Oil prices going down

[Wags + 3]

16 hours ago, PeterfromCalgary said:

We seem to be in an era of energy abundance.  However, I don't see a return to $30 because the world including the Saudi's have learned that you cannot starve the frackers by flooding the market with oil.   At the same time I don't see $100 oil (unless their is a new geopolitical crises) because demand destruction is a real concern for the Saudis and they don't want that to happen.    

Uncertain Factors to watch

1. China's economy and debt

2. Global economic growth

3. Israel - Arab relations

4. Iran's oil production

Factors that the market already knows

1. Valenzuela's production is collapsing.

2. Fracking is getting more efficient.

3. Pipeline constraints mostly in Canada but also in the USA

this. Oil companies and Governments will do anything to prevent oil from dropping to 30 or even 50 dollar oil again. The Saudis learned their lesson that americans will go into infinite debt to keep the oil pumping. Its doesnt make sense to sell such a valuable non-renewable commodity at such low prices and start pumping more out driving prices even low. And if the Saudis really have that much control of the price, theyll be smart to control the price in the 60-70+ range if they have any hope of achieving their 2030 vision plan.

[William Edwards + 708]

6 minutes ago, Wags said:

this. Oil companies and Governments will do anything to prevent oil from dropping to 30 or even 50 dollar oil again. The Saudis learned their lesson that americans will go into infinite debt to keep the oil pumping. Its doesnt make sense to sell such a valuable non-renewable commodity at such low prices and start pumping more out driving prices even low. And if the Saudis really have that much control of the price, theyll be smart to control the price in the 60-70+ range if they have any hope of achieving their 2030 vision plan.

While I agree with your sentiments regarding the oil company ad government wishes, I am also aware that neither group has any clue as to how to prevent the trading price from going ANYWHERE. Just look at past history. Too high, too low! Both will occur.

[Rodent + 1,424]

3 minutes ago, William Edwards said:

 I am also aware that neither group has any clue as to how to prevent the trading price from going ANYWHERE. Just look at past history. Too high, too low! Both will occur.

They know they can manipulate oil prices, they just can't do it with any precision.

[William Edwards + 708]

5 minutes ago, Rodent said:

They know they can manipulate oil prices, they just can't do it with any precision.

I think that you give them way to much credit. Past history suggests that they cannot create price moves even in the desired direction, much less to the desired price level. 

[Claude + 7]

The ones who can and do manipulate oil prices in the short and medium term are the Goldman Sachs of the world. It is not for their clients, but for themselves directly. 

[Dennis Coyne + 82]

22 hours ago, William Edwards said:

Unfortunately, too many of the self-proclaimed "oil specialists" adopt the same basis for assessments that you honestly admitted. "I just assumed". I recommend that ALL analysis begins with a study of the data rather than beginning with an assumed answer. I think that one of my early postings on Oilprice covered the fact that demand DOES NOT set the price -- with supporting data.

In the long run that's correct, do you think the balance of supply and demand influences the oil price at all over the short term?  Price formation is a complex topic, but generally if supply is short in the short term, prices will tend to rise until demand matches supply, so I would agree that price will determine the quantity of demand in this case rather than the reverse.  Eventually (usually there is some time lag), the higher price may result in a higher quantity of supply, though as you have correctly pointed out the swing producer could counteract any increase in supply by cutting back on output to keep prices high.

Essentially the swing producer sets the price (though there are limits, today probably in the range of $50 to $120/b) and demand and other suppliers adjust to the market price "set" by the swing producer.

[Manfred Kruger + 40]

Seems everyone is throwing around supply numbers and no one is talking about demand. Unless there is a global economic contraction annual global demand should continue to grow by roughly 1.5 million barrels per day for the foreseeable future. EV‘s will eventually dent gasoline demand but will not do so significantly until some time after the middle of the next decade. IMHO betting on much lower oil prices is a fool’s errand because the Saudis need stable oil prices (in the Brent 70 to 90 $/BBL range) to succeed with their “ARAMCO IPO”.  Historically the Saudis have always prevailed on pricing and I doubt that this time will be different. Furthermore the Russians are not stupid and I doubt that they will want to revisit much lower prices.

[William Edwards + 708]

4 minutes ago, Manfred Kruger said:

Seems everyone is throwing around supply numbers and no one is talking about demand. Unless there is a global economic contraction annual global demand should continue to grow by roughly 1.5 million barrels per day for the foreseeable future. EV‘s will eventually dent gasoline demand but will not do so significantly until some time after the middle of the next decade. IMHO betting on much lower oil prices is a fool’s errand because the Saudis need stable oil prices (in the Brent 70 to 90 $/BBL range) to succeed with their “ARAMCO IPO”.  Historically the Saudis have always prevailed on pricing and I doubt that this time will be different. Furthermore the Russians are not stupid and I doubt that they will want to revisit much lower prices.

Manfred, how much pricing history have you actually studied, or even been exposed to? I spent fifteen years between 1985 and 2000 in intense discussions with OPEC and its members, including Saudi Arabia, with the thrust being "How can we get the price back up to $20/B?" To think that the Saudis have a history of keeping prices high is laughable. Please study the data before you advise us.

[Dennis Coyne + 82]

2 hours ago, William Edwards said:

I think that you give them way to much credit. Past history suggests that they cannot create price moves even in the desired direction, much less to the desired price level. 

William,

I agree the oil price moves around quite a bit and often it takes time for a policy to work, for example the price of Brent went lower in the first 6 months after the OPEC/Russia cuts, but one might argue that prices would likely have been even lower without those cuts, it took some time for World stock levels to be reduced, since June 2017 the policy has been quite effective in raising the oil price (from $45/b in June 2017 to $73/b in June 2018.  There are many factors which affect the price of oil so it's difficult (or impossible actually) to control the price precisely.

[Dennis Coyne + 82]

3 minutes ago, William Edwards said:

Manfred, how much pricing history have you actually studied, or even been exposed to? I spent fifteen years between 1985 and 2000 in intense discussions with OPEC and its members, including Saudi Arabia, with the thrust being "How can we get the price back up to $20/B?" To think that the Saudis have a history of keeping prices high is laughable. Please study the data before you advise us.

William,

Do you believe the Saudis are still trying for $20/b in 2000$? Note that $75/b in 2018 $ is roughly $51/b in 2000$ and $29/b in 2018$ would be about $20/b in 2000$.

Also, perhaps I am missing something, why did OPEC/Russia cut production in 2017, were they trying to get the price of oil back to $29/b? 

[William Edwards + 708]

4 minutes ago, Dennis Coyne said:

William,

Do you believe the Saudis are still trying for $20/b in 2000$? Note that $75/b in 2018 $ is roughly $51/b in 2000$ and $29/b in 2018$ would be about $20/b in 2000$.

Also, perhaps I am missing something, why did OPEC/Russia cut production in 2017, were they trying to get the price of oil back to $29/b? 

I presumed too much of our readers. My comment referred to Manfred's statement "Historically the Saudis have always prevailed on pricing and I doubt that this time will be different." I should have spelled it out.

[Dennis Coyne + 82]

4 minutes ago, Dennis Coyne said:

William,

Do you believe the Saudis are still trying for $20/b in 2000$? Note that $75/b in 2018 $ is roughly $51/b in 2000$ and $29/b in 2018$ would be about $20/b in 2000$.

Also, perhaps I am missing something, why did OPEC/Russia cut production in 2017, were they trying to get the price of oil back to $29/b? 

I do agree the high prices in 2011 to 2014 were not due to OPEC action, though if as a "swing producer" Saudi Arabia had the ability to bring prices to lower levels by "flooding the market" with their lower cost of production crude, they chose not to use that power for 3.5 years.  So at least for that period they did not choose to pursue a policy of $29/b oil.

[Bobiz + 3]

Hi,I'm Bob,just joined the Oilprice community a few minutes ago,and wanna konw how my membership and interactions with other members would impact my crude oil day trading.Do you have regular webinars or workshops?

[utamparkash 0]

Hi every body 

[William Edwards + 708]

5 minutes ago, Bobiz said:

Hi,I'm Bob,just joined the Oilprice community a few minutes ago,and wanna konw how my membership and interactions with other members would impact my crude oil day trading.Do you have regular webinars or workshops?

You might consider just sticking with the old "flip a coin" method. It seems to work as well as anything else for what are, after all, random numbers.

[Dennis Coyne + 82]

2 minutes ago, William Edwards said:

I presumed too much of our readers. My comment referred to Manfred's statement "Historically the Saudis have always prevailed on pricing and I doubt that this time will be different." I should have spelled it out.

Yes I agree, they have not always prevailed on pricing, in the cases where OPEC was pursuing a low price policy the general public was pleased and it got less press.  Also concern over climate change has become more widespread than before 1995 and those that are concerned don't necessarily see low oil prices as a positive development for the environment.  In addition, the need to wean ourselves from oil as a peak in oil output is eventually reached will require higher oil prices to spur such a transition.  It's doubtful that World Oil supply will meet World Demand for oil at less than $65/b in 2018$ and over time the price needed will increase as lower cost supply is depleted.

[CMOP + 227]

22 minutes ago, Bobiz said:

Hi,I'm Bob,just joined the Oilprice community a few minutes ago,and wanna konw how my membership and interactions with other members would impact my crude oil day trading.Do you have regular webinars or workshops?

Great to have you onboard @Bobiz! Currently we do not have webinars or workshops - but it is something that we may implement in the future. 

I recommend checking out these two sub categories for more info regarding Stocks and Trading - 
https://community.oilprice.com/forum/73-stocks/
https://community.oilprice.com/forum/74-trading/

[Manfred Kruger + 40]

Hi William, I have been trading oil since 1972 when I started my Career with the Royal Dutch Shell Group, and I can tell you without any reservations that historically the Saudis have always gotten their way with oil prices, both to push them down like they did in the mid seventies and at the end of 2014, or to push them up like they did during the embargo and recently. Anyone who has actually traded oil for a living knows that the Saudis have managed the OPEC supply balance for decades and dismissing them when they really set their mind on the direction that they want is extremely foolish. Regardless of Trumps wishes for higher Saudi production, I think that MBS wants higher prices to promote the Aramco IPO and I am pretty sure that he will succeed. 

[Percy 0]

Awesome! I will start to send my commets ASAP. Thanks for intive me guys!

[John VILLE 0]

Prices were artificially kept low and even below costs (eg. Alaska sands oil) by political leverage. This practice should stop to reestablish a balance suitable to producers and consumers. It seems political ambitions of our planet rulers are more oriented to their own main concern - remaining at the steering wheel in order to take care of their own interests. In spite of some strategic mistakes and lack of cohesion, OPEC is still in the position of a strong regulator and the final chooser of its allies.

John VILLE

[Jan van Eck + 7,558]

I see these terms of "supply " and "demand" and "balance" being tossed around, and I hesitate to barge in, but here goes. 

There is no supply and demand balance; there never will be.  What you have is a Production and Consumption balance.  And that is quite a different animal.  Production will always be very close to consumption; there is a frictional factor in there, the building or drawing down of inventories, and (somewhat hidden) the ability of the US Government to draw upon the Reserve hidden away underground in those salt domes, sourced from a 10% volume levy as a federal extraction tax  (which they collect in physical oil instead of dollars).  

The reference to pricing being manipulated by the Goldman Sachs crowd is prescient; those guys have been known to buy tankerloads of crude and simply park the physical material and pay a demurrage fee, leaving the stuff sitting sometimes for months on end in order to supply physical product at the tail end of a commodity trade with long delivery, upon which they can collect an arbitrage.  If you have the coin and credit to buy and park enough inventory then yes you can drive the price up for the other day traders and clean their clock. This is especially handy for beating the shorts and scalping them. 

And you cannot isolate the price of oil outside of accounting for the commodity traders (and their inventory buys).  It is that part which drives the "random numbers" portion of price moves.  A VLCC  ("very large crude carrier") or "ULCC" ("ultra large crude carrier") can hold two million barrels.  The largest built to date will hold four million barrels.  Your rental fee is probably going to be $50,000/day but with those sizes hey who cares?  If the Goldman speculators can pull say 50 ships off the open market it effectively cuts production by that amount, same as shutting in the wells, and up goes the price. Sell it off for the arbitrage and you have just created price volatility. Remember that the price of the last trade by the most desperate buyer (or from the most desperate seller) pushes all the other trades in that direction, until the production flows again dominate. 

[William Edwards + 708]

15 minutes ago, Jan van Eck said:

I see these terms of "supply " and "demand" and "balance" being tossed around, and I hesitate to barge in, but here goes. 

There is no supply and demand balance; there never will be.  What you have is a Production and Consumption balance.  And that is quite a different animal.  Production will always be very close to consumption; there is a frictional factor in there, the building or drawing down of inventories, and (somewhat hidden) the ability of the US Government to draw upon the Reserve hidden away underground in those salt domes, sourced from a 10% volume levy as a federal extraction tax  (which they collect in physical oil instead of dollars).  

The reference to pricing being manipulated by the Goldman Sachs crowd is prescient; those guys have been known to buy tankerloads of crude and simply park the physical material and pay a demurrage fee, leaving the stuff sitting sometimes for months on end in order to supply physical product at the tail end of a commodity trade with long delivery, upon which they can collect an arbitrage.  If you have the coin and credit to buy and park enough inventory then yes you can drive the price up for the other day traders and clean their clock. This is especially handy for beating the shorts and scalping them. 

And you cannot isolate the price of oil outside of accounting for the commodity traders (and their inventory buys).  It is that part which drives the "random numbers" portion of price moves.  A VLCC  ("very large crude carrier") or "ULCC" ("ultra large crude carrier") can hold two million barrels.  The largest built to date will hold four million barrels.  Your rental fee is probably going to be $50,000/day but with those sizes hey who cares?  If the Goldman speculators can pull say 50 ships off the open market it effectively cuts production by that amount, same as shutting in the wells, and up goes the price. Sell it off for the arbitrage and you have just created price volatility. Remember that the price of the last trade by the most desperate buyer (or from the most desperate seller) pushes all the other trades in that direction, until the production flows again dominate. 

 OK folks. You would be wise to pay attention to what this man says. 

[Dennis Coyne + 82]

Jan and William,

 

You both know more about the oil trade than most of us.  Generally when people say "demand" they mean the quantity of demand at a given price level, I am not sure I see the distinction between that and consumption, likewise oil output (or production) is the same as the quantity of supply.

In the long run these will balance, but in the short term as traders "store" oil whether onshore or on ships (I would think ships would be more expensive) this "supply" that is not consumed becomes inventory.  There are typical levels for oil inventory (usually the 5 year average level is used as a benchmark.) Supply being "short" or "tight" simply means the inventory level is below the 5 year average, these numbers are not very good (as public data), but there may be better proprietary data that oil traders use to gauge oil inventory levels.  Typically the trend in past data is used as an indicator to guess at current inventory levels and the market often gets this wrong, hence volatility results as news gets released over time (political developments also add a lot of volatility).

In the real world there is no demand or supply schedule, this is a theoretical shortcut to describe a complex system, but is close enough for a quick discussion in my view.

It can easily be restated that if in the short term consumption is higher than production (so that inventory levels are decreasing) that oil prices are likely to rise.  There is an exception to this however, in the case when oil inventory is much higher than the 5 year average level, in that case prices might decrease even though consumption is higher than production.  This was likely the reason for a decline in the price of Brent Oil from Jan through June 2017 as oil inventory was far above the 5 year average level in December 2016.  After 5 to 6 months as the market saw oil inventory levels starting to fall, oil prices started to rise for the next 11 months, currently estimates have oil inventory at close to the 5 year average, if production and consumption match fairly closely going forward (oil stocks remain relatively constant) then oil prices may remain about where they are.  On top of this is a bunch of political stuff (Iranian sanctions, Venezuelan turmoil, Libyan civil war, Nigerian and Angolan problems, war in Oman, rebels in Kurdistan, etc) that will also influence the oil price.  These add quite a bit of randomness to the supply/production and demand/consumption fundamentals.

Both of you know all of this, perhaps there are a few who do not.

Edited June 6, 2018 by Dennis Coyne

[Dennis Coyne + 82]

12 minutes ago, Dennis Coyne said:

Jan and William,

 

You both know more about the oil trade than most of us.  Generally when people say "demand" they mean the quantity of demand at a given price level, I am not sure I see the distinction between that and consumption, likewise oil output (or production) is the same as the quantity of supply.

In the long run these will balance, but in the short term as traders "store" oil whether onshore or on ships (I would think ships would be more expensive) this "supply" that is not consumed becomes inventory.  There are typical levels for oil inventory (usually the 5 year average level is used as a benchmark.) Supply being "short" or "tight" simply means the inventory level is below the 5 year average, these numbers are not very good (as public data), but there may be better proprietary data that oil traders use to gauge oil inventory levels.  Typically the trend in past data is used as an indicator to guess at current inventory levels and the market often gets this wrong, hence volatility results as news gets released over time (political developments also add a lot of volatility).

In the real world there is no demand or supply schedule, this is a theoretical shortcut to describe a complex system, but is close enough for a quick discussion in my view.

It can easily be restated that if in the short term consumption is higher than production (so that inventory levels are decreasing) that oil prices are likely to rise.  There is an exception to this however, in the case when oil inventory is much higher than the 5 year average level, in that case prices might decrease even though consumption is higher than production.  This was likely the reason for a decline in the price of Brent Oil from Jan through June 2017 as oil inventory was far above the 5 year average level in December 2016.  After 5 to 6 months as the market saw oil inventory levels starting to fall, oil prices started to rise for the next 11 months, currently estimates have oil inventory at close to the 5 year average, if production and consumption match fairly closely going forward (oil stocks remain relatively constant) then oil prices may remain about where they are.  On top of this is a bunch of political stuff (Iranian sanctions, Venezuelan turmoil, Libyan civil war, Nigerian and Angolan problems, war in Oman, rebels in Kurdistan, etc) that will also influence the oil price.  These add quite a bit of randomness to the supply/production and demand/consumption fundamentals.

Both of you know all of this, perhaps there are a few who do not.

On the Goldman Sachs and other big traders influencing the market.  I would think that there are several of these companies trying to game the market, I would think from a game theory perspective there would be other large players with deep pockets that would be on the other side of some of these trades, wouldn't it be a wash?  Sure I can see some volatility being added as large trades would move the market, but it would really just amount to some random noise unless a bunch of traders acted in concert, which I believe would result in problems with the legal system.

Edited June 6, 2018 by Dennis Coyne

[Jan van Eck + 7,558]

1 minute ago, Dennis Coyne said:

On the Goldman Sachs and other big traders influencing the market.  I would think that there are several of these companies trying to game the market, I would think from a game theory perspective there would be other large players with deep pockets that would be on the other side of some of these trades, wouldn't it be a wash?  Sure I can see some volatility being added as large trades would move the market, but it would really just amount to some random noise unless a bunch of traders acted in concert, which I believe would result in problems with the legal system.

Addressing first your comments on inventory and drawdowns, all that depends on the motives of the guys holding the inventory.  You point out that there are two parties to each futures contract; all true.  So, between those players, it is a zero-sum game.  The problem for the retail buyer, and also the refiner, is that for those guys it is not a zero-sum game. If the price is pushed up because the traders are holding inventory in idled ships, then the ultimate buyers are getting whacked - to the benefit of the traders. And if you buy inventory, sell a futures contract at a higher price, short the same time, then dump the inventory at maturity, push the spot price down, and buy some more at the low spot price to deliver the first trade, you have whacked your buyer.  Back in the Khrushchev days. the Russians pulled this off on the Chicago Merc. First they went in and bought futures contracts at the prevailing lower price. Then they went in and started buying physical inventory, and the word spread like wildfire: "The Russians are buying!"  The futures market took off.  The Russians then sold their contracts at the higher price, and the vigorish (or spread) was enough to cover them for their physical purchases.  In effect, the Russians got millions of tons of grain for free - out of the pants of the speculators on the Merc. 

You cannot seriously suggest that these Goldman guys are not playing that game all day long. Random noise? I wouldn't count on it. Remember that the swings are all done on the margins; the last contract controls the market price.