Oil prices going down

[William Edwards + 708]

3 minutes ago, Jan van Eck said:

Product substitution, including methanol, ethanol, wood and grass biomass, remain the major threats to the traditional oil producers. 

I am of the thinking that at some point The Donald simply says to the Middle East:  "We have had quite enough of this, from here on in you guys are shut out of our market." Meanwhile I predict that Russia will install a gas pipeline to China overland, and the Chinese will use gas as a feedstock to produce methanol as a drop-in fuel. 

And don't forget that a breakthrough on energy retrieval from magnetic fields, nuclear fusion, or some other exotic discovery will also work to make fossil fuels no longer the prime fuel choice. But we probably won't live long enough to say "I told you so!"

[Jan van Eck + 7,558]

2 minutes ago, William Edwards said:

And don't forget that a breakthrough on energy retrieval from magnetic fields, nuclear fusion, or some other exotic discovery will also work to make fossil fuels no longer the prime fuel choice. But we probably won't live long enough to say "I told you so!"

You will see vast quantities of methanol produced by mature technology from natural gas for fuel for large freighters, it is a drop-in fuel for those engines. This assumes that the International Maritime Organization (IMO) sticks to its guns and insists that LSFO be required -which cannot be realistically produced in volumes for the world shipping fleet.  The idea that these guys are going to shift over to light diesel as a substitute is not realistic, they don't have the money for that.  

Once methanol is being generated in large quantities, it will be fast into the retail consumer marketplace.  That is inexorable.  That happens within a year, so figure 2021 and methanol starts to seriously crowd pumped oil.  There's lots of gas out there looking for a home. 

[William Edwards + 708]

43 minutes ago, Jan van Eck said:

You will see vast quantities of methanol produced by mature technology from natural gas for fuel for large freighters, it is a drop-in fuel for those engines. This assumes that the International Maritime Organization (IMO) sticks to its guns and insists that LSFO be required -which cannot be realistically produced in volumes for the world shipping fleet.  The idea that these guys are going to shift over to light diesel as a substitute is not realistic, they don't have the money for that.  

Once methanol is being generated in large quantities, it will be fast into the retail consumer marketplace.  That is inexorable.  That happens within a year, so figure 2021 and methanol starts to seriously crowd pumped oil.  There's lots of gas out there looking for a home. 

Do you have any ballpark numbers on the cost per BTU of methane converted to methanol to compare with the cost of BTU's in heavy resid from petroleum? That would seem to be a key factor in whether large methanol substitution in ships can occur. I am aware of technology that can allow removal of the sulfur from the heavy fraction of most of the world's crudes at a relatively low cost. If ship owners were offered 0.5% S heavy fuel at a cost less than crude, how would methanol stack up?

[Jan van Eck + 7,558]

7 minutes ago, William Edwards said:

 how would methanol stack up?

William, all depends on the cost of the feedstock  (the natural gas).  

Will mass conversion of gas to methanol drive up the price of natural gas?  Sure. 

Will it drive up the price to the point where the conversion of residual oil remains cheaper?  Dunno.

But I think the IMO standard being bandied about is 0.1%. not 0.5%.  And that is a toughie. Does anybody reading have these numbers?  If so, please chime in. 

PS: but here's the thing: the intro of lots of methanol (and alcohol) into the market is also going to start displacing gasoline.   And meanwhile battery autos (hybrids) are gong to come into the market with a vengeance.  So you have lots and lots of displacement of oil being threatened. Producer's nightmare:  product substitution. Once it happens, that market is gone forever. The oil guys don't get it back. 

Edited June 17, 2018 by Jan van Eck

[William Edwards + 708]

Just now, Jan van Eck said:

William, all depends on the cost of the feedstock  (the natural gas).  

Will mass conversion of gas to methanol drive up the price of gas?  Sure. 

Will it drive up the price to the point where the conversion of residual oil remains cheaper?  Dunno.

But I think the IMO standard being bandied about is 0.1%. not 0.5%.  And that is a toughie. Does anybody reading have these numbers?  If so, please chime in. 

I haven't seen the 0.1% number for general international bunkers, b[just close in stuff. The world has enough of a challenge to deal with the upcoming 0.5% spec that I suspect ten or twenty years will be required to digest that change. After all, the real problem is disposing of the bottom part of 10 million barrels a day of high sulfur production. Relative to that disposal problem finding the substitute fuel is a minor challenge. My proposed solution works both problems, simultaneously, and at an attractive cost.

For a peek into the challenging future, try to answer the question of how low the price will drop as the producers fight to avoid shutting in their high sulfur, heavy crude production, which will be shut in anyway? This is the factor that I believe will give us $20 crude in 2020.

[Jan van Eck + 7,558]

2 minutes ago, William Edwards said:

try to answer the question of how low the price will drop as the producers fight to avoid shutting in their high sulfur, heavy crude production, which will be shut in anyway? This is the factor that I believe will give us $20 crude in 2020.

Figure on five bucks.

[William Edwards + 708]

18 minutes ago, Jan van Eck said:

Figure on five bucks.

Per barrel of per MMBTU? Heavy, high sulfur crude or light sweet?

[Jan van Eck + 7,558]

44 minutes ago, William Edwards said:

Per barrel of per MMBTU? Heavy, high sulfur crude or light sweet?

Sorry, I was not clear.  I figure five bucks for the heavy stuff that nobody really wants.  You could presumably still make asphalt out of it, assuming you do not flood that market to oblivion.  As far as regular crude oil, yup you are probably as close as anybody.  I would have thought a few bucks more,  but hey, I am guessing. Maybe $22-$28?  In any event, it is more likely to go rocketing down than up! Cheers. 

Edited June 17, 2018 by Jan van Eck
typing error

[William Edwards + 708]

1 minute ago, Jan van Eck said:

Sorry, I was not clear.  I figure five bucks for the heavy stuff that nobody really wants.  You could presumably still make asphalt out of it, assuming you do not flood that market to oblivion.  As far as regular crude oil, yup you are probably as close as anybody.  I would have thought a few bucks more,  but hey, I am guessing. Maybe $22-$28?  In any event, kit is more likely to go rocketing down that up! Cheers. 

We remain on the same page.

[Dale.Nadasen 0]

How do you calculate the Dubai/Oman average? Which indexes and codes are used? I can't seem to find the Oman Oil price ad published by the country of Oman

[Dan Warnick + 6,100]

Thanks William and Jan, for sharing a very interesting and insightful discussion.

[William Edwards + 708]

1 minute ago, Dan Warnick said:

Thanks William and Jan, for sharing a very interesting and insightful discussion.

As you well know, Jan’s comments always have substance and interest.

[BillKidd + 139]

Yes, this thread is very interesting with all of the expert info from everyone.  I sure wish I had a crystal ball.

[William Edwards + 708]

Just now, BillKidd said:

Yes, this thread is very interesting with all of the expert info from everyone.  I sure wish I had a crystal ball.

When you find that good clear ball with a good clear readings, please share them with us.

[ronwagn + 6,290]

To Jan van Eck: Do you have any information that natural gas to methanol would be price competitive. A few years ago there was big talk about natural gas to gasoline and there may still be a Shell facility in the Middle East that is doing this. It was discussed for the Southeast USA back then. 

See https://arpa-e.energy.gov/?q=slick-sheet-project/efficient-natural-gas-methanol-conversion

I personally prefer compressed or liquified natural gas as transportation fuel, heating, and electrical generation, fertilizer etc. 

Edited June 17, 2018 by ronwagn
added reference

[Jan van Eck + 7,558]

Ron, it would depend on the configuration of the engine it is going to run in. 

Where methanol gets interesting is in the big problem being faced by the large motorship industry.  Those boats, which have engines up into the tens of thousands of horsepower, are designed to run on Bunker, or what is known as IFO 180 or HFO 380 residual oil. They are being forced to go to ULSFO, and to run on straight distillate (diesel) would be ruinously expensive, especially if they all attempt to do that, because of the crowding-out factor. The big prohibition, thus change, hits in 2020.  Nobody is ready, so it is either methanol or bust.  To change over such an engine to methanol requires a few rebuilding steps.  The heads have to be removed and replaced.  Fortunately those big engines all have individual cylinder heads, so it is not the end of the world.  The technical reason for the replacement is that a diesel engine fires on compression, not spark, so the replacement head has a special port for injecting a tiny squirt of regular diesel, just enough to set off the fire, and simultaneously a big shot of the methanol is injected to generate the power stroke.  To do that you also have to rebuild the fuel injector system, including new fuel injectors  (two sets, one for the charge diesel and one for the methanol). And you have to change over some plumbing. Skilled mechanics can do all this rather fast.  Once you get it sorted out, then you can directly fill the old bunker tanks with methanol, hence the term "drop-in fuel."

Now if you want to expand the market for that methanol and include gasoline engines, then methanol has a similar structure to ethanol, and you should be able to get it to burn in there.  However, due to the short-chain molecule, you likely have to get it started up on regular gas, then switch over, unless you are running some blend. To pull maximum power out of the methanol you need a higher compression ratio, something at or over 16:1, where your typical auto engine running on "regular" or 87 octane may be at 8.2:1  So if you run it straight into that same engine, you lose some of the fuel potential, and thus get less miles per gallon. 

Assuming you can survive that drop, then what makes it competitive is the price of the natural gas.  As long as that is cheap enough, any alcohol will compete just fine; look at Brasil (although in that case the stuff is made by fermentation of sugars).  Still, same principle: the feedstock costs will determine the competitiveness of the end product.  Methanol and alcohol (ethanol) have the advantage of being a liquid fuel, so you can use the same station tanks, pumps, filling hoses and so forth that is currently used for gasoline.  The conversion I recall works by passing the gas over steam, some rather simple process, I don't anticipate that that is costly even on a smaller scale.  In any event that technology is mature and well understood  (OK, not by me, but still...). 

[Jan van Eck + 7,558]

5 hours ago, William Edwards said:

As you well know, Jan’s comments always have substance and interest.

As long as nobody starts using these speculations as the foundation for investment decisions!  Horrors! Remember, I am just some opinionated old guy with a typewriter.  It's a crazy world out there.  

[Doyle Johnson + 14]

Who has the TRUE global storage, daily production, daily demand number? It would seem to me that the price of oil would come down to these 3 numbers and the willingness to restrict production.

Doyle Johnson, Texas

[sudhir + 9]

13 hours ago, William Edwards said:

For your convenience, Sudhir, I will repeat the answer to your question as that answer appeared in the post "Price Determines Demand (and Supply)".

This then leaves us with the question ”If demand does not set the price, what does?” The uncomfortable, but accurate answer is “Price is an independent variable which is set by the marginal producer.” Whether that marginal producer sets the price overtly or by acquiescence, that is still the price setting mechanism.

In today’s world, the marginal producer is Saudi Arabia. The floor price of crude is the price that the Saudis  are willing to accept for their  sales. If they accept the futures price, then that will be the price of oil. If they, instead, select a number — any number — and abide by it, then that will be the price of oil. The real takeaway from this situation is that if producers around the world want a good price for their production, they will do whatever is necessary to convince Saudi Arabia to set a good price and stick with it. Non-Saudi producers should beg, plead, negotiate, educate, cooperate or anything else that convinces Saudi Arabia to set a desirable price. Incidentally, production level is not a meaningful tool as it is determined by demand and needs no management. Production level will take care of itself.

Thanks for the answer William. While i am convinced that producers like Saudi Arabia sets the prices but i doubt that they have a free will. Recent example , they tried to kill the US shale competition and didn't lower their daily production. The prices kept on falling. This took  a toll on their balance sheets as in 2-3 years Saudis were thinking of how to remove dependence from oil. Saudi people , for the first time , were forced to accept the fact that they will not remain wealthy as before. However , that changed in 2017 as prices soared (i am still trying to make out the actual reason of price increase , China on recovery ?) . So , when prices increased ( and kept on increasing) , the buyers yelled. Now we see Russia and Saudi talking about increasing the output. So there seems to be a two way mechanism which determines the price of oil. 

[William Edwards + 708]

2 hours ago, Jan van Eck said:

As long as nobody starts using these speculations as the foundation for investment decisions!  Horrors! Remember, I am just some opinionated old guy with a typewriter.  It's a crazy world out there.  

I would think that your views are of a much higher quality than most investment advisors.

[William Edwards + 708]

5 minutes ago, sudhir said:

Thanks for the answer William. While i am convinced that producers like Saudi Arabia sets the prices but i doubt that they have a free will. Recent example , they tried to kill the US shale competition and didn't lower their daily production. The prices kept on falling. This took  a toll on their balance sheets as in 2-3 years Saudis were thinking of how to remove dependence from oil. Saudi people , for the first time , were forced to accept the fact that they will not remain wealthy as before. However , that changed in 2017 as prices soared (i am still trying to make out the actual reason of price increase , China on recovery ?) . So , when prices increased ( and kept on increasing) , the buyers yelled. Now we see Russia and Saudi talking about increasing the output. So there seems to be a two way mechanism which determines the price of oil. 

The problem with your understanding, Sudhir, is that you have in mind an incorrect idea of the pricing mechanism. Your believe that the price is determined by oil business activity. That may seem reasonable, but it is not correct. The price of oil is set by the actions of the speculative futures trading activity. Therefore if you wish to try to understand why prices have moved in a certain manner, you need to look at what was transpiring in the futures trading world. If the charts tell the majority of the traders to go long, the price will rise until the group changes its composite mind. And since futures traders know nothing about real oil facts, and care less, it is not surprising that there is no apparent correlation between real oil factors and the price movements.

Oil is one commodity with its own unique characteristics. Oil futures contracts is another distinctly different commodity with its own unique characteristics. The connection between the two is only the fact that name on the futures contracts is "oil" and the real oil buyers and sellers adopt the futures traders' prices as their transaction numbers. Thus real oil prices perform based upon the fundamental characteristics of futures contract trading, not real oil market trading.

The real oil world counts for something, but not for short term price fluctuations. Over time the real oil fundamentals will provide pricing guidelines to the trading price, but slowly and gently over long time spans. Fundamental factors for real oil provide guidance on trends more than actual prices. Futures prices determine the day-to-day prices.

[William Edwards + 708]

2 hours ago, Doyle Johnson said:

Who has the TRUE global storage, daily production, daily demand number? It would seem to me that the price of oil would come down to these 3 numbers and the willingness to restrict production.

Doyle Johnson, Texas

"True" global storage numbers are not available and will never be. They are never completely tabulated or reported. But that is OK. They have always shown "enough" availability, with some spare tankage capacity.

Daily production numbers are not tabulated, and probably never will be. Monthly numbers, as country composites, are reported by OPEC each month with only a 10 day delay. Pretty good.

Demand number estimates are reported two to three years after the fact. A better source for demand numbers is OPEC's monthly report of "Global Supply". That number is pretty good for supply since supply must equal consumption, common thought of as demand.

Now, since you have been informed that the numbers you wish to use to guide prices do not exist, do you have another idea?

[Doyle Johnson + 14]

Thanks Bill, I appreciate your experience and insight . I have done well in energy since mid 2016, but I keep looking for the holy grail  of understanding, hard to come by, will keep a closer eye on the OPEC data. I made a bet last week and sold a put on USO strike $12.50 collected 0.62 premium, break even $11.88, expiry Jan 18,2019.  Down now, but I think it will go back up after the June 22 OPEC BS has settled and production remains mostly restricted.    

Doyle Johnson, Texas

Edited June 18, 2018 by Doyle Johnson

[Dan Warnick + 6,100]

9 hours ago, William Edwards said:

I would think that your views are of a much higher quality than most investment advisors.

You think?!?!  LOL!  They only know how to sell snake oil.  All you need to do is read the headlines each day: one headline will say oil is set to soar for abc reason and the next one will say oil is set to fall based on xyz reason.  At least Jan, and some other honest people, tell it like it is and not how they would like it to be (or whatever the boss says to pump out there today).

[Dan Warnick + 6,100]

9 hours ago, William Edwards said:

The problem with your understanding, Sudhir, is that you have in mind an incorrect idea of the pricing mechanism. Your believe that the price is determined by oil business activity. That may seem reasonable, but it is not correct. The price of oil is set by the actions of the speculative futures trading activity. Therefore if you wish to try to understand why prices have moved in a certain manner, you need to look at what was transpiring in the futures trading world. If the charts tell the majority of the traders to go long, the price will rise until the group changes its composite mind. And since futures traders know nothing about real oil facts, and care less, it is not surprising that there is no apparent correlation between real oil factors and the price movements.

Oil is one commodity with its own unique characteristics. Oil futures contracts is another distinctly different commodity with its own unique characteristics. The connection between the two is only the fact that name on the futures contracts is "oil" and the real oil buyers and sellers adopt the futures traders' prices as their transaction numbers. Thus real oil prices perform based upon the fundamental characteristics of futures contract trading, not real oil market trading.

The real oil world counts for something, but not for short term price fluctuations. Over time the real oil fundamentals will provide pricing guidelines to the trading price, but slowly and gently over long time spans. Fundamental factors for real oil provide guidance on trends more than actual prices. Futures prices determine the day-to-day prices.

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?