A Return of Low Prices Is Suggested

[William Edwards + 708]

It was reported yesterday by CNN that Khalid al Falih, Oil minister of Saudi Arabia, said "Two years ago we pulled supply. I think in the near future there will be time to release supply," Al-Falih said. "It's likely that it will happen in the second half of this year. We've had intensive discussions [with Russian energy Minister Alexander Novak], and I think we're aligned on that," .

Apparently most observers accept this statement with an attitude of "Of course - no problem". But is a bit more thought and critical questioning needed to understand the consequences of such an action? Let us examine these consequences. It may turn out that the Saudi's and Russia's increasing production is more complicated than they imagine. In fact, since oil can only be produced if you have an empty receiving vessel awaiting delivery of oil, neither country can produce more oil without enticing potential customers to provide a means for receiving such additional oil. Currently we know of no empty tankers at anchor outside either the Saudi or Russian loading ports that are awaiting acceptance of their nomination for a cargo of oil. So how do they accomplish this promised increase in production?

The only control lever that Russia and the Saudis possess is the pricing lever. There is no lever, no on/off switch, to force the customer to accept an increase in production. So, in order to entice additional vessels to enter the loading port, ready to receive cargo, the producers must offer a price advantage. This leads to the inevitable conclusion that for the Saudis and Russia to fulfill their promise to increase production they must become more price aggressive. Since demand is currently being readily supplied, and the Saudi/Russian wish to increase production will not increase that demand, the only way that the Saudis and Russia can increase production is to cut the price below that of another producer so that that producer's oil is displaced from the market. In other words, the actions of 2014 are about to be repeated. A similar price decline is possible.

One would have thought that the Saudis would have learned from the 2014 experience. But that was Al Naimi. This is Al Falih. Neither minister can put ten gallons of oil in a five gallon bucket. Al Naimi thought that he could regain market share by undercutting the shale oil price. He did not gain market share from doing this, he only lost revenue, as did the entire industry. What suggests that Al Falih will fare any differently? He will not. If OPEC tries, this year, to regain the 1.8 million barrels a day of market share that they conceded to others two years ago, prices will likely return to the $30's.

If you lived through the 2014/15 time period, you will recall that, initially, when the price dropped from $110/B to $90/B the industry was sure that this "low" price would soon be reversed. When the price dropped to the $80's, the idea of a quick recovery persisted. When the price keep falling and reached $70, even al Naimi assured the industry that the price would go no lower. He was wrong. The fall continued into the $20's. 

In spite of the falling prices, the talk of "recovery" did not subside. First it was believed that a "V" shaped price recovery would occur. Then, as time marched on and prices did not recover, the industry shifted to the expectation of a "U-shaped" recovery. When it became obvious that it was more likely an "L-shaped" profile, OPEC gave up. They quit trying to maintain market share through price cutting and conceded 1.8 million barrels a day of the market to non-OPEC. By removing the downward price pressure of trying to maintain market share, the speculative trading community was able to restore the higher prices through persistent demand for and accumulation of the "long" side of the futures market.

This same trading community had the usual knee-jerk reaction to the Saudi/Russian announcement of planning to regain markets. The futures price dropped. But will the drop persist? If the marginal producers, the Saudis and the Russians, follow through with their expressed intention of pushing back into the already-satisfied market, the drop in price will continue through the pressure of  liquidation of the long side of the futures contracts, while the buyers of real oil take advantage of the producers' price war. A repeat of 2014/15 seems quite likely.

For those of you who've become convinced that inventory levels dictate the price, I might point out that the figures for US total stocks, the only numbers reflecting the current time period, show inventories now at essentially the same level as they were at this time in 2015. The price then was comparable to the current level. By early 2016, nine months later, the price had halved and US oil stocks had increased by 100 million barrels. If you believe that surplus inventories at that time contributed to the price drop, then do you similarly believe that inventory levels will again place downward pressure on prices? Will the price drop by 50% again?

This is an important time for the oil industry. The developing events remind us again that without an understanding of how prices are actually formed - the pricing mechanism - the industry is left with a random, hit or miss system of oil prices. Good luck!

[Tom Kirkman + 8,860]

William, it's great to see you are back in the game in online discussions, in top form, and once again pointing out issues for logical consideration.

Al-Naimi didn't learn, had resigned after his 2015 "market share" fiasco, and became the head chearleader for solar power in Saudi Arabia.

Hoping we don't see a disasterous repeat of 2015.

[William Edwards + 708]

1 minute ago, Tom Kirkman said:

William, it's great to see you are back in the game, in top form, and pointing out issues for logical consideration.

Al-Naimi didn't learn, had resigned after his 2015 "market share" fiasco, and became the head chearleader for solar power in Saudi Arabia.

Hoping we don't see a disasterous repeat of 2015.

Thanks, Tom.

[Bhimsen Pachawry + 72]

Considering that every year the oil consumption growth has been 1.5MBPD, the 1MBPD additional production can be easily shipped. The production increase need not be immediate but can be gradual. The oil price could be pegged to a fixed price of $70 and any increase in demand at that price could be simply met by increasing production rather than increasing price to reduce demand

[William Edwards + 708]

13 minutes ago, Bhimsen Pachawry said:

Considering that every year the oil consumption growth has been 1.5MBPD, the 1MBPD additional production can be easily shipped. The production increase need not be immediate but can be gradual. The oil price could be pegged to a fixed price of $70 and any increase in demand at that price could be simply met by increasing production rather than increasing price to reduce demand

The same facts that you present applied in 2014/15. If your thesis is correct, the price then should have remained above $70/B. What happened?

[Bhimsen Pachawry + 72]

2 hours ago, William Edwards said:

The same facts that you present applied in 2014/15. If your thesis is correct, the price then should have remained above $70/B. What happened?

Oil prices are fixed by multiple political interest groups (countries). In 2014, USA started pumping shale oil in larger quantity, Iran sanctions were lifted in 2015 and for some reason, the Saudis agreed to increase oil production.

In case of USA, oil prices are desirable to be low as the value chain associated with oil like manufacturing, transportation etc will improve. So, even by means of bailouts and tax rebates, the shale oil had to be increased. In 2014-5, the additional oil was produced mainly by USA, not by Arabs. Also, at that time, Arabs had made a bounty with sovereign wealth funds overflowing due to the last 7 years of high oil prices (2007-2014 with 1 year break in between). So, the political interests were different in 2014-15. Now, however, the low oil prices brought sovereign wealth fund lower and the global growth increased demand for oil. The oil which was extra in 2014-15 is now a necessity to maintain current production levels. The political interest and the pricing requirements are different now

[Jan van Eck + 7,558]

3 hours ago, Tom Kirkman said:

 

Hoping we don't see a disastrous repeat of 2015.

It is not at all clear why a drop in raw oil prices should be viewed as "disastrous."  I view that as a positive.  Oil is a basic feedstock for plastics monomers, the building blocks for the plastic resins used in the plastics molding industries (injection molding, thermoforming, roto-molding, and so forth).  Cheap plastics cascades through the American economy to produce real wealth, which real wealth becomes widely distributed. What's not to like?

In any event, remember that some oil (quite a lot in New England) is burnt for heat fuel.  Lower oil prices lead to lower heating fuel prices, and that puts real money into the pockets of ordinary people.  Recall that at one time Mr Chavez of Venezuela fame would send tanker-loads of heating oil up to New England to be distributed by non-profits to the poor, so they would not be freezing in the cold. You could get your tank topped off by free Citgo heating oil.  Chavez did that to embarrass Washington, and he did that with aplomb. Then again, today Washington has no sense of shame so the embarrassment card has no real value. 

Today the northern New England States are encouraging the replacement of oil heat with wood-pellet stoves, and wood is taking market share from oil  (there is limited gas available for retail users in Northern New England).  And that policy will continue to put a little more pressure downwards on oil pricing in the future. 

[Tom Kirkman + 8,860]

2 minutes ago, Jan van Eck said:

It is not at all clear why a drop in raw oil prices should be viewed as "disastrous." 

 

 

[Jan van Eck + 7,558]

Russia has to continue to increase its oil production as Putin needs the cash to finance his military machine.  Putin is a sick man; he has these visions of the old Imperial Russia extending total dominance over all the countries of the old USSR.  He is perfectly prepared to invade and occupy his neighbors, and has done so repeatedly:  Georgia, South Ossetia, Crimea, Eastern Ukraine.  Russia sits on the border of the Eastern European countries, including Poland, when you remember that Russia controls the Kaliningrad Oblast, now a totally militarized piece of real estate.  

It all requires military machinery and troops - and that costs beaucoup bucks.  Where is that cash going to come from? Russia, i.e. Putin, needs to selll oil and gas.  That is the source of the funding for the military machine.  I anticipate that Russia will continue to pump, and will allow the price to drop to clear his inventory. 

The West should flatly refuse to buy Putin's oil.  Why finance the entity that seeks to invade Eastern Europe?  We have had quite enough of Russian expansionism and militarism. 

Edited May 26, 2018 by Jan van Eck

[Tom Kirkman + 8,860]

6 minutes ago, Jan van Eck said:

The West should flatly refuse to buy Putin's oil.  Why finance the entity that seeks to invade Eastern Europe?  We have had quite enough of Russian expansionism and militarism. 

So... NATO expansionism and militarism is better?

[Jan van Eck + 7,558]

9 hours ago, Tom Kirkman said:

So... NATO expansionism and militarism is better?

Yes.  Vastly better.  No comparison. 

Remember that Mr. Putin has no compunctions about having his men do hits right smack dab in the middle of the London Bridge in broad daylight. His KGB/FSB hitmen murder inside England with impunity.  And you want to support a regime like that? 

Putin wants a rebirth of the USSR.  He will stop at nothing to achieve that. Murder, war, invasion, hey means nothing.  Putin's secret army, the "Wagner Group," slaughtered 10,000 civilians in the Donbas.  What makes you think he is going to be gentle with the Poles?  The Czechs?  The Romanians? 

The way you stop Putin is to impoverish Russia.  And the way you do that is sanctions, complete embargo of oil purchases, and a collapsed oil/gas price. 
 

Edited May 27, 2018 by Jan van Eck
typing error

[Jan van Eck + 7,558]

29 minutes ago, Tom Kirkman said:

 

 

What's wrong with $28? Sounds good to me!

[JMS + 3]

William, 

A great article that helps bring clarity to crude pricing fundamentals and the necessary crude oil price reduction that must occur (assuming other variables remain constant) once  OPEC and Russia abandon their production cuts .  OPEC cuts since 2016 have now reached approximately 2 million barrels per day, or approximately 60% higher than originally planned, as the result of Venezuela’s production  problems.  The supply side of crude oil production is having no problem meeting today’s demand at current prices.  Since the current market demand is already satisfied at today’s price level, raising OPEC and Russian production, even gradually, to pre-cutback levels would create additional crude supply looking to regain \market share.  As you point out, the result of this increase to the supply variable must cause lower crude prices.   Thanks for the clarity.

By the way,  a strengthening  US dollar and rising interest rates further support the potential for lower future crude prices.

 

[William Edwards + 708]

1 hour ago, JMS said:

William, 

A great article that helps bring clarity to crude pricing fundamentals and the necessary crude oil price reduction that must occur (assuming other variables remain constant) once  OPEC and Russia abandon their production cuts .  OPEC cuts since 2016 have now reached approximately 2 million barrels per day, or approximately 60% higher than originally planned, as the result of Venezuela’s production  problems.  The supply side of crude oil production is having no problem meeting today’s demand at current prices.  Since the current market demand is already satisfied at today’s price level, raising OPEC and Russian production, even gradually, to pre-cutback levels would create additional crude supply looking to regain \market share.  As you point out, the result of this increase to the supply variable must cause lower crude prices.   Thanks for the clarity.

By the way,  a strengthening  US dollar and rising interest rates further support the potential for lower future crude prices.

 

 Thanks, Jim. Having Someone of your stature agree with me is a feather in my cap.

[Tomasz + 1,608]

3 hours ago, Jan van Eck said:

Yes.  Vastly better.  No comparison. 

Remember that Mr. Putin has no compunctions about having his men do hits right smack dab in the middle of the London Bridge in broad daylight. His KGB?FSB hitmen murder inside England with impunity.  And you want to support a regime like that? 

Putin wants a rebirth of the USSR.  He will stop at nothing to achieve that. Murder, war, invasion, hey means nothing.  Putin's secret army, the "Wagner Group," slaughtered 10,000 civilians in the Donbas.  What makes you think he is going to be gentle with the Poles?  The Czechs?  The Romanians? 

The way you stop Putin is to impoverish Russia.  And the way you do that is sanctions, complete embargo of oil purchases, and a collapsed oil/gas price. 
 

So I would strongly suggest watching at least these movies and think a little bit.

Lets start with some satirical programms with English subtitiles - from german public television ZDF

https://www.youtube.com/watch?v=WkldaRRPAw4

https://www.youtube.com/watch?v=jSOfQ7tgTLg

https://www.youtube.com/watch?v=WdjJGdyr8qM

https://www.youtube.com/watch?v=T9CXm598q4k

https://www.youtube.com/watch?v=5P8ILFWlBzA

From scientific point of view- profesor Stephen Cohen from Princetown - surely one of greatest modern sovietologists and expert on russian affairs.

https://www.youtube.com/watch?v=jUWAsTij9yg

https://www.youtube.com/watch?v=vTBNBLQXRCk

 

Can you tell how rebel  forces killed 10.000 people in Donbas in situation when vast majority of rebel forces recruits are exacly people from Donbass and Lugansk? Are they killing their families, friends and next-door neighboirs? Apart from the fact that most people in Donbas and Lugansk are in reality native Russian - are they killing their supporters? Thats the reason why more than 1,5 milion people in war regions when the war started escape to Russia not central or western Ukraine?

http://nationalinterest.org/feature/the-great-exodus-ukraines-refugees-flee-russia-12181

https://www.theguardian.com/world/2016/jan/05/ukrainian-russia-refugee-conflict

And at the end the small problem with scale - Russia produces more than 10 % of world oil output and is world biggest gas exporter feeding more than one third of european gas consumption. Well if you no problem with that you must be a shareholder of Pierre Andurand hedging fund because he wants 300 $ oil. And if you live in Europe I would suggest garthering  brushwood - the problem is a lot of countries in Europe doesnt have woods anymore so thats not the solution.

 

PS
Thats end of discussion from my side - its oil community not political forum but I must react to some stupid comments.

Edited May 27, 2018 by Tomasz

[Danny Hangartner + 31]

Social media is something that I'm straying away from. Changing my mind and stuff is impossible when not allowed to delete previous posts.

So I edit.

Edited September 15, 2022 by Danny Hangartner
Social media is something that I'm straying away from. Changing my mind and stuff is impossible when not allowed to delete previous posts. So I edit.

[Jan van Eck + 7,558]

29 minutes ago, Tomasz said:

 

Can you tell how rebel  forces killed 10.000 people in Donbas in situation when vast majority of rebel forces recruits are exacly people from Donbass and Lugansk? Are they killing their families, friends and next-door neighboirs? Apart from the fact that most people in Donbas and Lugask are native Russian - are they killing their supporters?

 

And at the end the small problem with scale - Russia produces more than 10 % of world oil output and is world biggest gas exporter feeding more than one third of european consumption. Well if you no problem with that you must be a shareholder of Pierre Andurand hedging fund because he wants 300 $ oil.

Sorry, Tomasz, I appreciate that you are Russian by birth and have an affinity for the Motherland.  I would gently point out, however, that that does not qualify you as an expert on the situation in Ukraine  (which I have been intensively following in consort with a number of Ukrainians).  First, the people of both the Donbas and the Crimea are not "native Russian."  They are all Ukrainians, although a number speak Russian as a first language and are ethnically of Russian descent.  It is that group that felt that the Ukrainians of Ukrainian ethnic descent would not treat them fairly once the puppet regime was overthrown in the Maidan uprising. That group, which you refer to as "native Russians,"  definitely wanted to break away and become part of Greater Russia, in the thinking that they would somehow be better off.  Well, the history of the past years has put that idea underground.  The Donbas today has no factory output, no money, no coal for heat, and thus no hot water either.  The place is effectively ruined.  The ethnic Russian population is long ago weary of the situation and feels abandoned by Russia - which they are. 

Now, it is true that a number of those locals joined up with military units.  Those units are not the ones fighting with the Ukrainian Army; those guys are actual Russians, typically men who have enlisted and then served their shifts, and are now discharged and unemployed.  They were recruited by Wagner Enterprises to serve as mercenary troops.  The Wagner troops are the ones looting, raping and killing.  They steal whatever they can and have no compunction about seizing a nice apartment and killing the owners, then moving in.  Who is going to stop them?  You? Nobody stops them. You have this lawless band of mercenaries running wild in the Donbas. 

Putin has trouble convincing regular troops to go into the Donbas - they have to cut the insignia off their uniforms and that removes them from protections of international war conventions. Putin has filled the gap by cleaning out his jails, putting hardened criminals into these para-military units.  And those are murdering cutthroats. 

Putin is the instigator of a kind of frozen war - not quite hot, but never at truce.  It keeps the Ukraine on edge, creates instability on the cheap, and assures that the acts of the Russian Army are always at the forefront of the thinking and actions of Kyiv.  Putin's goal is to take over the Ukraine and install a puppet government - and he can accomplish that exactly the way he seized the Crimea:  create unrest, be "invited in to save the Russian-speaking peoples," move in the paratroopers and mercenaries, and install a puppet.  I predict that Putin will next seize the city of Kharkov, using exactly those pretexts.  Right now he has six divisions sitting on the Border at Kharkov, including two mechanized brigades and armor.   Who is going to stop him?  You? 

Yes, you are perfectly correct that Russia is a big producer of oil and gas.  The Germans are living in a fantasy when they invite Russia to be the provider of their main fuel.  Putin uses gas as a political weapon.  Germany got a taste of that a few years back when Russia simply shut off the gas  (the pretext was that Ukraine was siphoning off some gas that was in transit).  They probably were. But Russia was also refusing to pay transit fees, so Ukraine took it out in kind.  Right now Ukraine has a Judgment from the International Arbitration Court against Russia for multiple billions, and Russia is on record as saying they refuse to pay and refuse to acknowledge that the International Court has any jurisdiction over them. 

A number of years ago I had some 30 Russian Judges as my guests and took them on a tour of New York City.  I hired a translator, but was surprised at how good their English was and their nuanced understanding of the intricacies of New York and its legal system (and police). Russians, when you get away from Putin, are perfectly nice people, and happy to join the West (especially Russian women, who desire marriage to Western men). Putin has seized the country and turned it into a kleptocracy, where his gang of thugs loot the country.  If you play with this guy and hand him cash for his oil and gas, you perpetuate his criminal enterprise.  That, for the West, is a prescription for suicide. 

Edited May 27, 2018 by Jan van Eck

[Ian Austin + 131]

Bill, that’s sound reasoning. A question: when OPEC decides to release production back to the market, will it be on a “safe schedule” or all at once. 

That would likely have have some kind of effect on the actions of the trading community, wouldn’t it?

Edited May 29, 2018 by Ian Austin

[William Edwards + 708]

1 hour ago, Ian Austin said:

Bill, that’s sound reasoning. A question: when OPEC decides to release production back to the market, will it be on a “safe schedule” or all at once. 

That would likely have have some kind of effect on the actions of the reading community, wouldn’t it?

I suspect that they will tiptoe in, Ian. But keep in mind that that action is not a supply activity, it is a pricing activity. If the Saudis decide to undercut the competitor's price, it probably will make little difference to the speculators and to the media whether the price cut is $0.25, $1 or $2. The headline will still read "Saudis cut price!" Traders will dump long positions accordingly. And each time they have to do it again, the price takes another drop.

[izzzy 0]

Things never happen the same way twice

[William Edwards + 708]

41 minutes ago, izzzy said:

Things never happen the same way twice

I would not say"never", unless we are speaking exactly. But if we substitute the word "similarly" for "the same way", I would definitely disagree. Thanks for your comment, Izzy.

[Harsh vardhan singh + 36]

On 5/26/2018 at 8:43 PM, William Edwards said:

It was reported yesterday by CNN that Khalid al Falih, Oil minister of Saudi Arabia, said "Two years ago we pulled supply. I think in the near future there will be time to release supply," Al-Falih said. "It's likely that it will happen in the second half of this year. We've had intensive discussions [with Russian energy Minister Alexander Novak], and I think we're aligned on that," .

Apparently most observers accept this statement with an attitude of "Of course - no problem". But is a bit more thought and critical questioning needed to understand the consequences of such an action? Let us examine these consequences. It may turn out that the Saudi's and Russia's increasing production is more complicated than they imagine. In fact, since oil can only be produced if you have an empty receiving vessel awaiting delivery of oil, neither country can produce more oil without enticing potential customers to provide a means for receiving such additional oil. Currently we know of no empty tankers at anchor outside either the Saudi or Russian loading ports that are awaiting acceptance of their nomination for a cargo of oil. So how do they accomplish this promised increase in production?

The only control lever that Russia and the Saudis possess is the pricing lever. There is no lever, no on/off switch, to force the customer to accept an increase in production. So, in order to entice additional vessels to enter the loading port, ready to receive cargo, the producers must offer a price advantage. This leads to the inevitable conclusion that for the Saudis and Russia to fulfill their promise to increase production they must become more price aggressive. Since demand is currently being readily supplied, and the Saudi/Russian wish to increase production will not increase that demand, the only way that the Saudis and Russia can increase production is to cut the price below that of another producer so that that producer's oil is displaced from the market. In other words, the actions of 2014 are about to be repeated. A similar price decline is possible.

One would have thought that the Saudis would have learned from the 2014 experience. But that was Al Naimi. This is Al Falih. Neither minister can put ten gallons of oil in a five gallon bucket. Al Naimi thought that he could regain market share by undercutting the shale oil price. He did not gain market share from doing this, he only lost revenue, as did the entire industry. What suggests that Al Falih will fare any differently? He will not. If OPEC tries, this year, to regain the 1.8 million barrels a day of market share that they conceded to others two years ago, prices will likely return to the $30's.

If you lived through the 2014/15 time period, you will recall that, initially, when the price dropped from $110/B to $90/B the industry was sure that this "low" price would soon be reversed. When the price dropped to the $80's, the idea of a quick recovery persisted. When the price keep falling and reached $70, even al Naimi assured the industry that the price would go no lower. He was wrong. The fall continued into the $20's. 

In spite of the falling prices, the talk of "recovery" did not subside. First it was believed that a "V" shaped price recovery would occur. Then, as time marched on and prices did not recover, the industry shifted to the expectation of a "U-shaped" recovery. When it became obvious that it was more likely an "L-shaped" profile, OPEC gave up. They quit trying to maintain market share through price cutting and conceded 1.8 million barrels a day of the market to non-OPEC. By removing the downward price pressure of trying to maintain market share, the speculative trading community was able to restore the higher prices through persistent demand for and accumulation of the "long" side of the futures market.

This same trading community had the usual knee-jerk reaction to the Saudi/Russian announcement of planning to regain markets. The futures price dropped. But will the drop persist? If the marginal producers, the Saudis and the Russians, follow through with their expressed intention of pushing back into the already-satisfied market, the drop in price will continue through the pressure of  liquidation of the long side of the futures contracts, while the buyers of real oil take advantage of the producers' price war. A repeat of 2014/15 seems quite likely.

For those of you who've become convinced that inventory levels dictate the price, I might point out that the figures for US total stocks, the only numbers reflecting the current time period, show inventories now at essentially the same level as they were at this time in 2015. The price then was comparable to the current level. By early 2016, nine months later, the price had halved and US oil stocks had increased by 100 million barrels. If you believe that surplus inventories at that time contributed to the price drop, then do you similarly believe that inventory levels will again place downward pressure on prices? Will the price drop by 50% again?

This is an important time for the oil industry. The developing events remind us again that without an understanding of how prices are actually formed - the pricing mechanism - the industry is left with a random, hit or miss system of oil prices. Good luck!

Great Article!! Worth Reading it....

But the scenario in the industry shows that after the 3 years long war against crashed oil prices ends with nothing...

I just feel like what was happened prior to 2014 is taking place right now. Oil producers who wants oil prices high for higher revenues is cutting their production, drive prices up. but the unconventional oil producers is always hurdle on the way and they start gaining market share. And before anyone thinks, oil prices crashed !!

but now the kingdom is again risks losing their market share after the production cut and now this time they don't want to lose their market share so, again raise the supply in the market...I guess they learn't from their mistake...                 

But all these current state somewhere shows that OPEC don't have any Oil cut Exit strategy....

 

[William Edwards + 708]

1 minute ago, Harsh vardhan singh said:

Great Article!! Worth Reading it....

But the scenario in the industry shows that after the 3 years long war against crashed oil prices ends with nothing...

I just feel like what was happened prior to 2014 is taking place right now. Oil producers who wants oil prices high for higher revenues is cutting their production, drive prices up. but the unconventional oil producers is always hurdle on the way and they start gaining market share. And before anyone thinks, oil prices crashed !!

but now the kingdom is again risks losing their market share after the production cut and now this time they don't want to lose their market share so, again raise the supply in the market...I guess they learn't from their mistake...                 

But all these current state somewhere shows that OPEC don't have any Oil cut Exit strategy....

 

Thanks, Harsh. You and I think similarly.

[HK Rach + 10]

On 26. 05. 2018. at 11:13 AM, William Edwards said:

It was reported yesterday by CNN that Khalid al Falih, Oil minister of Saudi Arabia, said "Two years ago we pulled supply. I think in the near future there will be time to release supply," Al-Falih said. "It's likely that it will happen in the second half of this year. We've had intensive discussions [with Russian energy Minister Alexander Novak], and I think we're aligned on that," .

Apparently most observers accept this statement with an attitude of "Of course - no problem". But is a bit more thought and critical questioning needed to understand the consequences of such an action? Let us examine these consequences. It may turn out that the Saudi's and Russia's increasing production is more complicated than they imagine. In fact, since oil can only be produced if you have an empty receiving vessel awaiting delivery of oil, neither country can produce more oil without enticing potential customers to provide a means for receiving such additional oil. Currently we know of no empty tankers at anchor outside either the Saudi or Russian loading ports that are awaiting acceptance of their nomination for a cargo of oil. So how do they accomplish this promised increase in production?

The only control lever that Russia and the Saudis possess is the pricing lever. There is no lever, no on/off switch, to force the customer to accept an increase in production. So, in order to entice additional vessels to enter the loading port, ready to receive cargo, the producers must offer a price advantage. This leads to the inevitable conclusion that for the Saudis and Russia to fulfill their promise to increase production they must become more price aggressive. Since demand is currently being readily supplied, and the Saudi/Russian wish to increase production will not increase that demand, the only way that the Saudis and Russia can increase production is to cut the price below that of another producer so that that producer's oil is displaced from the market. In other words, the actions of 2014 are about to be repeated. A similar price decline is possible.

One would have thought that the Saudis would have learned from the 2014 experience. But that was Al Naimi. This is Al Falih. Neither minister can put ten gallons of oil in a five gallon bucket. Al Naimi thought that he could regain market share by undercutting the shale oil price. He did not gain market share from doing this, he only lost revenue, as did the entire industry. What suggests that Al Falih will fare any differently? He will not. If OPEC tries, this year, to regain the 1.8 million barrels a day of market share that they conceded to others two years ago, prices will likely return to the $30's.

If you lived through the 2014/15 time period, you will recall that, initially, when the price dropped from $110/B to $90/B the industry was sure that this "low" price would soon be reversed. When the price dropped to the $80's, the idea of a quick recovery persisted. When the price keep falling and reached $70, even al Naimi assured the industry that the price would go no lower. He was wrong. The fall continued into the $20's. 

In spite of the falling prices, the talk of "recovery" did not subside. First it was believed that a "V" shaped price recovery would occur. Then, as time marched on and prices did not recover, the industry shifted to the expectation of a "U-shaped" recovery. When it became obvious that it was more likely an "L-shaped" profile, OPEC gave up. They quit trying to maintain market share through price cutting and conceded 1.8 million barrels a day of the market to non-OPEC. By removing the downward price pressure of trying to maintain market share, the speculative trading community was able to restore the higher prices through persistent demand for and accumulation of the "long" side of the futures market.

This same trading community had the usual knee-jerk reaction to the Saudi/Russian announcement of planning to regain markets. The futures price dropped. But will the drop persist? If the marginal producers, the Saudis and the Russians, follow through with their expressed intention of pushing back into the already-satisfied market, the drop in price will continue through the pressure of  liquidation of the long side of the futures contracts, while the buyers of real oil take advantage of the producers' price war. A repeat of 2014/15 seems quite likely.

For those of you who've become convinced that inventory levels dictate the price, I might point out that the figures for US total stocks, the only numbers reflecting the current time period, show inventories now at essentially the same level as they were at this time in 2015. The price then was comparable to the current level. By early 2016, nine months later, the price had halved and US oil stocks had increased by 100 million barrels. If you believe that surplus inventories at that time contributed to the price drop, then do you similarly believe that inventory levels will again place downward pressure on prices? Will the price drop by 50% again?

This is an important time for the oil industry. The developing events remind us again that without an understanding of how prices are actually formed - the pricing mechanism - the industry is left with a random, hit or miss system of oil prices. Good luck!

For instance, watching the Saudis play pricing with the Russians (and Iranians) for Asian market share? I think I recall several times over the past year that the Saudis have lowered prices for the Asian market to try to win back market share ... 

[Outlaw Jackie + 78]

Refreshing to hear serious reflection from a credible source.  So much 'cheer leading' on LinkedIn from supposed 'oilfield' folks predicting WTI $100+ per barrel by years end.  I think like Tom Kirkman; be happy with a steady $65, after all sharp peaks make for deep valleys.