‘Lower for longer’ for the oil price is just taking a pause

(edited)

Something that we all were discussing in another thread of mine ("Oil prices going down") last week. This piece is quite insightful. @William Edwards and @Jan van Eck it iterates what you gentlemen were saying the other day! Lower for longer is just taking a break. . . . Indeed it is!

https://www.ft.com/content/ebc6ce3a-6a45-11e8-8cf3-0c230fa67aec

Edited by Osama
Typing error

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Few interesting takeouts:

In the long term, the race to produce the most competitive barrel will be central to understanding how oil prices will trend and our analysis suggests a return in prices to the low $50s once Opec, shale producers and major international oil companies start to fight for a greater share of the world’s oil demand.


Oil-rich nations with huge reserves and very low extraction costs, including many Opec members, have historically possessed some of the highest fiscal burdens, using oil revenues to prop up generous social programmes and low-tax regimes. This has typically meant they were more reluctant to pump oil at full potential for fear of a negative impact on price, which would be detrimental to their fragile socio-economic structures. But with a new-found belief that oil demand could peak within their lifetimes, the leaders of GCC countries are unlikely to relapse into the previous patterns of behaviour that a rally in oil prices normal provokes.

Technological changes are making this a possibility. As Big Oil embraces Big Data we shouldn’t underestimate the potential to produce more for less. Technological change including AI, Big Data and Digitisation has only scratched the surface of what they can bring to capital efficiency in the oil industry. These are not new concepts but it needed an oil price collapse to drive change. Already the biggest oil companies have been able to slow decline rates at their largest producing fields, down to 2-3 per cent annually from what many forecasters had assumed would be 7-8 per cent by now.

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1 hour ago, Osama said:

Something that we all were discussing in another thread of mine ("Oil prices going down") last week. This piece is quite insightful. @William Edwards and @Jan van Eck it iterates what you gentlemen were saying the other day! Lower for longer is just taking a break. . . . Indeed it is!

https://www.ft.com/content/ebc6ce3a-6a45-11e8-8cf3-0c230fa67aec

I hit a paywall.

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2 hours ago, William Edwards said:

I hit a paywall.

You can bypass the paywall by doing a Google search for the article title:

‘Lower for longer’ for the oil price is just taking a pause

FT is one of the sites that will usually lower their paywall if you find the article via Google Search, but keeps the paywall block if you try to access the article via social media.

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Tellingly, the break-even price for both international oil companies and Opec is declining. For Opec members we see the oil price they need to meet budgetary needs falling from the mid-$60s this year to the low $50s in 2020. 

^ this generally supports my opinion that $65 oil is a "reasonable" Goldilocks price.  Others may argue $70 to $80 is reasonable.

My hope for an average of $65 oil this year is based on my best guestimate that $65 is not too high to kill off global economies, and not too low to hurt oil producers.  A balance.

Are you tired of hearing my same comment over and over again?  Already know what my comment will say?  Good.  Then I've managed to get you to at least recognize and be familiar with my opinion, even if you don't agree.

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7 hours ago, Tom Kirkman said:

Tellingly, the break-even price for both international oil companies and Opec is declining. For Opec members we see the oil price they need to meet budgetary needs falling from the mid-$60s this year to the low $50s in 2020. 

^ this generally supports my opinion that $65 oil is a "reasonable" Goldilocks price.  Others may argue $70 to $80 is reasonable.

My hope for an average of $65 oil this year is based on my best guestimate that $65 is not too high to kill off global economies, and not too low to hurt oil producers.  A balance.

Are you tired of hearing my same comment over and over again?  Already know what my comment will say?  Good.  Then I've managed to get you to at least recognize and be familiar with my opinion, even if you don't agree.

Indeed!! There was another article in FT that showed how higher oil prices have already started to dent demand in Euro Zone. The recent recovery there was in fact only possible, inter alia, due to the fall in oil prices.

 

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I would be interested where the author of the report this article is referring to got his lower costs for oil production. I am sure that technology can make some cost lower but costs in general have lowered substantially due to the fact there was no work for many people and suppliers in the oil industry so they have accepted low rates just to keep a cash flow even if they are losing money in the case of some suppliers of equipment and services. This is not a sustainable model going forward people will leave the industry and suppliers will go bankrupt. The example of the shalers is that the low cost production they claimed is now going up due to the fact they cannot find people to work on their fields or suppliers with rigs to supply them as many were decommissioned during the low prices of the last few years. In addition parts are going up in price due to many companies chasing the same vendors for them.
I have first hand knowledge of this as I have worked in oil all my life and regularly change job and country due to the fluctuation in oil prices. I suspect the report's writer is taking an accountant's view of costs that costs will remain fixed rather than realise if you keep prices down you actually destroy the infrastructure that produces the oil thus sowing the seeds for a massive rise in costs when people and suppliers become rare. Oil lower for longer does not work as production will fall as there is not enough actual low cost fields to supply world demand. Companies and individuals will suffer a short term downturn of a couple of years or so as we have all been through the cycle before but if it goes on longer there will be nobody to do the work as I and many others will leave the industry and suppliers will go bust. Oil requires trained individuals and high cost specialist equipment to be produced that will not change if anyone thinks it will they have not worked at the sharp end and seen the standards we have to work to.

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(edited)

15 hours ago, Tom Kirkman said:

You can bypass the paywall by doing a Google search for the article title:

‘Lower for longer’ for the oil price is just taking a pause

FT is one of the sites that will usually lower their paywall if you find the article via Google Search, but keeps the paywall block if you try to access the article via social media.

Thanks, Tom.

After reading the article I agree with the author's thrust. Al Naimi's stated reason for the aggressive stance of Saudi Arabia in 2014 was precisely what Ms Malek reported -- the fear of stranded reserves after oil demand had been replaced. The current prince may be more short-term oriented and the emphasis in Saudi Arabia may be diverted to high prices for a time, but the will of the entirety of the "large reserve" producers will eventually push them into a competitive stance. After all, it is the competitive pricing action that sets the price, not producing costs.

And my reading of historical, inflation-adjusted prices suggests a range near $40, not $65 -- for what that is worth.

Edited by William Edwards
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A return to 'lower for longer' seems unlikely. America is in denial that the age of cheap petroleum and the V8  are over.  There is plenty of oil out there we are just running out of cheap oil.

There’s no doubt that ECoEs (energy cost of energy)   are rising fast . Reported costs are often only operating expenses, not capital costs. Decline rates on some wells can be reduced by investment, but that cost needs to be taken into account. Annual decline rates on shales are enormous. Shale oil requires a constant 'drilling treadmill' that requires huge capital investment, low interest rates ? and high oil prices to be sustainable.

The amount of oil discovered annually has plunged to an all-time low. Technology is limited to the physical envelope of the resource being accessed, something very widely overlooked. Saudi water injection is huge, itself evidence of the ageing of much of the Saudi resource base.

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The fundamentals are strong..that's not to say the US won't try to manipulate the oil price downwards for short term electoral advantage only for it to spring back up again. Saddam Hussein might well have been toppled   because he wanted to trade oil in euros instead of dollars thus weakening the sacred 'petro prop'.

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Saudis will push for high prices at least until the Aramco IPO in 2019.  But what  next ? Will they lower the price in 2020 to please the US consumers and help Trump for the reelection campaign ?

And did the US administration really want a lower oil price that could kill the shale producers ?

 

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4 hours ago, Guillaume Albasini said:

Saudis will push for high prices at least until the Aramco IPO in 2019.  But what  next ? Will they lower the price in 2020 to please the US consumers and help Trump for the reelection campaign ?

And did the US administration really want a lower oil price that could kill the shale producers ?

 

Points to ponder, indeed!

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Perhaps the Saudis don't have as much spare capacity as we are led to believe and even if they do it will just get eaten up by rising demand?.  We know that the energy cost of energy is on a rising trajectory - it's hard to see how the market could sustain low prices with that headwind. ECOE has doubled since the last oil spike in 2007....

ecoe.png

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There are some that argue that there will soon be a period of perceived oil abundance as EVs and renewables ramp up.  Eventually this may be the case, but I expect it will be around 2040 before we arrive at that point.

I am skeptical the $65/b in 2017$ will result in an incentive to invest in deep water offshore projects and for OPEC to increase their output capacity.  The claim that US tight oil producers "break even" at $65/b is only true if there is adequate pipeline capacity to keep transport costs in the Permian basin near $4/b.  The average 2016 Permian oil well has an average "break even price" (NPV of DCF=zero at an annual real discount rate of 7%) of about $65/b, if we assume a $4/b transport cost and a full well cost of $9.5 million.  Note that until the pipeline constraints in the Permian basin are removed, the marginal Permian barrel (that needs to use rail or truck which increases transport cost to $10/b for rail and $15/b for truck) will increase the short term break even price for marginal producers (who do not have pipeline capacity locked up) to $71/b for rail and $76/b for truck due to the higher cost of transporting the crude to the refinery.

I also remain skeptical that many OPEC producers will be able to live with $65/b oil as the oil price needed to balance their social budgets is more like $75 to $80/b in the near term.  When OPEC expands it's output capacity or World demand for petroleum stops growing, we may see $65/b oil or even $40/b oil as William Edwards predicts.  At that point oil will be on its way out as the primary energy source for land transport and will mostly be used on sea or for air transport and might be suppled primarily by OPEC and Russia as higher cost oil will be left in the ground.

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