Oil prices going down

[William Edwards + 708]

6 minutes ago, Dan Warnick said:

Hi William.  To your point, and forgive me if I'm way off base, I was once informed that the real value of oil should always be between $10-$20 per barrel and that all the rest is politics and futures speculation.  Is there anything to that?

Actually, I do not think that there is a "real value" of oil, over time. Historically the price of oil to the then-existing economy has been between $20 and $120 in today's dollars. The average has been below $40. The price spent about 100 years around $20. That is about as specific as I can get and it applies to the past 150 years or so. Future conditions of the world economy could take it outside of that range, either above $120 or below $20.

[Dan Warnick + 6,100]

Another tidbit to put in one's back pocket.

[Mike Shellman + 548]

In the first ten years of my 40 career as an oil producer I learned I could not predict the price of oil...and nobody else could either. There is no logical, rational-based metric to follow, as Mr. Edwards points out. Imagine what that  does to budget meetings regarding exploration and/or infill development of known, proven undeveloped reserves; its impossible to ever have full control of one's own destiny. So why on earth anyone outside the oil industry would want to invest in stock plays, based on oil price predictions, is beyond me. If those investment decisions work occasionally, it is just outhouse luck, IMO.

 

As a producer I do, however, follow OPEC comments regarding oil markets and I do so with keen interest. OPEC and its primary members have been, and always will be, price manipulators to the extent in which they can be. The American shale oil phenomena is not a "swing" producer. That's a self serving term created by the shale industry itself in order to keep other peoples money flowing into the scheme. Shale oil production, and inventory numbers (phftttt!)  have created additional opportunity for speculators to jack the market around and to make money from that, little else. Product prices actually mean nothing to the US shale oil industry; the past 4 years have proven that beyond doubt. Available capital controls  shale production  and in that regard the FOMC has as much indirect influence on short term oil markets as anyone. That is only temporary, however, as it the shale phenomena itself.

 

So as a producer I tune most of the BS completely out, make financial decisions based on the here and now and  never, I repeat never, borrow money to drill wells. If  the economics of a proposed well works at $60 a barrel I discount that price by 20%, make sure the time to payout of all D&C costs is 3 years or less, and the ultimate return on my initial investment is at least 3 to 1, at discounted oil prices, held constant over the life of the well. If all that looks good on paper I call the the drilling contractor and get rolling.  

 

NONE of those economic parameters I have outlined (taught to me by generations of oil finders before me) are remotely applicable to the US LTO gig. That is precisely why it is in horrible financial condition, likely over $300 billion in debt (public and private) and unlikely to ever be able to pay that debt back. Its only hope is  higher oil prices. No real oil men EVER make economic decisions based on hope for higher oil prices.

 

 

Edited June 18, 2018 by Mike Shellman

[William Edwards + 708]

2 hours ago, Mike Shellman said:

In the first ten years of my 40 career as an oil producer I learned I could not predict the price of oil...and nobody else could either. There is no logical, rational-based metric to follow, as Mr. Edwards points out. Imagine what that  does to budget meetings regarding exploration and/or infill development of known, proven undeveloped reserves; its impossible to ever have full control of one's own destiny. So why on earth anyone outside the oil industry would want to invest in stock plays, based on oil price predictions, is beyond me. If those investment decisions work occasionally, it is just outhouse luck, IMO.

 

As a producer I do, however, follow OPEC comments regarding oil markets and I do so with keen interest. OPEC and its primary members have been, and always will be, price manipulators to the extent in which they can be. The American shale oil phenomena is not a "swing" producer. That's a self serving term created by the shale industry itself in order to keep other peoples money flowing into the scheme. Shale oil production, and inventory numbers (phftttt!)  have created additional opportunity for speculators to jack the market around and to make money from that, little else. Product prices actually mean nothing to the US shale oil industry; the past 4 years have proven that beyond doubt. Available capital controls  shale production  and in that regard the FOMC has as much indirect influence on short term oil markets as anyone. That is only temporary, however, as it the shale phenomena itself.

 

So as a producer I tune most of the BS completely out, make financial decisions based on the here and now and  never, I repeat never, borrow money to drill wells. If  the economics of a proposed well works at $60 a barrel I discount that price by 20%, make sure the time to payout of all D&C costs is 3 years or less, and the ultimate return on my initial investment is at least 3 to 1, at discounted oil prices, held constant over the life of the well. If all that looks good on paper I call the the drilling contractor and get rolling.  

 

NONE of those economic parameters I have outlined (taught to me by generations of oil finders before me) are remotely applicable to the US LTO gig. That is precisely why it is in horrible financial condition, likely over $300 billion in debt (public and private) and unlikely to ever be able to pay that debt back. Its only hope is  higher oil prices. No real oil men EVER make economic decisions based on hope for higher oil prices.

 

 

For those of you who do not know, Mike is providing you with guidance based upon sound judgment and extensive experience. The wise reader will benefit from that advice.

The unwise or arrogant reader can follow his own course and eventually realize that he should have heeded Mike’s guidance.

[mjmj5 + 1]

Is your crystal ball clean or does it have finger prints all over it? That is your two bits for Monday!!!!

[raymondroy + 2]

back to the drawing board, naturally price is always a function of supply demand coupled with geopolitical updates and presumption of what the future will hold. I feel the 3 biggest factors are 1) increased shale production, 2) Saudi and Russia's planned increase in production and 3) the uncertain increase in demand forecasted from developing countries. In the end we must remember that crude is a scarce resource that once burnt is lost forever and therefore there is just so much available supply and demand will find a way to outstrip supply in the long run.

[Dr. Abelatif Hamza + 4]

All know that the interactions of the oil "supplies and demands powers " is naturally affecting its prices levels in somehow, but the more effective factor is the practises of the dominating "political powers"..this is the unseen fudemental factor is the one which making any technical analysis alone incomplete and inaccurate in terms of any  futuristic expections.

www.linkedin.com/in/abdelatifmh

 

[William Edwards + 708]

2 minutes ago, Dr. Abelatif Hamza said:

All know that the interactions of the oil "supplies and demands powers " is naturally affecting its prices levels in somehow, but the more effective factor is the practises of the dominating "political powers"..this is the unseen fudemental factor is the one which making any technical analysis alone incomplete and inaccurate in terms of any  futuristic expections.

www.linkedin.com/in/abdelatifmh

 

I agree that there is an interaction, Dr. Hazma, between oil demand, supply and prices. Where I differ from most observers is in the order of the interaction. First comes price, then demand, then supply.

[William Edwards + 708]

1 hour ago, raymondroy said:

back to the drawing board, naturally price is always a function of supply demand coupled with geopolitical updates and presumption of what the future will hold. I feel the 3 biggest factors are 1) increased shale production, 2) Saudi and Russia's planned increase in production and 3) the uncertain increase in demand forecasted from developing countries. In the end we must remember that crude is a scarce resource that once burnt is lost forever and therefore there is just so much available supply and demand will find a way to outstrip supply in the long run.

I beg to differ, Raymond. Price is not a function of supply and demand, supply and demand are functions of the price. Price is an independent variable. You may wish to investigate the validity of this statement, then you will probably revise your assessment. You might begin with checking history to see if you can find an instance where demand was met with insufficient supply -- ever!

[Tom Kirkman + 8,860]

7 hours ago, William Edwards said:

For those of you who do not know, Mike is providing you with guidance based upon sound judgment and extensive experience. The wise reader will benefit from that advice.

The unwise or arrogant reader can follow his own course and eventually realize that he should have heeded Mike’s guidance.

I second that ^

[Jan van Eck + 7,558]

Do the futures market speculators actually set the current and future price of a commodity?  If so, how?  Herewith a cautionary tale to those who have the idea that some other metric, such as "demand," will impact the price and be the marker.

In the USA, there are a vast number of independent milk producers. The "dairymen," or milk farmers  (most also grow corn to feed to their cows) have to sell their product into a national market, and for the past several years that market price for wholesale bulk milk has been so ruinously low that for the small dairymen the price received is well below the cost of production.  Despair sweeps over the rural milk landscape, with small farmers shooting their herds in the barn and committing suicide.  How did we get to such a deplorable state? 

It turns out that the K---- Corporation, a giant food operation, buys wholesale bulk milk and manufactures cheese.  It also turns out that the price of bulk milk is set by the corresponding price in the commodity exchange for cheese, measured by the railcar load.  So what K----- does is simply sell off a few carloads of cheese into the forward market, a process known in the "trading pits" as "selling against interest."  This is a pernicious practice and forbidden at the Chicago Mercantile Exchange, so K---- got kicked out of there and now does this at some other Exchange that they can dominate. 

The cheese forward market is thin, so a hefty sale of dumped cheese instantly depresses the forward price.  OK, so why would the managers at K--- Corp do something against their own price interests?  Because the price of milk, their input ingredient, is tied to that cheese number.  With a depressed price for milk, they now can go corral a vast amount of raw milk for the cheese manufacturing process.  The drop in the materials price vastly outweighs, by a factor of ten to one, the losses in the moment for the dumped cheese wheels. 

If K--- Corp were not around, the price of milk would likely be stable at some $22/cwt instead of $15., maybe higher, and there would be a profit in having a dairy farm and herd. 

the lesson to be learned from this example is that "price" of a commodity is not set by market fundamentals as you might intuitively think; instead, it flows from the actions of speculators on Exchanges and other external gamblers intent on speculating, using instruments (futures contracts) and techniques (puts, calls, straddles) that slide in there due to the open, and largely unregulated, casino we call "capitalism."

You kid yourself if you think that milk is unique, and oil is somehow immune to these "pit" gambling factors.  It is pretty much universal.  

Edited June 19, 2018 by Jan van Eck

[Tom Kirkman + 8,860]

Jan, I grew up on a small family owned dairy farm (50 cows) cum cash crop farm (yes we grew corn, along with soybeans, wheat and oats).

Growing up, the "bogeyman" that drew our ire was the "middleman" who seemed to suck up 90% of the profits.

[William Edwards + 708]

1 hour ago, Jan van Eck said:

Do the futures market speculators actually set the current and future price of a commodity?  If so, how?  Herewith a cautionary tale to those who have the idea that some other metric, such as "demand," will impact the price and be the marker.

In the USA, there are a vast number of independent milk producers. The "dairymen," or milk farmers  (most also grow corn to feed to their cows) have to sell their product into a national market, and for the past several years that market price for wholesale bulk milk has been so ruinously low that for the small dairymen the price received is well below the cost of production.  Despair sweeps over the rural milk landscape, with small farmers shooting their herds in the barn and committing suicide.  How did we get to such a deplorable state? 

It turns out that the K---- Corporation, a giant food operation, buys wholesale bulk milk and manufactures cheese.  It also turns out that the price of bulk milk is set by the corresponding price in the commodity exchange for cheese, measured by the railcar load.  So what K----- does is simply sell off a few carloads of cheese into the forward market, a process known in the "trading pits" as "selling against interest."  This is a pernicious practice and forbidden at the Chicago Mercantile Exchange, so K---- got kicked out of there and now does this at some other Exchange that they can dominate. 

The cheese forward market is thin, so a hefty sale of dumped cheese instantly depresses the forward price.  OK, so why would the managers at K--- Corp do something against their own price interests?  Because the price of milk, their input ingredient, is tied to that cheese number.  With a depressed price for milk, they now can go corral a vast amount of raw milk for the cheese manufacturing process.  The drop in the materials price vastly outweighs, by a factor of ten to one, the losses in the moment for the dumped cheese wheels. 

If K--- Corp were not around, the price of milk would likely be stable at some $22/cwt instead of $15., maybe higher, and there would be a profit in having a dairy farm and herd. 

the lesson to be learned from this example is that "price" of a commodity is not set by market fundamentals as you might intuitively think; instead, it flows from the actions of speculators on Exchanges and other external gamblers intent on speculating, using instruments (futures contracts) and techniques (puts, calls, straddles) that slide in there due to the open, and largely unregulated, casino we call "capitalism."

You kid yourself if you think that milk is unique, and oil is somehow immune to these "pit" gambling factors.  It is pretty much universal.  

Thanks for another example, Jan, of a system much like the oil futures system, with or without unscrupulous actors.

[Jan van Eck + 7,558]

40 minutes ago, Tom Kirkman said:

Growing up, the "bogeyman" that drew our ire was the "middleman" who seemed to suck up 90% of the profits.

Today a good number of dairymen have attempted to ditch the middlemen by forming co-operatives for marketing their product.  That would be successful enough, except that the co-op still faces the pricing set by the arbitragers responding to the cheese dumping done by K. Corp.  

And therein lies the big problem:  commodity pricing, whether milk or oil, ends up getting set, not by some supply-demand rhetoric, but by traders in the commodities pit, who speculate on contracts and also can and will trade against interest  (although the oil markets are probably far too deep for a group to attempt to manipulate them in the crass was that the milk/cheese markets are cynically manipulated). Still, the market price for oil ends up set by the emotions and aggressions of these traders.  Watch out.

[Osama + 248]

12 hours ago, Mike Shellman said:

In the first ten years of my 40 career as an oil producer I learned I could not predict the price of oil...and nobody else could either. There is no logical, rational-based metric to follow, as Mr. Edwards points out. Imagine what that  does to budget meetings regarding exploration and/or infill development of known, proven undeveloped reserves; its impossible to ever have full control of one's own destiny. So why on earth anyone outside the oil industry would want to invest in stock plays, based on oil price predictions, is beyond me. If those investment decisions work occasionally, it is just outhouse luck, IMO.

 

As a producer I do, however, follow OPEC comments regarding oil markets and I do so with keen interest. OPEC and its primary members have been, and always will be, price manipulators to the extent in which they can be. The American shale oil phenomena is not a "swing" producer. That's a self serving term created by the shale industry itself in order to keep other peoples money flowing into the scheme. Shale oil production, and inventory numbers (phftttt!)  have created additional opportunity for speculators to jack the market around and to make money from that, little else. Product prices actually mean nothing to the US shale oil industry; the past 4 years have proven that beyond doubt. Available capital controls  shale production  and in that regard the FOMC has as much indirect influence on short term oil markets as anyone. That is only temporary, however, as it the shale phenomena itself.

 

So as a producer I tune most of the BS completely out, make financial decisions based on the here and now and  never, I repeat never, borrow money to drill wells. If  the economics of a proposed well works at $60 a barrel I discount that price by 20%, make sure the time to payout of all D&C costs is 3 years or less, and the ultimate return on my initial investment is at least 3 to 1, at discounted oil prices, held constant over the life of the well. If all that looks good on paper I call the the drilling contractor and get rolling.  

 

NONE of those economic parameters I have outlined (taught to me by generations of oil finders before me) are remotely applicable to the US LTO gig. That is precisely why it is in horrible financial condition, likely over $300 billion in debt (public and private) and unlikely to ever be able to pay that debt back. Its only hope is  higher oil prices. No real oil men EVER make economic decisions based on hope for higher oil prices.

 

 

Beautiful!

[William Edwards + 708]

11 minutes ago, Jan van Eck said:

Today a good number of dairymen have attempted to ditch the middlemen by forming co-operatives for marketing their product.  That would be successful enough, except that the co-op still faces the pricing set by the arbitragers responding to the cheese dumping done by K. Corp.  

And therein lies the big problem:  commodity pricing, whether milk or oil, ends up getting set, not by some supply-demand rhetoric, but by traders in the commodities pit, who speculate on contracts and also can and will trade against interest  (although the oil markets are probably far too deep for a group to attempt to manipulate them in the crass was that the milk/cheese markets are cynically manipulated). Still, the market price for oil ends up set by the emotions and aggressions of these traders.  Watch out.

If by some magic the Saudis clicked in to the validity of this fact, do you suppose that they might begin pricing their crude as a $/B number rather than a delta off of some trading number?

[Jan van Eck + 7,558]

2 minutes ago, William Edwards said:

If by some magic the Saudis clicked in to the validity of this fact, do you suppose that they might begin pricing their crude as a $/B number rather than a delta off of some trading number?

I suspect the Saudis are getting sharper over time, as more of their top people are educated in Western universities.  And for all we know, those new elites also read the discussion forums at oilprice,com, and will be amending their pricing strategies accordingly!

Seriously, no, I don't think so, because old habits and practices are so hard to break.  Selling oil has developed its own cadence, and that cadence has its own built-up rust that is holding the old steel plates together, so to speak.  Can you break loose the old rust?  Probably not.  It takes some major externality to budge thinking patterns.  Ask Galileo. Look what he went through. 

[William Edwards + 708]

Just now, Jan van Eck said:

I suspect the Saudis are getting sharper over time, as more of their top people are educated in Western universities.  And for all we know, those new elites also read the discussion forums at oilprice,com, and will be amending their pricing strategies accordingly!

Seriously, no, I don't think so, because old habits and practices are so hard to break.  Selling oil has developed its own cadence, and that cadence has its own built-up rust that is holding the old steel plates together, so to speak.  Can you break loose the old rust?  Probably not.  It takes some major externality to budge thinking patterns.  Ask Galileo. Look what he went through. 

I relate to Galileo. I first recommended to OPEC, in their March 1986 meeting, that they return to fixed pricing. Yamani vetoed that idea. The idea was good then, and it is good now. But the Saudi lack of understanding still prevails. Therefore so does trading volatility.

 

[Tom Kirkman + 8,860]

37 minutes ago, Osama said:

Beautiful!

Osama, you might also like Mike Shellman's latest article"

"Growth Based On Debt Is Unsustainable, Artificial"

[EDLAG + 1]

Thank you for the registration.  Surely this will help me in my day to day work....

[William Edwards + 708]

28 minutes ago, Tom Kirkman said:

Osama, you might also like Mike Shellman's latest article"

"Growth Based On Debt Is Unsustainable, Artificial"

Scary stuff!

[Osama + 248]

1 hour ago, Tom Kirkman said:

Osama, you might also like Mike Shellman's latest article"

"Growth Based On Debt Is Unsustainable, Artificial"

Thank you for the mention Mr@Tom Kirkman, I will read and get back!

[Tiberindwa John Vianney + 1]

Wonder why OPEC would shoot itself in the foot by increasing supply! I still think that the renewed sanctions on Iran and the declining ability of Venezuela to produce will balance any foreseeable increase in supply. I bet the oil prices are not going to crush to as low as Williams predicts.

[Kofi Agyemang-Badu + 1]

There will always be a pinch somewhere. At times some of us find ourselves doff the the hat of a consumer and a semi-producer.

 

 

 

[Osama + 248]

Just now, Tiberindwa John Vianney said:

Wonder why OPEC would shoot itself in the foot by increasing supply! I still think that the renewed sanctions on Iran and the declining ability of Venezuela to produce will balance any foreseeable increase in supply. I bet the oil prices are not going to crush to as low as Williams predicts.

Who knows? Who saw oil prices falling to $26? and then rallying up all the way to $80? Predicting oil prices is never easy. We can, however, safely trace out, with careful reading and observation, the trend(s)!