OPEC Cuts Deep to Save Cartel

[Auson + 123]

4 hours ago, Jan van Eck said:

Tankers used in floating storage are never started up and taken out for a run.  There are no crews on board. 

Old tankers designated for scrapping are typically used for floating storage by speculators. 

The industry does not use floating storage, the practice is to build tanks on land.  Part of the reason is liability insurance costs, or even availability.  If a tank leaks, it is controlled by a containment dike.  If some floating tanker leaks or sinks, it becomes a huge, gigantic cost. Nobody wants to write that insurance policy. 

Jan van Eck,

Thanks again for you lengthy and detailed reply. 

Here is one of the old articles I mentioned previously hence my questioning.

https://www.reuters.com/article/us-oil-tankers-storage/oil-traders-to-store-millions-of-barrels-at-sea-as-prices-slump-idUSKBN0KM23K20150113

[Tom Kirkman + 8,860]

23 minutes ago, William Edwards said:

Regarding whether $40 is a sustainable price, Tom, may I suggest that you look at the data that give me encouragement that that level will work. That data display is the constant-dollar oil price history that BP publishes each year. Just do the average for the past 160 years.

To further support my assessment, please keep in mind that, for at least 75 years, additional production capacity in the Middle East has remained off the shelf, even with a producing cost of $5/B, while other more expensive production helped fill the demand. Now imagine a world where demand fails to satisfy the wishes of all the successful oil-finding activity, electric cars come in and the Middle East begins losing market share and incurring huge spare capacity numbers. $40 in today's dollars will seem to be merely a wonderful dream.

Heh heh, William, I was going to put $20 instead of $40... but figured it would just confuse lurkers who are used to seeing me spout off about $65 oil.  And my views about a "relative balance" between oil producers and oil consumers.

Any chance you can repost your old Oilpro article from around 2014 / 2015 where you warned that oil may fall to $20.  It was very instructive, and I recall the comments got pretty heated, but you stood your ground well on your logic.

If you still have a copy of it, maybe repost it here as a new thread.  I did something similar here with one of my old Oilpro articles.

[William Edwards + 708]

6 minutes ago, William Edwards said:

Regarding whether $40 is a sustainable pi[rice, Tom, may I suggest that you look at the data that give me encouragement that that level will work. That data display is the constant-dollar oil price history that BP publishes each year. Just do the average for the past 160 years.

To further support my assessment, please keep in mind that, for at least 75 years, additional production capacity in the Middle East has remained off the shelf, even with a producing cost of $5/B, while other more expensive production helped fill the demand. Now imagine a world where demand fails to satisfy the wishes of all the successful oil-finding activity, electric cars come in and the Middle East begins losing market share and incurring huge spare capacity numbers. $40 in today's dollars will seem to be merely a wonderful dream.

May I add one further observation, Tom, regarding your $60-65 price hope. The data show that the price of oil has been above $40, not $60, on a year average basis and in today's money, for only three decades since 1860. The first was during the Civil War, the second in the 1980's and the third the recent 2005-15 period. The fact that 2018 makes it to the $65 threshold has created unbelievable optimism, suggesting that we can forget the first 150 years of history. I am not similarly persuaded. 

[William Edwards + 708]

7 minutes ago, Tom Kirkman said:

Heh heh, William, I was going to put $20 instead of $40... but figured it would just confuse lurkers who are used to seeing me spout off about $65 oil.  And my views about a "relative balance" between oil producers and oil consumers.

Any chance you can repost your old Oilpro article from around 2014 / 2015 where you warned that oil may fall to $20.  It was very instructive, and I recall the comments got pretty heated, but you stood your ground well on your logic.

If you still have a copy of it, maybe repost it here as a new thread.  I did something similar here with one of my old Oilpro articles.

Here it is Tom. Post it if you can. Is $20 Oil Possible? - Oilpro.pdf

Let me know of the link doesn't work.

[Tom Kirkman + 8,860]

2 minutes ago, William Edwards said:

Here it is Tom. Post it if you can. Is $20 Oil Possible? - Oilpro.pdf

Let me know of the link doesn't work.

Thanks, that's the one.  And it includes the comments, too

[William Edwards + 708]

4 minutes ago, Tom Kirkman said:

Thanks, that's the one.  And it includes the comments, too

I particularly appreciated the comment by Joseph Triepke, a top editor, where he said 

Joseph Triepke · 1y ago · Reply · Like · ! 2
Excellent analysis, Bill. Your well reasoned case for oil prices falling first outlined on Oilpro several months ago has turned out to be spot on so far. I've got to hand it to you for having the gumption to make the call you did when you did - at the time, very few folks were calling for materially lower oil prices, and even fewer had a sound case supporting their view. While your prediction made many uncomfortable at the time (myself admittedly included), those who listened have been better informed and better able to plan for and react to the conditions facing the industry now. Well done.

[Illurion + 894]

56 minutes ago, Tom Kirkman said:

$20 to $40 oil should scare the bejeezus out of you.  Absurdly, excessively low oil prices can cause global havoc in much the same way that absurdly, excessively high oil prices can.

My own favored economic balance between oil producers and oil consumers for this year was $65 [Brent].  My ad nauseum comments about this are easy enough to find on this forum.  And my hope for $65 oil this year seems to be pretty close.

My own favored *hope* for 2019 is $70 [Brent] and $65 [WTI].

In my opinion, that should be a relative balance, neither too high nor too low.

If recall correctly, William suspects that oil should be heading back down to more historical levels of around $40.  (Please note I'm not trying to speak on behalf of William.)

I tend to view $40 oil as unsustainable, as oil companies will not be able to re-invest profits back into new exploration activities.  But I can't control the zero sum game of oil traders.

I have no idea what is sustainable over time.

i just know what i would "prefer" to pay,  and what i believe is a "fair" price.

 

In the 1970's,  i used to pay 17 cents per gallon up until the creation of OPEC,  and the embargo.

From the late 1970's to approximately 2008,   the price of gasoline pretty much fluctuated between $1.40 to $1.70 per gallon.

 

When George W. Bush left office,  the price of gasoline was around $1.68 per gallon.

I would like to RETURN TO THAT PRICE.

 

Given that the current $50 per barrel seems to equal about $1.98 at the pump,   i would estimate that about $45 per barrel would return us to the $1.68 per gallon that the MARKETS HAD HELD AS SUSTAINABLE FOR OVER 25 YEARS.

I believe the savings generated by our new production technologies should equal any "inflationary" increase.

So,  i see no reason why we cannot maintain a sustainable market price of $45 per barrel.

[Tom Kirkman + 8,860]

4 minutes ago, Illurion said:

So,  i see no reason why we cannot maintain a sustainable market price of $45 per barrel.

We seem to be pretty much on the same page.  The only difference is in our differing opinions on a sustainable price.  

While you view $45 as sustainable, I view $65 to $70 as sustainable.  And I cannot offer solid justifications for my opinions and hopes about $65 to $70 being a relatively sustainable oil price.  Because it is only my opinion.

I view $100 oil as unsustainably too high.  And similarly view $20 oil as unsustainably too low.  Again, just my opinion.

[Tom Kirkman + 8,860]

23 minutes ago, William Edwards said:

I particularly appreciated the comment by Joseph Triepke, a top editor, where he said 

Joseph Triepke · 1y ago · Reply · Like · ! 2
Excellent analysis, Bill. Your well reasoned case for oil prices falling first outlined on Oilpro several months ago has turned out to be spot on so far. I've got to hand it to you for having the gumption to make the call you did when you did - at the time, very few folks were calling for materially lower oil prices, and even fewer had a sound case supporting their view. While your prediction made many uncomfortable at the time (myself admittedly included), those who listened have been better informed and better able to plan for and react to the conditions facing the industry now. Well done.

Yes, I remember that thread, and I remember Joseph making that comment.  He was correct.  Your logic was sound.

[William Edwards + 708]

11 minutes ago, Illurion said:

I have no idea what is sustainable over time.

i just know what i would "prefer" to pay,  and what i believe is a "fair" price.

 

In the 1970's,  i used to pay 17 cents per gallon up until the creation of OPEC,  and the embargo.

From the late 1970's to approximately 2008,   the price of gasoline pretty much fluctuated between $1.40 to $1.70 per gallon.

 

When George W. Bush left office,  the price of gasoline was around $1.68 per gallon.

I would like to RETURN TO THAT PRICE.

 

Given that the current $50 per barrel seems to equal about $1.98 at the pump,   i would estimate that about $45 per barrel would return us to the $1.68 per gallon that the MARKETS HAD HELD AS SUSTAINABLE FOR OVER 25 YEARS.

I believe the savings generated by our new production technologies should equal any "inflationary" increase.

So,  i see no reason why we cannot maintain a sustainable market price of $45 per barrel.

I agree that $45 is a first approximation of a sustainable price. Now, how do we arrange for the price to stay at $45 long enough for the supply and consumption to reach equilibrium at that price? I know how to do it, but currently I do not possess the influence needed to arrange implementation. So we are left guessing. My guess is that $65 is too high. According to the numbers that I see, a price at that level would bring out too much supply to be comfortably accommodated. And the resulting discomfort will destroy the price.

[Guillaume Albasini + 851]

6 hours ago, Auson said:

Jan,

Very interesting. So either those stories were made up by the traders ( highly possible ) or the tankers are started up and taken for a run once a week or so. 

There is also the possibility that the older tankers due for the scrappers were used ?

I think some of the tankers on the Iranian sanctions list may be used now for oil storage.

[Dan Warnick + 6,100]

On 12/11/2018 at 10:01 PM, William Edwards said:

The glut is the next drop after the bucket is full. The world always operates with a glut. The concept of a glut as a real entity is a manufactured and imaginary concept. No such thing exists in reality. (If you think otherwise, where in the world does it reside? Can you touch it or put a dip stick in it to measure it?) I think what the "glut" proponents actually mean is that there is more oil looking for an outlet than is provided by consumption. However, for the system to function smoothly, that condition must be the normal situation. To put it in layman's terms, think how disruptive the automobile supply system for gasoline would be if the service station carried no "glut", and you might or might not find fuel at the pump.

@William Edwards I got this from our discussions way back when this website was starting out and I still try to explain it around here from time to time when the comments come up disregarding the reality.  I have a feeling a lot of the lurking audience gets it, and most of the regular participants, but you still have to explain it every time "oversupply" comes up: every time.  Your descriptions are dead on and easy to understand and I value your input.  Thanks for joining the debate at times when the issues need a dose of reality to keep the readership sane.

[Dan Warnick + 6,100]

23 hours ago, William Edwards said:

That is called "speculative storage" That differs from "operational storage", necessary for smooth operations. One portion of the "operational storage" is the provision for cargo accumulation and loadings. There is also "contingency storage" that is necessary because things break down or miss schedules. Storage has many necessary uses, the smallest of which is the "speculative storage".

"Glut" is your term, not mine. So you are free to define it in any way that you choose. There is no meaningful, inherently sound definition. It is a media-inspired term, undefined, and essentially a catch-all word that is supposed to convey some meaning suggesting impending doom for suppliers. You might wish to place it in the receptacle labeled "garbage terms".

@William Edwards Can you put some realistic numbers on how much storage there actually is in the world?  I mean, let's say, if all the pumps stopped pumping tomorrow, how long could the world run on what's in storage at any given time?  I speculated some time back that the time would be pretty darn short, but I don't have any way to back up my thoughts with facts.

[Dan Warnick + 6,100]

22 hours ago, Jan van Eck said:

Not quite.  The prices of crude are not set consequent to total inventory levels.  They are set as a functions of various traders attempting to gore the next trader fellow over at the next trading booth, in what is a "zero sum game;"  I make money on the trade, you lose money on the trade.  

As far as "supermassivetankers moored," you are referencing a VLCC.  Those things are expensive, and the owners do not rent them out for floating storage.  The reason is surprising: a tanker actually will deteriorate if it just sits at a mooring and is not being run.  If you want to use a VLCC for floating storage then you will pay more per diem than if it is actually running at sea.  The reasons are subtle.  I speculate that it relates to the buildup of humidity in the areas where heat otherwise would be present, specifically in the machinery rooms and the bilges underneath the machinery.  You  want those to be bone  dry to keep that steel from rusting.  It cannot stay dry unless the machinery is throwing off heat, absorbing the moisture (and venting it out the stack). 

Putting a tanker into storage (indeed, any cargo ship) is expensive. Ship owners will actually charter out a ship for a loss per diem, just to avoid the costs of layup and the damage to their ship from rust.

Very interesting aspect I had no idea about.  Thanks, Jan.

[William Edwards + 708]

1 hour ago, Dan Warnick said:

@William Edwards I got this from our discussions way back when this website was starting out and I still try to explain it around here from time to time when the comments come up disregarding the reality.  I have a feeling a lot of the lurking audience gets it, and most of the regular participants, but you still have to explain it every time "oversupply" comes up: every time.  Your descriptions are dead on and easy to understand and I value your input.  Thanks for joining the debate at times when the issues need a dose of reality to keep the readership sane.

Thanks, Dan.

[William Edwards + 708]

1 hour ago, Dan Warnick said:

@William Edwards Can you put some realistic numbers on how much storage there actually is in the world?  I mean, let's say, if all the pumps stopped pumping tomorrow, how long could the world run on what's in storage at any given time?  I speculated some time back that the time would be pretty darn short, but I don't have any way to back up my thoughts with facts.

Based upon the swings in world inventories that have been reported over the years, my guess is that there is about a billion barrels of "swingable" inventory available. That quantity would easily cover a 2 million barrels a day disruption for about a year and a half.

[Bhimsen Pachawry + 72]

18 hours ago, William Edwards said:

May I add one further observation, Tom, regarding your $60-65 price hope. The data show that the price of oil has been above $40, not $60, on a year average basis and in today's money, for only three decades since 1860. The first was during the Civil War, the second in the 1980's and the third the recent 2005-15 period. The fact that 2018 makes it to the $65 threshold has created unbelievable optimism, suggesting that we can forget the first 150 years of history. I am not similarly persuaded. 

I have tild this several times that oil prices are political in nature.

This low oil price is due to pressure from Indian PM -Narendra Modi to help him win 2019 election to be held in April. Since Modi has a lot of leverage due to geopolitical reason and historical reason, the oil prices are being kept low to avoid antagonising Modi.

There is nothing optimistic or pessimistic about current oil prices. This is only till 2019 Indian general election. Afte that price will rise to $100 dollar a barrel before 2020.

The data ofoil shows nothing of significance. Oil prices have always been political as natural resources is a gift of nature and can't be recreated by human effort. So, natural resources are priceless and are used for political purposes

[William Edwards + 708]

27 minutes ago, Bhimsen Pachawry said:

I have tild this several times that oil prices are political in nature.

This low oil price is due to pressure from Indian PM -Narendra Modi to help him win 2019 election to be held in April. Since Modi has a lot of leverage due to geopolitical reason and historical reason, the oil prices are being kept low to avoid antagonising Modi.

There is nothing optimistic or pessimistic about current oil prices. This is only till 2019 Indian general election. Afte that price will rise to $100 dollar a barrel before 2020.

The data ofoil shows nothing of significance. Oil prices have always been political as natural resources is a gift of nature and can't be recreated by human effort. So, natural resources are priceless and are used for political purposes

I think I will assign your assessment about the same credibility as I have given the global head of Goldman Sachs' commodities research. Here is an excerpt from a just-published interview. Judge for yourself its quality.

Interviewer: The big question on everyone’s lips is whether we are going to see a return to oil prices at $100/barrel and beyond. Where do you think the market is going?

Jeffrey Currie: We’re not saying $100/barrel oil cannot happen. It’s not our base case, nor do we think it’s very likely. To get a $100 price spike, you need to have a sustainable loss in all of Iran’s exports for an extendable period of time... The key point here is yes, if you had a sustained outage you could see a spike of that magnitude, but in no way is it our base case.

Our base case is for a modest decline in inventories in the fourth quarter, which will likely keep prices somewhere around $80/barrel. But the faster and sooner the Iranian barrels are lost, the greater the upside potential, because it’s harder and more difficult for the non-Iranian producers in OPEC to respond to that kind of disruption.

My comment: His world is too small!

[Auson + 123]

18 hours ago, William Edwards said:

I agree that $45 is a first approximation of a sustainable price. Now, how do we arrange for the price to stay at $45 long enough for the supply and consumption to reach equilibrium at that price? I know how to do it, but currently I do not possess the influence needed to arrange implementation. So we are left guessing. My guess is that $65 is too high. According to the numbers that I see, a price at that level would bring out too much supply to be comfortably accommodated. And the resulting discomfort will destroy the price.

William, 

Again thanks for your in depth contributions I find them most interesting.

Regarding the $45 a barrel debate what are your thoughts on the purchasing power of $45 today versus the 1970s ?

Here are some calculations

A simple Purchasing Power Calculator would say the relative value is $272.00. This answer is obtained by multiplying $45 by the percentage increase in the CPI from 1971 to 2017.real value in consumption of that commodity is $298.00
labor value of that commodity is $271.00 (using the unskilled wage) or $342.00 (using production worker compensation)
income value of that commodity is $480.00
economic share of that commodity is $753.00

[William Edwards + 708]

5 minutes ago, Auson said:

William, 

Again thanks for your in depth contributions I find them most interesting.

Regarding the $45 a barrel debate what are your thoughts on the purchasing power of $45 today versus the 1970s ?

Here are some calculations

A simple Purchasing Power Calculator would say the relative value is $272.00. This answer is obtained by multiplying $45 by the percentage increase in the CPI from 1971 to 2017.real value in consumption of that commodity is $298.00
labor value of that commodity is $271.00 (using the unskilled wage) or $342.00 (using production worker compensation)
income value of that commodity is $480.00
economic share of that commodity is $753.00

The price of oil in 1971 was about $2/B in current dollars, which, according to BP, corrects to about $12/B in today's money. By the end of that decade the price had jumped to $36/B, or about $110/B in today's money. The average for that decade was about $45/B in today's money.

[Auson + 123]

16 minutes ago, William Edwards said:

The price of oil in 1971 was about $2/B in current dollars, which, according to BP, corrects to about $12/B in today's money. By the end of that decade the price had jumped to $36/B, or about $110/B in today's money. The average for that decade was about $45/B in today's money.

Thanks William,

Yes so with the same calculator that comes out at between $21 and $54.80 in today's money.

Do you know why Brent seemed to hold quite steady around $110 until 2014 ?

[William Edwards + 708]

28 minutes ago, Auson said:

Thanks William,

Yes so with the same calculator that comes out at between $21 and $54.80 in today's money.

Do you know why Brent seemed to hold quite steady around $110 until 2014 ?

My view is that it was the result of continued positive impulses that kept the speculators on board on the long side. Then they quit thinking that it would get better and began unloading their positions.

[Auson + 123]

7 minutes ago, William Edwards said:

My view is that it was the result of continued positive impulses that kept the speculators on board on the long side. Then they quit thinking that it would get better and began unloading their positions.

Interesting,

On the Nymex speculative net long positions were around 300-400k contracts 2012-2014

They are in a similar range now ( 330k ) having come down from a 730k peak in Feb 18.

[William Edwards + 708]

34 minutes ago, Auson said:

Interesting,

On the Nymex speculative net long positions were around 300-400k contracts 2012-2014

They are in a similar range now ( 330k ) having come down from a 730k peak in Feb 18.

Those numbers are consistent with mine.

[Tom Kirkman + 8,860]

6 hours ago, William Edwards said:

The price of oil in 1971 was about $2/B in current dollars, which, according to BP, corrects to about $12/B in today's money. By the end of that decade the price had jumped to $36/B, or about $110/B in today's money. The average for that decade was about $45/B in today's money.

Ah, so that's how you arrived at the $45 bbl historical average.