Oil prices going down

[Dennis Coyne + 82]

4 hours 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,

If one focuses on crude plus condensate (as that is where production may not meet consumption) rather than the all liquids numbers (including NGL and biofuels which are lower energy content barrels and have a very different price from C+C) the consumption of C+C has increased at an average annual rate of 800 kb/d from 1984 to 2017 (EIA monthly World C+C data fitted with a linear trendline), the 1.4 Mb/d consumption increase estimate by the IEA includes NGL and biofuels and may over estimate the C+C production increase needed by 400 to 600 kb/d.  If we look at the period from July 2014 to Feb 2018 using EIA World C+C data production has increased by only 600 kb/d.  A longer 10 year estimate from Jan 2008 to Dec 2017 has an annual increase average trend of 950 kb/d.  I think 800+/-200 kb/d is probably a good estimate for the annual C+C consumption increase.

[Dennis Coyne + 82]

10 minutes ago, Jan van Eck said:

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. 

Jan,

By random noise I am talking about how this influences the market price, no doubt these traders try to out game each other on their trades. For every opportunity to make money on these schemes there are counter trades to try to make money off others in the market.  To those in the physical market who don't care about all the trading they can try to protect themselves with options, but sometimes they shoot themselves in the foot (as in hedges that are below the current market price of oil).  To someone who is not in that game the ups and downs of the market price look rather random, and certainly future price movements can be predicted by no one.

[Dennis Coyne + 82]

1 minute ago, Dennis Coyne said:

Jan,

By random noise I am talking about how this influences the market price, no doubt these traders try to out game each other on their trades. For every opportunity to make money on these schemes there are counter trades to try to make money off others in the market.  To those in the physical market who don't care about all the trading they can try to protect themselves with options, but sometimes they shoot themselves in the foot (as in hedges that are below the current market price of oil).  To someone who is not in that game the ups and downs of the market price look rather random, and certainly future price movements can be predicted by no one.

Yes the last trade controls the price, but nobody knows what the last trade will be or at what price, at any point during a day there are many trades at many different prices.  The closing price its just the last trade.  You put in your bid or ask and the computer matches them up, simple as that and there are millions of these trades.

[Jan van Eck + 7,558]

1 minute ago, Dennis Coyne said:

Jan,

  To someone who is not in that game the ups and downs of the market price look rather random, and certainly future price movements can be predicted by no one.

Yup, all true. And that is why the larger Buyers, the big refineries, try to protect their sourcing by purchasing on longer-term contract.  And that makes the futures traders indispensable. Ultimately you have to hedge or if the price drops like a stone say to $22 and your contracts for delivery in October are at $76, then you will be out of business, because nobody is going to buy your refined product. And those trader guys are constantly gaming the system, to create a rigged trading pit.

[Phil Gustafson + 3]

Rajiv    I agree and my preference is $68-72.  Do you have a range in mind   Phil Gustafson

[Benoit MAI + 4]

Hello I am (brand) new to the forum, and currently suffering from a too ambitious spread trade, I read most of the conversation. I wanted to ask JAN what he meant exactly by "the most desperate buyers" and the relation to the direction of the market. Something I have never been able to get are the formulas that set up the prices for different markets considering the orders.

 

[wellsliq@gmail.com + 1]

This whole oil thing is one big shell game that the players maker money on.  Up today, down tomorrow, up and down up and down

[William Edwards + 708]

4 hours ago, Manfred Kruger said:

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. 

Manfred, when you state "I can tell you without any reservations that historically the Saudis have always gotten their way with oil prices," it is obvious that you do not have an accurate recollection of history, and you either did not read my response to your previous post, or you completely ignored it based upon your confidence derived from your Shell Oil Trading history. While your Shell trading experience is impressive, indeed, I might mention that in the early seventies, when you were learning trading at Shell, I had graduated from oil trading for Esso and was in a private trading company ejoying taking advantage of overconfident traders in the major oil companies. Of course I am sure that you were smarter than those that I took advantage of, even though Shell traders were among my trading participants. Further, you might take into account that while you were honing your skills in Shell, I was consulting for OPEC on the subject of "how to improve prices". You see, I, too, have some trading and pricing experience.

I will remind you of a bit of history regarding the pricing competence of the Saudi ministerial level. In 1985/86 the Saudi Oil Minister took an action that  dropped the price from $30 to $10.  The Saudi king ordered Yamani to get the price back up. A plan for price recovery was presented to OPEC in March 1986. Yamani rejected it. The price remained low. Yamani was fired. Five years later, with the price still below $15, I personally told the then current Saudi Oil Minister, Hisham Nazer, in a private meeting, that there was a way that the price could be improved to the upper twenties level. His sad rejection was "I wish I could believe you!" Five years later he was fired. Five years later the new Saudi minister, Ali al Naimi, came up with a plan to tighten availability and allow prices to rise unhindered. Bolstered by the enthusiasm of the trading community and the media it worked to the point that in 2008 the then king gathered world leaders to discuss how to stop the price rise that had exceeded $125/B. Five years later Al Naimi took actions to regain market share being lost to newcomers (because of the too-high price). He became aggressive on prices. He sought to get prices down to $70 and flush out the the tight oil producers. To his surprise, the price dropped to $30 and flushed out OPEC. Three years later al Naimi was fired and a new minister began a new plan. The jury is out on his results. Wait a couple of years to assess his results.

Does that history support your contention that the Saudis have always gotten their way with oil prices?

[William Edwards + 708]

1 hour ago, Benoit MAI said:

Hello I am (brand) new to the forum, and currently suffering from a too ambitious spread trade, I read most of the conversation. I wanted to ask JAN what he meant exactly by "the most desperate buyers" and the relation to the direction of the market. Something I have never been able to get are the formulas that set up the prices for different markets considering the orders.

 

Once the price moves against you and you get a margin call that you cannot cover you will understand the meaning of "desperate".

[Dennis Coyne + 82]

William,

Thanks for the history lesson.  So from 1998 to 2014, the Saudis more or less dictated prices, is that roughly correct (with the possible exception of 2008)?

[Jan van Eck + 7,558]

54 minutes ago, William Edwards said:

I will remind you of a bit of history regarding the pricing competence of the Saudi ministerial level. In 1985/86 the Saudi Oil Minister took an action that  dropped the price from $30 to $10.  The Saudi king ordered Yamani to get the price back up. A plan for price recovery was presented to OPEC in March 1986. Yamani rejected it. The price remained low. Yamani was fired. Five years later, with the price still below $15, I personally told the then current Saudi Oil Minister, Hisham Nazer, in a private meeting, that there was a way that the price could be improved to the upper twenties level. His sad rejection was "I wish I could believe you!" Five years later he was fired. Five years later the new Saudi minister, Ali al Naimi, came up with a plan to tighten availability and allow prices to rise unhindered. Bolstered by the enthusiasm of the trading community and the media it worked to the point that in 2008 the then king gathered world leaders to discuss how to stop the price rise that had exceeded $125/B. Five years later Al Naimi took actions to regain market share being lost to newcomers (because of the too-high price). He became aggressive on prices. He sought to get prices down to $70 and flush out the the tight oil producers. To his surprise, the price dropped to $30 and flushed out OPEC. Three years later al Naimi was fired and a new minister began a new plan. The jury is out on his results. Wait a couple of years to assess his results.

 

And if you folks think that is way beyond bad, all the way to pathetic, in the performance of those Oil Ministers, I invite you to contemplate the performance records of various Ministers of Finance and Budget Directors in Canada, the USA, and various Provinces and States.  Example: in the Canadian Province of Ontario, the budget directors supposedly had plans for anti-recessionary spending and pro-growth spending.  That crowd ran up a procession of budget deficits running from 11.7 billion to 31 billion, and even bumped up taxes to the point where the industrial crowd fled, and have managed to spend the place into oblivion.  So, after all that, did anybody get fired?  Nope. 

The successor institution to Ontario Hydro, and I think they now brand the corporation as Hydro One, has a president paid six million a year - by the board of directors, not the politicians.  The leading candidate for election as Premier, Doug Ford  (brother of the late Bob Ford, the wacky mayor of Toronto),has made the centerpiece of his campaign that as his first act as premier, he will fire the president - and the Board of Directors.  That is so hugely popular that the trifling fact that the Premier has zero authority to fire the President of Hydro One is ignored by the voters.  But, if the Board is fired and a new, compliant Board is installed, then when they fire the President of Hydro, he gets a ten million dollar Golden Parachute.  So:  who are the lunkheads who designed those contracts and made those pay decisions?  Do they ever get fired?  Nope.

A certain drilling rig blew out in the Gulf,and the damage tab for BP started at $25 Billion.  Did anyone ever get fired for that stunt?  And here we are talking way beyond rank incompetence and arrogant stupidity, we go to a stupefying level of stupidity. Answer:  nope.  Nobody got fired, even for that.  

Give the King (of the House of Saud) some credit:  he actually fired his incompetent dummies.  Didn't help in setting the price of oil, though. 

Edited June 7, 2018 by Jan van Eck

[Wags + 3]

Thanks guys for your amazing insights , great to talk to people with actual in depth knowledge and real experience about the oil industry.

Just one question , what do you think about the prince MBS, he seems to have a closer connection to the US , and has shown he's in control of things but also seems like a bit of a wild card.

[William Edwards + 708]

2 hours ago, Dennis Coyne said:

William,

Thanks for the history lesson.  So from 1998 to 2014, the Saudis more or less dictated prices, is that roughly correct (with the possible exception of 2008)?

I think not. At about the time that the too-low price had run its course, OPEC gave the price a needed boost. Once the trend begun in earnest, there was no stopping it until the system was able to act on the now too-high prices. The Saudis just went along for the ride, for the most part. The downward boost they applied in 2014 simply accelerated a move that was overdue. Not what I would label price dictation by any means.

[Afif + 1]

I am very glad to be accepted in oil price community

[William Edwards + 708]

45 minutes ago, Wags said:

Thanks guys for your amazing insights , great to talk to people with actual in depth knowledge and real experience about the oil industry.

Just one question , what do you think about the prince MBS, he seems to have a closer connection to the US , and has shown he's in control of things but also seems like a bit of a wild card.

A wild card attitude and lack of experience (consequences) seem to go together. I am concerned.

[Jan van Eck + 7,558]

Incompetence, hubris, arrogance, and general stupidity on the part of a cadre of professional bureaucrats numbering thousands is about to get mass fired in spectacular fashion tomorrow afternoon. 

The Province of Ontario is holding an election on the single issue of the management of the Liberal Party of the Province and economy for the past 15 years.  The Liberals today have a super-majority,  56 seats out of 107.  As of tomorrow night, the Liberals will hold one seat. 

The Party is expected to be demolished.  The two competing parties, the Conservatives and the New Democrats, are apparently a nose or less apart at the finish line. If they come in dead even (53 each), which is possible, then the irony is that the utter incompetence of the Liberals will leave them with the coalition seat, and thus still pulling the strings.  Amazing what goes on in the world. 

If the Leftists prevail, even by one seat, then Ontario will end up with a carbon tax, money to be transferred from the voters to the special interest groups at the rate of $10 a ton, rising to $50 a ton.And because electricity is now so incredibly expensive, again due to colossal mismanagement by the Liberal Party, the residents there will have to eat it and become even poorer. And then you can also forget about a pipeline from Alberta heading East. 

[Guest]

So on the front page of the main site the headline article is stating that Venezuela cannot meet its obligations, will be lucky to produce 700k barrels in June, and is basically on the verge of collapse.

What effect is this going to have on prices? We're talking about potentially 2 million barrels off the market, in an already tight market? 

 

[Bharath + 12]

people ignoring electric trucks and buses which uses 30% of fuel. China producing 1 lak electric buses every year and this year india ordered for 3k electric buses . if this trend continues till 2022 almost 6-7 million barrels of oil dont have buyers.

1 diesel truck uses - 250 litres of fuel thats equivalent to 5 barrels of oil per day - 500k electric trucks by 2022 thats equal to 2.5 million barrels of oil will be un-used

1 diesel bus uses - 100 litres of fuel thats equivalet to 2 barrels of oil per day  - 2 million electric buses by 2022 thats equal to 4 million barrels of oil will be not required.

above are just assumptions. But even not taking EV cars into account easily 5-6 million barrels of oil demand can be offset by 2022.

My bet is 5 million barrels of oil demand will be offset by 2022. See this comment in 2022

Oil price in 2022 will be $35 or lower unless there is a geo-political crisis

[William Edwards + 708]

2 minutes ago, Fulcaneli said:

So on the front page of the main site the headline article is stating that Venezuela cannot meet its obligations, will be lucky to produce 700k barrels in June, and is basically on the verge of collapse.

What effect is this going to have on prices? We're talking about potentially 2 million barrels off the market, in an already tight market? 

 

2 Million Barrels a day? Tight market? Possibly an overstatement. The question is valid, however as to how the temporary loss of Venezuelan crude might impact the market. My judgement is that because of the quality of the crude and the spare producing capacity of heavy barrels worldwide, the impact will be muted. At its worst, it might keep things tight in the heavy end of the barrel until the IMO impact kicks in in a year or so.

[Tim Turley + 27]

At 99.7 mbpd global demand, oil has a floor in this current environment of about $65... if the world economy stays on track, and demand increases 1.5% again this year, we'll see $80 by eoy, imo.  The lag  between upstream investment and oil price is about to rear its ugly head just like it does in every cycle.  Shale is only delaying the inevitable spike.

[Billyjack + 58]

Considering that the CME trades 1.2 billion paper barrels per day versus 100 million liquid barrels per day in the world, I'd check with Goldman Sachs concerning what prices will be in an over supply market.

[Dennis Coyne + 82]

9 hours ago, William Edwards said:

I think not. At about the time that the too-low price had run its course, OPEC gave the price a needed boost. Once the trend begun in earnest, there was no stopping it until the system was able to act on the now too-high prices. The Saudis just went along for the ride, for the most part. The downward boost they applied in 2014 simply accelerated a move that was overdue. Not what I would label price dictation by any means.

Ok.  It seems I remember at least one occasion where OPEC acted to reduce output in response to lower prices (in late 2008 I believe).  In addition, if OPEC has the spare capacity claimed, it was always an option to increase output and thereby reduce the oil price level.  By not doing so OPEC was choosing a higher price level, unless one believes that the "spare capacity" claimed by OPEC is overstated and they were producing at very close to full capacity during the period of high prices.

Also note that the thing that stopped the too high prices was the supply response from non-OPEC, primarily an increase in US LTO output of about 4 Mb/d from Jan 2008 to Dec 2014.  OPEC had a clear choice in Nov 2014, reduce output and maximize revenue or fight for market share.  So let's take 32 Mb/d at $50/b or about $1600 million per day of gross revenue and compare with 30 Mb/d at $100/b or $3000 million per day of gross revenue, a loss of $1.4 billion per day in gross revenue for OPEC and about $4 billion per day for all oil producers in the World.

Seems a 2 Mb/d cut in output would have been the smarter choice.  Or maybe just 1 Mb/d would have been enough to keep oil prices at $75/b, instead of dropping to $50/b (Brent average from 2015 to 2017).  

Perhaps you understand their motivations better, having dealt with them personally.  No doubt they underestimated the US LTO.

Another question:  in other comments you seemed to indicate that as the swing producer the Saudis could essentially choose the price they want.

Probably I misread.  Can a swing producer determine the oil price, or at least influence it?  You seemed to say something to that effect at one point, lately you say prices are random and OPEC has little control over prices.

I would say the output decisions of OPEC have a considerable influence on oil prices, would you agree?  For example if OPEC decided to increase or decrease output by 2 Mb/d we would expect to see an effect on the oil price (possibly with a lag of 4 to 6 months as inventory levels adjust).

Edited June 7, 2018 by Dennis Coyne

[Dennis Coyne + 82]

8 hours ago, William Edwards said:

2 Million Barrels a day? Tight market? Possibly an overstatement. The question is valid, however as to how the temporary loss of Venezuelan crude might impact the market. My judgement is that because of the quality of the crude and the spare producing capacity of heavy barrels worldwide, the impact will be muted. At its worst, it might keep things tight in the heavy end of the barrel until the IMO impact kicks in in a year or so.

Hi William,

How much spare capacity for heavy barrels is there in your opinion?

[TomTom + 183]

8 hours ago, Tim Turley said:

At 99.7 mbpd global demand, oil has a floor in this current environment of about $65... if the world economy stays on track, and demand increases 1.5% again this year, we'll see $80 by eoy, imo.  The lag  between upstream investment and oil price is about to rear its ugly head just like it does in every cycle.  Shale is only delaying the inevitable spike.

I think Tim is spot on here, and yes, Venezuela's collapse and structural declines in OPEC countries such as Angola, Algeria and non-OPEC countries such as China and Mexico will definitely keep a floor under oil prices. Unless we see an unprecedented global recession, prices should rise as upstream investment continues to lag.

[William Edwards + 708]

8 hours ago, Tim Turley said:

At 99.7 mbpd global demand, oil has a floor in this current environment of about $65... if the world economy stays on track, and demand increases 1.5% again this year, we'll see $80 by eoy, imo.  The lag  between upstream investment and oil price is about to rear its ugly head just like it does in every cycle.  Shale is only delaying the inevitable spike.

We would all appreciate seeing your correlation of historical demand versus price. BP's 50 year data do not show such.