Even a broken clock gets it right a few times

All sorts of things jostling around lately in international oil & gas + related geopolitics.
This article covers quite a bit of them.

And I'm hoping for an average of $65 oil this year - not too high and not too low - a Goldilocks price that would accomodate both global economics and oil producers.

This whole year, I've been commenting repeatedly, ad nauseum, that I've been hoping for an average of $65 oil this year, and 5 months into the year, a newspaper finally seems to agree with my opinion.  Guess I finally got lucky.

/ edit - guess I wasn't clear enough... I'm the broken clock here, not the news article.

Crude oil may lose steam ahead, likely to hit $64 in the short term

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there is a term for it, Tom - "confirmation bias":)

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45 minutes ago, DanilKa said:

there is a term for it, Tom - "confirmation bias":)

DanilKa, looks like my comment and title weren't clear enough... I was gently poking fun at myself (I'm the broken clock).

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1 hour ago, Tom Kirkman said:

DanilKa, looks like my comment and title weren't clear enough... I was gently poking fun at myself (I'm the broken clock).

I'm gently poking fun at you as well:) You $65 position is clear; I'm from $80-100 camp (dropping storage; increasing demand; underinvestment) but afraid we can see lower price if demand got smashed by financial turmoil.

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My prediction is that oil will average between $20 and $120 for H2 2018. :P

 

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3 minutes ago, DanilKa said:

I'm gently poking fun at you as well:) You $65 position is clear; I'm from $80-100 camp (dropping storage; increasing demand; underinvestment) but afraid we can see lower price if demand got smashed by financial turmoil.

Heh heh, so we are on the same page ... no problem : )

I can clearly see why you and many others are in the $80 - $100 camp, but I choose to stay here in my own $65 camp. 

Despite the myriad of reasons presented, I simply don't view $80 - $100 oil as currently sustainable in the global economy.  In my guesstimate, the current "Goldilocks" zone of not too high and not too low is around $65.  And I fully expect many others to disagree.  No worries, mate.

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9 minutes ago, Andi said:

Glad to be here!

Welcome to Oil Price forum, Andi.  Please feel free to introduce yourself in the New Members thread:

 

 

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Will sharply lower prices cause shut-in production anywhere in the USA?

Probably not.  Here's why:  contrasted with State-run operations abroad, the individual producers pumping or fracking oil and gas in the US are privately financed, through a "Prospectus" mailed out to the richer segment of society (the so-called "qualified investors" in SEC-speak), the people who put up the money for shares in the little business that actually goes out and drills the Property.  If the driller/producer then responds to lower prices by shutting down production, those investors receive zero "today" for a completed well that they own a share of.  That really irritates the investors, and then when that Producer/driller goes back into the investor marketplace looking for more capital for his next project, he is spurned.  Those doors to capital are closed. 

So the behavioral result to lower prices is, paradoxically, to continue pumping oil.   The investors receive less,but "less" is better than"nothing." So lower pricing does not tamp down US field production (at least, not by those guys). 

Now at the same time you have these international players that have built their economies around "petro-currencies," to the point where oil and gas are the financing agents of their economies.  So, once again, they have to pump. Does anybody seriously think that (for example) Nigeria is going to go shut in its production because of lower prices? Ain't gonna happen. 

Meanwhile, you have this interesting situation with the world manufacturing platform.  The US, with Trump, is going to scale back the amount of world trade by forcing manufacturers to source more of their production inside the USA. And that in turn is going to push down the demand for oil, as even a car factory sitting in Mexico shipping product to the US (and Canada) by rail is still using diesel oil to move that car. BIt by bit, aggregate demand gets knocked down.  And in Europe, continuing pressure to move freight by electric rail (through tunnels) and by river ship cuts down on truck diesel aggregate demand. 

So I foresee a situation where there are these throttles on demand in the developed nations, and producers loathe to shut down. Who is going to be the swing State to absorb the losses?  The Saudis?  To continue to surrender market share?  Maybe, but at some point they have to be in the game, and they certainly are not happy about constantly losing their market share. 

As long as Russia, Iran, and Venezuela continue to contract, then you can see $65 oil.  But if you push past that downward, then you enter the death-spiral territory, and oil can drop like a stone.  You bet on a bull market at your risk. 

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To me what matters more, as I pointed out in an earlier thread, is not the oil prices but what oil and gas companies are doing to make it work whether it's $65 oil or $80 oil. 

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3 hours ago, Rodent said:

My prediction is that oil will average between $20 and $120 for H2 2018. :P

 

"Safe" is always a good forecasting strategy. The other foolproof method is to forecast after the fact.

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(edited)

10 hours ago, Tom Kirkman said:

Heh heh, so we are on the same page ... no problem : )

I can clearly see why you and many others are in the $80 - $100 camp, but I choose to stay here in my own $65 camp. 

Despite the myriad of reasons presented, I simply don't view $80 - $100 oil as currently sustainable in the global economy.  In my guesstimate, the current "Goldilocks" zone of not too high and not too low is around $65.  And I fully expect many others to disagree.  No worries, mate.

Tom,

 

Why did an average Brent oil price of $110/b allow the Global economy to grow from 2011 to 2014, but will not today?  Over that period the revenue spent on crude oil by the World economy was about 5% of World real GDP in 2016$ (taking average oil consumption in BOE/year over the 2011-2014 period and multiplying by average Brent price in 2016$ over that same period.  For 2018 the IMF forecasts World Real GDP in 2016$ at $81,400 billion US at market exchange rates, 5% of that would be $4070 B (2016 US$) and if we assume 33.2 Gboe consumption in 2018 for average oil consumption levels, we get 4070 B/ 33.2 B or $122.60/b would equate to 5% of World real GDP (aka income) which would be similar to the 2011- 2014 average price level in terms of the percentage of income spent on oil consumption.

Also note the World real GDP growth rate from 2012 to 2014 averaged 2.63%/year and from 2015 to 2017 the average growth rate in World real GDP (both at market exchange rates) was 2.6%/year.

The rise or fall in oil prices has little effect on the World economy, based on this admittedly simple look at the 2012 to 2017 period.  

An oil price of $65/b would be fine if there is enough output but a rational Saudi/Russian deal would try to maintain an oil price of $75 to $85/b to maximize oil revenue.

I guess I have my own "camp" at $80+/-5 per barrel in 2017US$ (price for 4Q2018), with a slow rise to $150/b by 2027 when US LTO output is likely to be 4 years past peak.  So I expect oil prices to rise by about $70/b in 2017$ over a 9 year period or about $8/year, though clearly there will be volatility along the way.

See link below and comments as the model was modified based on suggestions by Mike Shellman and others.

http://peakoilbarrel.com/us-light-tight-oil-lto-update/

uslto1805d.png

Edited by Dennis Coyne

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11 hours ago, Dennis Coyne said:

Tom,

Why did an average Brent oil price of $110/b allow the Global economy to grow from 2011 to 2014, but will not today?

Dennis, please refer to the last half of my longwinded comment this morning on another thread:

I totally understand the $80 oil price camp.  But rightly or wrongly, my best guestimate for where oil prices should be is around $65.  And kindly note, that $65 number is not a price prediction, it's the price I'm hoping oil will average this year.

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10 hours ago, Dennis Coyne said:

Why did an average Brent oil price of $110/b allow the Global economy to grow from 2011 to 2014, but will not today? 

Perhaps economy grew despite high oil price due to an overriding influx of liquidity and cheap credit? That party is over (well, that's what hosts say but someone already went to get more booze and "tightening"/rate hikes my never reach declared numbers) and higher cost of energy has to trickle down into real economy and start slowing things.  

Slides 4 and 5 in Art Berman's presentation tells it better.

 

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Ramping up US oil exports are biting the saudi market share so my guess is that KSA target price could be the highest price that is under US  shale breakeven.

If Dennis calculations are accurate and the Permian oil breakeven is at 66 $ ... Tom's 65 $ prediction could be a correct pick.

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(edited)

On ‎5‎/‎30‎/‎2018 at 8:44 PM, DanilKa said:

Perhaps economy grew despite high oil price due to an overriding influx of liquidity and cheap credit? That party is over (well, that's what hosts say but someone already went to get more booze and "tightening"/rate hikes my never reach declared numbers) and higher cost of energy has to trickle down into real economy and start slowing things.  

Slides 4 and 5 in Art Berman's presentation tells it better.

 

Based on Bank for International Settlements (BIS) data for Market value of Debt in US $ for debt of all non-financial sectors (public and private debt) for all nations that report data to the BIS in relation to those nations GDP the Debt to GDP ratio was pretty flat from 2009 to 2016.  See chart below.

https://www.bis.org/statistics/totcredit.htm?m=6|380|669

Data from link above.

debtgdp3.png

Edited by Dennis Coyne

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(edited)

On ‎5‎/‎31‎/‎2018 at 5:17 AM, Guillaume Albasini said:

Ramping up US oil exports are biting the saudi market share so my guess is that KSA target price could be the highest price that is under US  shale breakeven.

If Dennis calculations are accurate and the Permian oil breakeven is at 66 $ ... Tom's 65 $ prediction could be a correct pick.

This assumes Saudi's are more concerned with market share than revenue.  It makes more sense for KSA to keep output a little lower so oil prices are a little higher, if the goal is to maximize revenue, if higher market share is the primary goal then they might as well aim for $40/b.  They did that for a while and didn't like the results.  I don't think World supply meets demand at $65/b, but I think at $80/b it does, I also think $80/b works better for the Saudis.

Remember the US LTO plays are not likely to increase by more than 800 kb/d in 2018, especially with the bottlenecks in the Permian basin and the high spreads at Midland.  Brazilian output is expected to be flat, Canadian spreads are also high and might lead to less of an increase in Canada than has been forecast, Venezuelan output is going down, Iranian output will likely decrease, China and Mexico will continue to decrease, so higher output from Russia, KSA, and other OPEC producers (probably only Iraq) may barely offset declines in China, Mexico, Venezuela, and Iran.

It's not clear why KSA and Russia would want to increase output unless they are worried that oil prices will get too high (over $90/b).

Also keep in mind there has been a general lack of investment and lack of discoveries so we may start to see deepwater offshore declines later in 2018 or early 2019, it will take some time to turn that around (probably 5 to 7 years).

I see a tight oil market going forward.  Hoping for $65/b is nice.  Supply and demand determines oil prices rather than hope. :)

On breakeven in the Permian, it is $70/b at the wellhead, the spread suggests the marginal producer (those that need to use rail or trucks for transport because pipelines are full) are getting about $15/b less than WTI or about $55/b.  The World oil price (Brent) is about $20/b above the wellhead price for the marginal Permian producer.  My guess is this price spread may lead to a slowdown in the rate of increase in Permian output as the more they produce at a wellhead price of $55/b, the more money they lose (about $15/b).  Note the $70/b is around a 60 month payout, most oil producers look for a 36 month payout (to get a payback for the high risk) which requires about $82/b at the well head in the Permian basin, at the current spreads at Midland that would be a WTI of 82+15=$97/b.

That's why I think oil prices won't be what Tom hopes for.

Edited by Dennis Coyne
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6 hours ago, Dennis Coyne said:

Based on Bank for International Settlements (BIS) data for Market value of Debt in US $ for debt of all non-financial sectors (public and private debt) for all nations that report data to the BIS in relation to those nations GDP the Debt to GDP ratio was pretty flat from 2009 to 2016.  See chart below.

https://www.bis.org/statistics/totcredit.htm?m=6|380|669

Data from link above.

debtgdp3.png

Average body temperature of hospital’s patients is a poor indicator... 

Increasing spread of debt to GDP as seen on page 4 (left) is not visible on BIS graph. China racked up massive debt during same period and its crude consumption grew by ~3M bopd. 

Another point of view - we never really recovered from 2008 crisis, just paper it over with money - chart 3 here

It also puzzles me. I don’t have the answer, I’m just a fracer. 

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6 hours ago, Dennis Coyne said:

That's why I think oil prices won't be what Tom hopes for.

Halliburton CEO is fine with oil prices between $60 and $70.  Says that price range is healthy for the oil and gas industry.  I don't expect others to agree with my opinions.  But you might want to consider listening to the Halliburton CEO.

 

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On 5/30/2018 at 5:05 AM, Tom Kirkman said:

All sorts of things jostling around lately in international oil & gas + related geopolitics.
This article covers quite a bit of them.

And I'm hoping for an average of $65 oil this year - not too high and not too low - a Goldilocks price that would accomodate both global economics and oil producers.

This whole year, I've been commenting repeatedly, ad nauseum, that I've been hoping for an average of $65 oil this year, and 5 months into the year, a newspaper finally seems to agree with my opinion.  Guess I finally got lucky.

/ edit - guess I wasn't clear enough... I'm the broken clock here, not the news article.

Crude oil may lose steam ahead, likely to hit $64 in the short term

Agree with your opinion that we need average $65/bbl this year...because now we will see the increase in supply and reduction of prices in upcoming months...and I think OPEC (saudi) is also agree with $65. They know the consequences of higher oil prices in very short span of time. Consumers can shift or pressure them for cheap oil prices. 

Geopolitical fear created the $80 artificial prices now we need to come back to affordable prices...

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The emerging trade war could slow world economic growth, reducing oil demand and frozing the bullish expectations.

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(edited)

On ‎6‎/‎1‎/‎2018 at 6:15 PM, Tom Kirkman said:

Halliburton CEO is fine with oil prices between $60 and $70.  Says that price range is healthy for the oil and gas industry.  I don't expect others to agree with my opinions.  But you might want to consider listening to the Halliburton CEO.

 

Tom,

Nobody knows the future oil price.  I just think non-OPEC supply (especially US LTO) will not increase as much as many assume.  Other oil industry experts (such as Mike Shellman) agree that US LTO will not make much money at $65/b WTI (with wellhead prices about $50/b due to pipeline constraints).  Perhaps Permian output will continue to increase despite Permian producers losing money at $50/b at the wellhead (for those without pipeline access), but Mike's analysis suggests over $80/b at the wellhead is needed for the average Permian well.

So I guess not all experts agree.  Certainly the futures strip shows the market believes you Goldilocks thesis.

I just think supply will be short at $65/b.  The lack of investment in the past 3 years will start to bite within 12 months.  If OPEC chooses $65/b, that will be the oil price, but before long they will be out of spare capacity, especially at $65/b.  So in the near term, perhaps you will be right (next 12 months).  After that prices should rise (though possibly sooner, 3Q2018) in my opinion.

Edited by Dennis Coyne

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Thank you, Dennis; I am no expert, however. I simply try to offer the "unique" observation of oil well economics 101 from the inside of a check book; in other words money out vs. money in. The shale oil industry is afraid to do that for fear of people finding out the truth; folks that analyze the shale oil industry don't know how.

Well costs are much higher than you think in the Permian (and actually higher than what you think in the other two shale basins also) but the "$80 at the wellhead," thing is not mine. Some of those guys can make a little money at $65.

What is "mine," however, is that LTO prices, not WTI prices, must reach $90 per barrel and STAY there for a long, sustained period of time in order for the shale oil industry to grow, appease angry lenders and shareholders and pay back what Thompson Reuters recently said is somewhere between $400 and $800 billion dollars, with a big 'ol 'B.' That is a lot of money and unless American's are willing to forgive all that debt, and give the mighty US shale oil industry a do-over, it must be paid back. I am astounded at how few analysts and shale oil cheerleaders actually grasp that.

 

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@Mike Shellman @Dennis Coyne

Related, here is a copy & paste of my comment this morning on LinkedIn:

==============================

Since the beginning of this year, I've been commenting incessantly that I hoped oil would average around $65.  That's my best guestimate of a Goldilocks price - not too high to hurt the global economies, and not too low to hurt oil companies and oil service providers.

The oil bulls have been on a rampage recently, still pushing for triple digit oil prices, warning about the consequences of oil prices being to low.

THEY ARE GETTING TOO GREEDY.

There are also negative global consequences if oil prices climb too high.

Please have a read of this article, foreshadowing what may happen to the global economy, if certain oil producers artificially pump up oil prices too high.

"The Strongest Flashing Red Light Since 2008": Will Oil Shock Trigger The Next Recession?

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