loss of farm equipment may take a year or more to recover, limiting planting next season's crop and harvesting it..

We should worry about China being able to continue consuming oil at the previous pace.  If they are starving again after the creation of some of the greatest cities and infrastructure on the planet, then they have learned nothing from the great leap forward of 60 years ago.

[BenFranklin'sSpectacles + 762]

11 hours ago, 0R0 said:

We should worry about China being able to continue consuming oil at the previous pace. 

This is a good point - and not just because of famine, floods, and Covid. There are any number of events that could decrease oil consumption, whereas continued consumption growth requires everything in the world to run smoothly.

Consumption projections seem to ignore risk - or am I missing something?

[Old-Ruffneck + 1,246]

3 hours ago, BenFranklin'sSpectacles said:

This is a good point - and not just because of famine, floods, and Covid. There are any number of events that could decrease oil consumption, whereas continued consumption growth requires everything in the world to run smoothly.

Consumption projections seem to ignore risk - or am I missing something?

NO, no your not missing anything. One year ago 100mbd+ then Covid crept in fast and stopped many economies....guessing on the the graph world consumption now 78mbd give or take a Mil. I think with 2nd round of Covid could slow consumption to 65-70mbd. Transportation seems to be the biggest loss in consumption.  Plastics and by-products will drop the more people stay home.

[Tomasz + 1,608]

Perhaps I am boring, but I once more recommend you to read the last report of the Oxford Institute for Energy Studies, the more so that compared to e.g. the reports of OPEC and IEA, it is not particularly long.

 

https://www.oxfordenergy.org/wpcms/wp-content/uploads/2020/09/After-the-Initial-Oil-Rebound-What-Next-for-Market-Fundamentals-and-Prices.pdf

 

[Ward Smith + 6,615]

On 10/3/2020 at 8:56 AM, BenFranklin'sSpectacles said:

The US spends around $90bn/year defending the Middle East, almost exclusively to protect the oil supply. We no longer need their oil. In fact, eliminating their competition in oil markets would be a major boon for us, both economically and geopolitically. Even more interestingly, the US need not do anything to destroy the Middle East's oil production. If we simply walked away (saving $90bn/year in the process), they'd tear themselves apart. If region-wide warfare didn't break out, inability to fund their welfare states at low oil prices would collapse them one-by-one. Keep in mind that their price to lift oil may be $12/bbl, but their price to sustain their nations is $60-$80/bbl - a price they can't command.

Given all that, are you still worried about Middle Eastern competition? 

The $90 billion is relatively cheap considering the net result was the Petrodollar standard, which almost single-handedly keeps America's currency afloat. The value of the petrodollar is massive, everything about the US economy hinges on that. Yanking the plug on the petrodollar is akin to cutting off the branch on which you're standing, high in the tree. 

[BenFranklin'sSpectacles + 762]

12 minutes ago, Ward Smith said:

The $90 billion is relatively cheap considering the net result was the Petrodollar standard, which almost single-handedly keeps America's currency afloat. The value of the petrodollar is massive, everything about the US economy hinges on that. Yanking the plug on the petrodollar is akin to cutting off the branch on which you're standing, high in the tree. 

I hadn't considered that; thank you for pointing it out.

I'm not convinced the petrodollar works in our favor though. Petrodollars enabled deficit spending, which in turn has had negative effects on my community. Deficit spending seems to enable coastal financial elites to get rich while "flyover country" suffers. It allows the powers that be to ignore the needs of their own population, focusing instead on outsourcing and immigration. If you don't need people for anything in particular, why invest in them? 

Has the petrodollar been good for America as a whole?  Maybe. Has that good been distributed to the people I want it distributed to?  It seems not. I want an America intently focused on competence (as opposed to "diversity" and other liberal BS) because it's one mistake away from destruction. I want people to feel that impending destruction every day lest they lapse into stupidity. I want life to be hard. Harsd enough that intelligence, conscientiousness, and grit are absolute requirements to survive. Deficit spending seems to produce the opposite: an incompetent welfare state.

I'm not an expert though, so please fill in the substantial gaps in my knowledge.

[BenFranklin'sSpectacles + 762]

55 minutes ago, Tomasz said:

Perhaps I am boring, but I once more recommend you to read the last report of the Oxford Institute for Energy Studies, the more so that compared to e.g. the reports of OPEC and IEA, it is not particularly long.

 

https://www.oxfordenergy.org/wpcms/wp-content/uploads/2020/09/After-the-Initial-Oil-Rebound-What-Next-for-Market-Fundamentals-and-Prices.pdf

 

I didn't know Oxford Energy existed, but it looks useful. Thank you.

The pdf you linked was interesting. I think they spent too much time on OPEC compliance relative to demand destruction. They glossed over structural changes to consumption, declaring it unknowable. A lot can, in fact, be known about this.

Of particular note:
1) They claim it can't be known if deliveries will reduce fuel consumption relative to in-store shopping. A back-of-envelope calculation would show that the average delivery consumes far less fuel than a trip to the store. If a delivery service handles 5-10 deliveries in a single area, they consume approximately 10-20% the fuel their customers would consume. For exceptionally efficient services like UPS, it's <5%. Because these services will be the first to completely electrify their vehicles, we'll see rapid consumption decline over the next 5-10 years.
2) No mention of permanent work-from-home arrangements. Companies are discovering that this saves both them and employees money. For many, this change will be permanent now that everyone has been forced to invest in the requisite IT. Meanwhile, word of its efficacy will spread to more executives, who will continue the rollout.
3) Covid has highlighted employees as an operations risk and, therefore, accelerated automation. Automation means fewer employees, which means permanent reductions in consumption.
4) Many companies will not survive this. Cinemas, restaurants, retailers, tourism hubs, cruise ships - all decimated. That means fewer employees driving to work every day and fewer customers driving to venues every day. That demand doesn't just come back when restrictions are lifted; the venues won't exist! Meanwhile, we've all found alternative entertainment - and many of us have learned we prefer those alternatives.

I'm out of time, but I'm certain I could find more examples. If Oxford Energy took a deeper look at consumption, I think they'd be surprised how much they could discover.

 

[Ward Smith + 6,615]

1 hour ago, BenFranklin'sSpectacles said:

I hadn't considered that; thank you for pointing it out.

I'm not convinced the petrodollar works in our favor though. Petrodollars enabled deficit spending, which in turn has had negative effects on my community. Deficit spending seems to enable coastal financial elites to get rich while "flyover country" suffers. It allows the powers that be to ignore the needs of their own population, focusing instead on outsourcing and immigration. If you don't need people for anything in particular, why invest in them? 

Has the petrodollar been good for America as a whole?  Maybe. Has that good been distributed to the people I want it distributed to?  It seems not. I want an America intently focused on competence (as opposed to "diversity" and other liberal BS) because it's one mistake away from destruction. I want people to feel that impending destruction every day lest they lapse into stupidity. I want life to be hard. Harsd enough that intelligence, conscientiousness, and grit are absolute requirements to survive. Deficit spending seems to produce the opposite: an incompetent welfare state.

I'm not an expert though, so please fill in the substantial gaps in my knowledge.

I'd respond that deficit spending was occurring regardless of petrodollars, in fact, we squandered a lot of hard earned gold after we simultaneously passed war on poverty legislation and war in Vietnam. The hit to the budget of all that welfare state is still the biggest expense, and can't be touched. Defense can be touched, but it has its own blowback. The economic position of the US without petrodollars is about 50% worse than the status quo. That is certainly beginning to change, but it will take time.

A Biden administration coupled with democrats holding the Congress plus packing the Supreme Court? Won't take any time at all to turn the almighty dollar into Zimbabwe currency, and destroy the world's economies in the mix. That's probably the plan, but if I say New World Order, the site management won't like it. As bad as we think banana republics are, for those at the very top they're quite nice indeed. Essentially an entire world as your economic slaves, to do with as you please? Sociopath heaven. 

[0R0 + 6,251]

5 hours ago, BenFranklin'sSpectacles said:

5 hours ago, Ward Smith said:

The $90 billion is relatively cheap considering the net result was the Petrodollar standard, which almost single-handedly keeps America's currency afloat. The value of the petrodollar is massive, everything about the US economy hinges on that. Yanking the plug on the petrodollar is akin to cutting off the branch on which you're standing, high in the tree. 

I hadn't considered that; thank you for pointing it out.

I'm not convinced the petrodollar works in our favor though. Petrodollars enabled deficit spending, which in turn has had negative effects on my community. Deficit spending seems to enable coastal financial elites to get rich while "flyover country" suffers. It allows the powers that be to ignore the needs of their own population, focusing instead on outsourcing and immigration. If you don't need people for anything in particular, why invest in them? 

Has the petrodollar been good for America as a whole?  Maybe. Has that good been distributed to the people I want it distributed to?  It seems not. I want an America intently focused on competence (as opposed to "diversity" and other liberal BS) because it's one mistake away from destruction. I want people to feel that impending destruction every day lest they lapse into stupidity. I want life to be hard. Harsd enough that intelligence, conscientiousness, and grit are absolute requirements to survive. Deficit spending seems to produce the opposite: an incompetent welfare state.

I'm not an expert though, so please fill in the substantial gaps in my knowledge.

The petrodollar is not the great help it was imagined to be. Back in the day, early on, Triffin pointed out the dilemma of reserve currency issuer, that it would necessarily cause a hollowing out of domestic manufacture. That since other countries would have to export to the reserve issuer in order to obtain  excess currency to pay down obligations denominated in it.

But there is another problem. That the global banking system (Eurodollar system today) would be able to expand credit in the issuer's currency and both create pressure to export to it to pay the interest when credit growth is slow, and cause inflation in the issuer's domestic market when credit growth is fast.

It would also distort interest rates as all other CBs can trade cash reserves for the issuer's bonds. Thus inducing low savings rates and lower capital formation within the reserve country.

This is exacerbated by the reserve CB as it attempts to preserve reserve status during inflationary times by raising rates to artificially high levels that choke the domestic economy and cause massive damage. That despite the source of the monetary expansion is in the offshore banking system and is driven by distortions created by foreign central banks. Particularly inflating their currency to promote low exchange rates and thus exports and reserve accumulation.

This fight against foreign sourced inflation of its currency is routinely answered by either political pressure (e.g. Plaza accords after the superdollar era) - which was the right thing to do. Or by raising domestic rates to deflate the monetary inflation abroad, rather than loosening in order to double up the problems for the inflating geographies. This can and did cause "conundrum" conditions for Greenspan and Bernanke as they kept rates higher than market in order to combat overheated capital intensive markets in the economy, Tech companies and stocks in the 1990s and real estate in the 2000s, The capital flows into the US so dwarfed domestic bank lending that the Fed lost control of a credit bubble and equity bubble of historic proportions that occurred twice within a decade. 

The big plus is that crisis conditions create reserve bond and currency demand abroad, thus allowing large scale borrowing and spending like a war time event. As we had seen recently, with little FX fluctuation nor runs on bonds. And prices remained fairly stable. In many market sectors prices collapsed.

Bottom line is that the benefit of reserve issuance is only good for the kind of cold war world that Bretton Woods was structured to support. For the domestic issuer's economy it is a long grating deflation of productive capacity as the growth spurts of other economies cause the reserve bank to raise rates at home to compensate, giving the growing economies abroad access to goods at domestic expense.

Reserve issue is an economic millstone, but a strategic asset of enormous power. .

 

[Ward Smith + 6,615]

4 minutes ago, 0R0 said:

Bottom line is that the benefit of reserve issuance is only good for the kind of cold war world that Bretton Woods was structured to support. For the domestic issuer's economy it is a long grating deflation of productive capacity as the growth spurts of other economies cause the reserve bank to raise rates at home to compensate, giving the growing economies abroad access to goods at domestic expense.

Reserve issue is an economic millstone, but a strategic asset of enormous power. .

Excellently stated @0R0. Being the only adult in the room doesn't help while all the other countries are hitting the punch bowl so hard. However, As a strategic asset, just look at the pressure we get to put on companies through the international banking system. We're forcing Japanese and German firms to cancel deals with Iran and China or risk getting frozen out of SWIFT banking, which would be the death knell for them, regardless of how profitable those deals are. Trying to tame the tiger with 19th century methods in the 21st century is the real problem. There's no real auctions anymore, especially for treasuries. The whole house of cards is held up by gossamer threads. 

We didn't use to have to back other Central Bank plays, but you're right, that has become a thing in the free float era. The last Central Bank to defend its currency as I recall was Bank of England, which is where George Soros made his first billions (and very likely had state help behind him). They're still pulling his strings I suspect. 

[BenFranklin'sSpectacles + 762]

1 hour ago, 0R0 said:

Bottom line is that the benefit of reserve issuance is only good for the kind of cold war world that Bretton Woods was structured to support. For the domestic issuer's economy it is a long grating deflation of productive capacity as the growth spurts of other economies cause the reserve bank to raise rates at home to compensate, giving the growing economies abroad access to goods at domestic expense.

Reserve issue is an economic millstone, but a strategic asset of enormous power. .

 

52 minutes ago, Ward Smith said:

However, As a strategic asset, just look at the pressure we get to put on companies through the international banking system.

I can see how reserve status was useful when the USSR was legitimately threatening to take over the world. At this point, I would prefer the US stop trying to pressure other nations and start focusing on developing itself. 

[dukeNukem + 80]

7 hours ago, Tomasz said:

Perhaps I am boring, but I once more recommend you to read the last report of the Oxford Institute for Energy Studies, the more so that compared to e.g. the reports of OPEC and IEA, it is not particularly long.

 

https://www.oxfordenergy.org/wpcms/wp-content/uploads/2020/09/After-the-Initial-Oil-Rebound-What-Next-for-Market-Fundamentals-and-Prices.pdf

 

Interesting read, however there are few more things to take into consideration - almost everyone these days printing money non-stop. It might be precursor of inflation, or most likely stagflation, and the crude market in a good place for money to influx (Crude oil market has the biggest volume, gold volume is just 1/10th of crude oil volume, or even less). We might already seen inflection point, or coming close to it. There is so much negative sentiment that  global oilfield CAPEX never recovered after 2014 levels. Moreover, current global CAPEX somewhere on 2002-2003 levels. I tend to think that oil prices will go up sooner, rather than later....Shale industry is broken, as not many banksters these days want to lend them cash. Investors might return to shale, but only if prices will be high enough (at least 70-80 bucks I would say). Shale industry (in general) already proved that it could nor generate positive cash flow with 60 bucks oil  

Edited October 6, 2020 by dukeNukem

[0R0 + 6,251]

2 hours ago, Ward Smith said:

We're forcing Japanese and German firms to cancel deals with Iran and China or risk getting frozen out of SWIFT banking, which would be the death knell for them, regardless of how profitable those deals are.

The SWIFT system's account tracing ability was an OECD project led by EU countries trying to chase down tax cheats and supposed terrorist and org crime money. The US claimed control and got recognized due to EU's fear of lost tax revenue. But the record keeping and FATCA reporting are slowly unraveling the complex structure of pipes connecting the banks. Fewer and fewer are wiling to do dollar transactions directly.

 

[Ward Smith + 6,615]

9 hours ago, 0R0 said:

Fewer and fewer are wiling to do dollar transactions directly.

Except for the petrodollar, so now we've come full circle

[Tomasz + 1,608]

23 hours ago, BenFranklin'sSpectacles said:

I didn't know Oxford Energy existed, but it looks useful. Thank you.

The pdf you linked was interesting. I think they spent too much time on OPEC compliance relative to demand destruction. They glossed over structural changes to consumption, declaring it unknowable. A lot can, in fact, be known about this.

Of particular note:
1) They claim it can't be known if deliveries will reduce fuel consumption relative to in-store shopping. A back-of-envelope calculation would show that the average delivery consumes far less fuel than a trip to the store. If a delivery service handles 5-10 deliveries in a single area, they consume approximately 10-20% the fuel their customers would consume. For exceptionally efficient services like UPS, it's <5%. Because these services will be the first to completely electrify their vehicles, we'll see rapid consumption decline over the next 5-10 years.
2) No mention of permanent work-from-home arrangements. Companies are discovering that this saves both them and employees money. For many, this change will be permanent now that everyone has been forced to invest in the requisite IT. Meanwhile, word of its efficacy will spread to more executives, who will continue the rollout.
3) Covid has highlighted employees as an operations risk and, therefore, accelerated automation. Automation means fewer employees, which means permanent reductions in consumption.
4) Many companies will not survive this. Cinemas, restaurants, retailers, tourism hubs, cruise ships - all decimated. That means fewer employees driving to work every day and fewer customers driving to venues every day. That demand doesn't just come back when restrictions are lifted; the venues won't exist! Meanwhile, we've all found alternative entertainment - and many of us have learned we prefer those alternatives.

I'm out of time, but I'm certain I could find more examples. If Oxford Energy took a deeper look at consumption, I think they'd be surprised how much they could discover.

 

So you can also hear about this topic in conversation.

The general thesis of this conversation is that the COVID trends are so far unclear as to their impact on future oil demand. The conversation about this topic is somewhere in the middle of the broadcast. Its only half hour time. The Oxford Institute very often adds a broadcast with the author of the report to the reports produced in pdf. In generaI personally appreciate the reports of the American EIA and OIES the most. Contrary to appearances, in my opinion, the work of the IEA is at a clearly lower level. 

In my opinion, they are more objective and the peak of objectivity are the EIA reports clearly showing  how much each LNG shipment from the USA costs. In Poland, the government propaganda says that LNG from America is far cheaper than Gazprom gas and I really appreciate the transparency of the USA, which indicates that your LNG is rather more expensive, and it show me details for each delivery from US  with information updated with only quarterly lag.

Podcast

https://www.oxfordenergy.org/publications/oxford-energy-podcast-after-the-initial-oil-rebound-what-next-for-market-fundamentals-and-prices/

Edited October 6, 2020 by Tomasz