A Return of Low Prices Is Suggested

[Tom Kirkman + 8,860]

16 hours ago, Outlaw Jackie said:

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. 

Hiya Jackie - great to see you over here from LinkedIn.  Happy to have more of the old crew from "another" forum over here.

Hopefully LinkedIn pundits will have a bit less of the $100+ (or even the - yikes - $300) bulls cheerleading for ever higher prices, which would lead to ever bigger price collapses.

[Tom Kirkman + 8,860]

/ moderator update - 

Received an alert for mods to check out comments on this thread. 

Since some political comments can be contentious, may I suggest dialing down a notch the remarks about Russia - either pro or con. 

This is an international forum, I'm not taking sides, and suggest that any overtly political discussions be posted in the Geopolitics subforum, where it shouldn't be off topic.

Have at it ladies and gents, just please don't get too wound up.  Here's a gentle reminder from my profile in the About Me section:

*** Important !   I do *not* expect others to agree with my opinions.  I tend to have rather unusual opinions about international Oil & Gas.  I *do* hope that readers will fearlessly voice their own views about international oil & gas.

As a former moderator on the Oilpro forum, (and now a moderator here on the Oil Price Community forum) I *encourage* dissent, and *encourage* Freedom of Speech, and *encourage* others to freely voice their views and convictions about oil & gas. 

A diversity of global views is what makes the world a special place.  Conformity is just a slow, painful death of not speaking your mind.  So SPEAK UP.  Please don't be a jerk about about it, though.  If you want others to consider your views, please be willing to consider the views of others.

Let's work together to make the Oil Price Community forum the Number 1 Oil & Gas forum on the internet.

Cheers, Mate.

 

[Dennis Coyne + 82]

It will be interesting to see how much OPEC and Russia increase output.  They can control prices, but it is not clear they will choose a low oil price.  They will choose a price that maximizes revenue, for example let's say the Russia/OPEC  combined output is 45 Mb/d of crude oil and the price is $70/b.

Revenue would be $3.15 B/d, if they target a price of $60/b, they would need to sell 52.5 Mb/d to earn the same amount of revenue.  Can they increase output by 7.5 Mb/d?  Considering Iran and Venezuela this seems unlikely, and it only gets them the same revenue as earned at $70/b.

Perhaps they will target $65/b as Tom suggested, which in this example would be 48.5 Mb/d, an increase of 3.5 Mb/d, which might be possible, but I believe they will struggle to achieve with declining Iranian and Venezuelan output, and again total revenue does not increase.  The smart move would be to wait until oil prices rise a bit more and just gradually increase output to keep oil prices from rising above their target price.

In fact, it would be best if they announce the price they are targeting and just adjust output to keep the price at that level, that might tend to stabilize the market.  If they like $75/b, they should just say so.  Perhaps they are shooting  for $70/b.

[Tom Kirkman + 8,860]

26 minutes ago, Dennis Coyne said:

In fact, it would be best if they announce the price they are targeting and just adjust output to keep the price at that level, that might tend to stabilize the market. 

Russia has budgeted for $40 oil for 3 years, starting in 2017.  Russia recently said they would be happy with $60.

And last month, Saudi Arabia started a whisper campaign to get prices up to $80 to maximize the potential value of their (potential) Aramco IPO. Then later started whispering for triple digit oil at $100, probably to see if the market could bear triple digit oil.

And of course, Trump tweeted his displeasure about artificially high oil prices, just before the Summer driving season in the U.S. and also before the upcoming midterm elections - - - U.S. voters tend to get annoyed with high gasoline prices.

So with Saudi Arabia angling for $80 to $100 oil, Russia budgeting for $40 oil and happy with $60 oil, Iran happy with $60ish oil (because that price hurts Saudi Arabia and Iran can live with $60) and all the other OPEC countries angling for their own preferred price... my general guesstimate of a Goldilocks comfort zone of around $65 for OPEC + Russia might not sound so crazy anymore.

Just my opinion; as always, you are free to disagree.

[William Edwards + 708]

2 hours ago, Dennis Coyne said:

It will be interesting to see how much OPEC and Russia increase output.  They can control prices, but it is not clear they will choose a low oil price.  They will choose a price that maximizes revenue, for example let's say the Russia/OPEC  combined output is 45 Mb/d of crude oil and the price is $70/b.

Revenue would be $3.15 B/d, if they target a price of $60/b, they would need to sell 52.5 Mb/d to earn the same amount of revenue.  Can they increase output by 7.5 Mb/d?  Considering Iran and Venezuela this seems unlikely, and it only gets them the same revenue as earned at $70/b.

Perhaps they will target $65/b as Tom suggested, which in this example would be 48.5 Mb/d, an increase of 3.5 Mb/d, which might be possible, but I believe they will struggle to achieve with declining Iranian and Venezuelan output, and again total revenue does not increase.  The smart move would be to wait until oil prices rise a bit more and just gradually increase output to keep oil prices from rising above their target price.

In fact, it would be best if they announce the price they are targeting and just adjust output to keep the price at that level, that might tend to stabilize the market.  If they like $75/b, they should just say so.  Perhaps they are shooting  for $70/b.

I enjoy theoretical price discussions as much as anyone. But can we now turn to reality? How do the Saudis translate their target price, stated or unstated, to the invoice on the receiving ship? Was their target yesterday different from a week ago? They sold oil yesterday based upon a $67 WTI price, and the previous Tuesday that put a $73 price on the invoice. Did they make a conscious decision to drop the price six dollars a barrel or did they simply follow the CME posting? Of course, they followed the futures posting. So the actual price was determined by the CME action, not the Saudi decision.

Had the Saudis chosen to put their own target price on the invoice, whether it was $50, $75 or $100, that would have been the price. The purchaser might have sailed way empty if that were an abrupt, unannounced decision and the price was higher than he would accept, but, since the Saudis provide the barrels of last resort, eventually he would agree to pay the Saudi price. If this fact ever sinks in to the decision makers ini Saudi Arabia, then a Saudi "target" price can be successfully implemented. Demand, and hence supply, would adjust to that price, whatever its is, down to the point where it was too low for the Saudi spare capacity to fulfill demand. On the upside it would be limited to the price so high that the Saudis were pushed completely out of the supply business and then they would relinquish the swing producer role and the next-in-line would set the price.

The idea that the Saudis "are thinking of a number" and that number, magically, becomes the CME settlement price and thereby appears on the Saudi invoices seems rather far-fetched.

[Ian Austin + 131]

Bill, that makes too much sense for a discussion about oil pricing. 

Lers steer this back to conspiracies, geopolitics (that none of us really understand), a Yergin quote or Donald Trump tweet

[Rodent + 1,424]

As someone who follows the industry in general, and not an expert on pricing or economics, I can't see how a ramp up in production from Saudi Arabia and Russia (and likely Iraq who was dragged into the production cut deal kicking and screaming) could be implemented without a change in price. They can't just flip a switch, as someone said, without having somewhere to put all that oil, be it a customer or storage--neither of which is infinite (and I have no idea how much storage KSA has), although the overhang was kept somewhere during these last couple of years.

Demand cannot immediately increase in any drastic way; they would have to pull market share away from someone else, and you can only do that by undercutting on price. Unless, that is, you slow rolled the increase in production as demand increased. 

Russia would be all too happy to undercut on price to regain market share. I can't see how Saudi Arabia, though, can afford lower prices, but the fact that they announced the Aramco IPO delay into 2019 suggests they are preparing for lower prices at least in 2018. It makes sense to me that the ramp up in production, which I think is inevitable at some point, will be gradual, as OPEC repeatedly suggested in months prior, not out of their goodness of their hearts as they try not to upend the market, but likely because they realize it is the only way option available to them.

 

[William Edwards + 708]

14 minutes ago, Ian Austin said:

Bill, that makes too much sense for a discussion about oil pricing. 

Lers steer this back to conspiracies, geopolitics (that none of us really understand), a Yergin quote or Donald Trump tweet

Sorry, Ian. Maybe, with effort, I can also contribute some mindless fluff to the conversation.

[William Edwards + 708]

6 minutes ago, Rodent said:

As someone who follows the industry in general, and not an expert on pricing or economics, I can't see how a ramp up in production from Saudi Arabia and Russia (and likely Iraq who was dragged into the production cut deal kicking and screaming) could be implemented without a change in price. They can't just flip a switch, as someone said, without having somewhere to put all that oil, be it a customer or storage--neither of which is infinite (and I have no idea how much storage KSA has), although the overhang was kept somewhere during these last couple of years.

Demand cannot immediately increase in any drastic way; they would have to pull market share away from someone else, and you can only do that by undercutting on price. Unless, that is, you slow rolled the increase in production as demand increased. 

Russia would be all too happy to undercut on price to regain market share. I can't see how Saudi Arabia, though, can afford lower prices, but the fact that they announced the Aramco IPO delay into 2019 suggests they are preparing for lower prices at least in 2018. It makes sense to me that the ramp up in production, which I think is inevitable at some point, will be gradual, as OPEC repeatedly suggested in months prior, not out of their goodness of their hearts as they try not to upend the market, but likely because they realize it is the only way option available to them.

 

You are getting there, Rodent, but you still allow yourself to think of "increasing production" without realizing that the PRICE, not production wishes, is the main selling activity. The sequence is 1) the desire to increase production occurs, 2) drop the price, 3) increase production after pushing out another producer by undercutting his price. The action step, the control lever, is the pricing action. Price controls production.

Keep thinking!

[William Edwards + 708]

4 hours ago, Dennis Coyne said:

It will be interesting to see how much OPEC and Russia increase output.  They can control prices, but it is not clear they will choose a low oil price.  They will choose a price that maximizes revenue, for example let's say the Russia/OPEC  combined output is 45 Mb/d of crude oil and the price is $70/b.

Revenue would be $3.15 B/d, if they target a price of $60/b, they would need to sell 52.5 Mb/d to earn the same amount of revenue.  Can they increase output by 7.5 Mb/d?  Considering Iran and Venezuela this seems unlikely, and it only gets them the same revenue as earned at $70/b.

Perhaps they will target $65/b as Tom suggested, which in this example would be 48.5 Mb/d, an increase of 3.5 Mb/d, which might be possible, but I believe they will struggle to achieve with declining Iranian and Venezuelan output, and again total revenue does not increase.  The smart move would be to wait until oil prices rise a bit more and just gradually increase output to keep oil prices from rising above their target price.

In fact, it would be best if they announce the price they are targeting and just adjust output to keep the price at that level, that might tend to stabilize the market.  If they like $75/b, they should just say so.  Perhaps they are shooting  for $70/b.

In your post you say " let's say the Russia/OPEC  combined output is 45 Mb/d of crude oil and the price is $70/b.", then you move forward with your arithmetic. Are you suggesting that Russia/OPEC sets the 45MB/D level? How do they implement this level?

But are your assumed numbers realistic? Are they even close? How do you know? The answer is, you don't and neither do the Russians/OPEC. Further, in order to get the data, you would have to be able to set and maintain the price level for twenty or so years for the equilibrium of price vs demand to stabilize. 

The point is that this is a rather complicated subject over which you, nor anyone else, have specified how to implement a desired production level. You talk readily about the production target, or wish, but you have yet to describe the steps that the producer takes to make that production level happen.

Edited May 30, 2018 by William Edwards

[Larry Albert + 5]

If the increase in production was just from the Saudis and Russians the market could absorb the additional production without a price discount, demand is growing 1.5 million barrels per day in 2018.  The problem is that the shale producers are also going to add 1 million barrels per day in 2018.  If Saudi and Russia match that number, we have a problem.

[William Edwards + 708]

4 hours ago, Larry Albert said:

If the increase in production was just from the Saudis and Russians the market could absorb the additional production without a price discount, demand is growing 1.5 million barrels per day in 2018.  The problem is that the shale producers are also going to add 1 million barrels per day in 2018.  If Saudi and Russia match that number, we have a problem.

I am sure that you realize that it is not just the Saudi and Russian supply that must match the total global demand. It is the totality of supply sources. But fear not, I will give you an ironclad guarantee that the supply over time will precisely match the consumption. Anything otherwise is physically impossible.

Edited May 30, 2018 by William Edwards

[Rodent + 1,424]

14 minutes ago, William Edwards said:

I am sure that you realize that it is not just the Saudi and Russian supply that must match the total global demand. It is the totality of supply sources. 

True, but not everyone has spare capacity that is easily turned on.

[William Edwards + 708]

1 minute ago, Rodent said:

True, but not everyone has spare capacity that is easily turned on.

But even if one producer has spare capacity, is he not able to participate in the game? And how does he turn on his spare capacity if he does not have a customer who wants to buy his oil at his price? Well, one answer is TO CUT HIS PRICE! Lower prices for the industry will be the ultimate result.

[Rodent + 1,424]

4 minutes ago, William Edwards said:

But even if one producer has spare capacity, is he not able to participate in the game? And how does he turn on his spare capacity if he does not have a customer who wants to buy his oil at his price? Well, one answer is TO CUT HIS PRICE! Lower prices for the industry will be the ultimate result.

Indeed, I just think for ease of conversation we assume those two are in the best position to turn on any spare capacity they may have. 

[OILINVESTOR99 0]

THIS IS MY FIRST POST. I AM AN OIL INDUSTRY INVESTOR , AND WANT TO KEEP TRACK OF WHAT IS HAPPENING.

[Rodent + 1,424]

7 minutes ago, OILINVESTOR99 said:

THIS IS MY FIRST POST. I AM AN OIL INDUSTRY INVESTOR , AND WANT TO KEEP TRACK OF WHAT IS HAPPENING.

Welcome @oilinvestor99! You've come to the right place. 

[William Edwards + 708]

13 minutes ago, OILINVESTOR99 said:

THIS IS MY FIRST POST. I AM AN OIL INDUSTRY INVESTOR , AND WANT TO KEEP TRACK OF WHAT IS HAPPENING.

Then take heed to the advice given in the title of this post.  Expect lower prices.

[Rodent + 1,424]

And it's interesting, today prices perked up because Reuters had a report that OPEC is going to stick with its supply quota.. Other outlets picked up on he headline, but failed to elaborate, as the original Reuters piece did.  Reuters ALSO said that OPEC et al would be “ready to make gradual adjustments to offset any supply shortage,” That part doesn't make for as good of a headline.

I guess it's all in how you say it, because yesterday people were scared off at the thought OPEC may increase supplies. Today, they say the same thing, just leading with something else, and everyone cheers. 

 

[William Edwards + 708]

3 minutes ago, Rodent said:

And it's interesting, today prices perked up because Reuters had a report that OPEC is going to stick with its supply quota.. Other outlets picked up on he headline, but failed to elaborate, as the original Reuters piece did.  Reuters ALSO said that OPEC et al would be “ready to make gradual adjustments to offset any supply shortage,” That part doesn't make for as good of a headline.

I guess it's all in how you say it, because yesterday people were scared off at the thought OPEC may increase supplies. Today, they say the same thing, just leading with something else, and everyone cheers. 

 

In a nutshell you have described the ridiculous nature of an industry that allows the whims and emotions of future speculators to determine the price that they get for their production.

[Rodent + 1,424]

Another new development on this topic, Hengli Petrochemical (China) is in talks with Saudi for long-term crude supplies for its brand spanking new 400,000 bpd refinery. First spot cargo will be in July for trial runs. China state approval already given--this will be the largest quota ever for a private Chinese refinery. BAM. There is Saudi's new customer.

[William Edwards + 708]

8 minutes ago, Rodent said:

Another new development on this topic, Hengli Petrochemical (China) is in talks with Saudi for long-term crude supplies for its brand spanking new 400,000 bpd refinery. First spot cargo will be in July for trial runs. China state approval already given--this will be the largest quota ever for a private Chinese refinery. BAM. There is Saudi's new customer.

And BAM! There is 400 MB/D of oil added to the supply side of the equation. See how easy it is? Now what do you suppose the pricing terms were? Do you suppose that Hengli gave the Saudis a premium? Or do you suppose that the Saudis gave Hengli a discount? Do you think that the Iranians, the Iraqis, the Kuwaitis and the Russians did not make a bid?

Edited May 30, 2018 by William Edwards

[Jan van Eck + 7,558]

3 hours ago, William Edwards said:

I am sure that you realize that it is not just the Saudi and Russian supply that must match the total global demand. It is the totality of supply sources. But fear not, I will give you an ironclad guarantee that the supply over time will precisely match the demand. Anything otherwise is physically impossible.

Not really.  It is entirely possible to have "unmet demand."  Unmet demand is what happens when there is a desire to acquire a product but either insufficient supply or there are barriers to entry into the marketplace for potential suppliers.  The classic way that pent-up, and unmet, demand is responded to is by rationing.  Think back to WWII and the ration coupons for gasoline and tires.  There was pent-up demand, no or insufficient supply, and rationing to distribute the limited quantity available and that kept pricing from rising.

OK, so then without formal rationing, how is unmet demand responded to in a market economy?  One way that you are not considering is by product substitution.  For example, in the case of gasoline, excess demand for personal transportation, of which the demand for gasoline is derivative, can and is responded to by construction of streetcar, bus and rail systems.  Do enough of that and make them electric, running off hydropower, and the pent-up demand is met - albeit by substitution.  Similarly, tariffs and quotas on aluminum, tamping supply and creating unmet demand, can be and are met by substitution with carbon fiber composites.  

In these examples, supply is not matching the demand, the unmet demand is met with substitution by other products. 

Cheers.

[Jan van Eck + 7,558]

2 hours ago, OILINVESTOR99 said:

THIS IS MY FIRST POST. I AM AN OIL INDUSTRY INVESTOR , AND WANT TO KEEP TRACK OF WHAT IS HAPPENING.

There is a lot of oil out there!  Amazing to consider how much is spent attempting to find even more. 

[William Edwards + 708]

6 minutes ago, Jan van Eck said:

Not really.  It is entirely possible to have "unmet demand."  Unmet demand is what happens when there is a desire to acquire a product but either insufficient supply or there are barriers to entry into the marketplace for potential suppliers.  The classic way that pent-up, and unmet, demand is responded to is by rationing.  Think back to WWII and the ration coupons for gasoline and tires.  There was pent-up demand, no or insufficient supply, and rationing to distribute the limited quantity available and that kept pricing from rising.

OK, so then without formal rationing, how is unmet demand responded to in a market economy?  One way that you are not considering is by product substitution.  For example, in the case of gasoline, excess demand for personal transportation, of which the demand for gasoline is derivative, can and is responded to by construction of streetcar, bus and rail systems.  Do enough of that and make them electric, running off hydropower, and the pent-up demand is met - albeit by substitution.  Similarly, tariffs and quotas on aluminum, tamping supply and creating unmet demand, can be and are met by substitution with carbon fiber composites.  

In these examples, supply is not matching the demand, the unmet demand is met with substitution by other products. 

Cheers.

Thanks for reminding me to be more precise in my wording. I mistakenly used "demand" for "consumption". The word "demand" is ambiguous. The word "consumption" is not. I apologize for my sloppy text. I shall edit the post.