Balancing Act---Sanctions, Venezuela, Trade War and Demand

[wrs + 893]

20 hours ago, William Edwards said:

By the way, you will never know how much spare capacity actually exists, unless you can see it reduced to zero. Up to that point, the number is mere speculation. But it matters not. One barrel of spare is enough. To put that pointy in perspective, my guess is that you do not even notice the amount of spare fuel in your car's tank until it gets close to your "bottom" point. Enough is plenty!

This is the trouble that the traders have in assessing the inventory numbers and using them to determine if the market is under supplied or over supplied.  As you point out, capacity has been increased but so has storage.  This storage is where I think the problems are in the oil industry.  There is a lot of floating storage as well as onshore storage.  When storage gets empty it also gets cheap and so the cost of storing produced oil above ground isn't much of a deterrent to overproducing.

When the market is in contango and storage is cheap, the cost of storing over-production is less than contango so it's possible to sell oil forward that has been overproduced.  Buying current output, selling a future for more than the purchase price and storing for less than the delta is a free money trade until storage gets more expensive than the contango.  We saw oil flip to contango rather abruptly in the summer of 2014 and by Feb of 2015 Cushing was 85% full.  The overproduction window was only about 8 months.  When storage got to about 85% at Cushing, US production started declining and didn't really start increasing again until late 2017 when storage levels at Cushing started declining below 85% and stayed there.  

Cushing is currently at about 45mmbbl which is roughly at 65% and the market is fairly well balanced.  If Cushing starts filling up again then I think prices will fall but given the additional pipelines open from the Permian to Houston and from the Permian to CC, that is unlikely.  Now the issue for US oil becomes more of how much can be exported and how much more can be taken up by US refiners.  If there is additional displacement of foreign oil then US oil production increases won't affect WTI prices but now we may see more effects from PADD 3 storage filling than Cushing.  In any case, we aren't at a point yet where overproduction is pushing storage levels to an extreme.  

 

Edited May 3, 2019 by wrs

[William Edwards + 708]

2 minutes ago, wrs said:

This is the trouble that the traders have in assessing the inventory numbers and using them to determine if the market is under supplied or over supplied.  As you point out, capacity has been increased but so has storage.  This storage is where I think the problems are in the oil industry.  There is a lot of floating storage as well as onshore storage.  When storage gets empty it also gets cheap and so the cost of storing produced oil above ground isn't much of a deterrent to overproducing.

When the market is in contango and storage is cheap, the cost of storing over-production is less than contango so it's possible to sell oil forward that has been overproduced.  Buying current output, selling a future for more than the purchase price and storing for less than the delta is a free money trade until storage gets more expensive than the contango.  We saw oil flip to contango rather abruptly in the summer of 2014 and by Feb of 2015 Cushing was 85% full.  The overproduction window was only about 8 months.  When storage got to about 85% at Cushing, US production started declining and didn't really start increasing again until late 2017 when storage levels at Cushing started declining below 85% and stayed there.  

Cushing is currently at about 45mmbbl which is roughly at 65% and the market is fairly well balanced.  If Cushing starts filling up again then I think prices will fall but given the additional pipelines open from the Permian to Houston and from the Permian to CC, that is unlikely.  Now the issue for US oil becomes more of how much can be exported and how much more can be taken up by US refiners.  If there is additional displacement of foreign oil then US oil production increases won't affect WTI prices but now we may see more effects from PADD 3 storage filling than Cushing.  In any case, we aren't at a point yet where overproduction is pushing storage levels to an extreme.  

 

Agreed. And it is well to remember that the significance of US inventory levels changed drastically when the US reversed the US export ban. Up to that point, overproduction versus US demand had no home. Tanks could actually fill up to the problem level. Then there was no place to go. Now, we can export as desired into the big global pool, as long as the midstream's keep building pipeline capacity from the well to the water.

[D Coyne + 305]

9 minutes ago, wrs said:

This is the trouble that the traders have in assessing the inventory numbers and using them to determine if the market is under supplied or over supplied.  As you point out, capacity has been increased but so has storage.  This storage is where I think the problems are in the oil industry.  There is a lot of floating storage as well as onshore storage.  When storage gets empty it also gets cheap and so the cost of storing produced oil above ground isn't much of a deterrent to overproducing.

When the market is in contango and storage is cheap, the cost of storing over-production is less than contango so it's possible to sell oil forward that has been overproduced.  Buying current output, selling a future for more than the purchase price and storing for less than the delta is a free money trade until storage gets more expensive than the contango.  We saw oil flip to contango rather abruptly in the summer of 2014 and by Feb of 2015 Cushing was 85% full.  The overproduction window was only about 8 months.  When storage got to about 85% at Cushing, US production started declining and didn't really start increasing again until late 2017 when storage levels at Cushing started declining below 85% and stayed there.  

Cushing is currently at about 45mmbbl which is roughly at 65% and the market is fairly well balanced.  If Cushing starts filling up again then I think prices will fall but given the additional pipelines open from the Permian to Houston and from the Permian to CC, that is unlikely.  Now the issue for US oil becomes more of how much can be exported and how much more can be taken up by US refiners.  If there is additional displacement of foreign oil then US oil production increases won't affect WTI prices but now we may see more effects from PADD 3 storage filling than Cushing.  In any case, we aren't at a point yet where overproduction is pushing storage levels to an extreme.  

 

wrs,

Interesting analysis, one problem is that the oil market is affected by storage levels throughout the World, Cushing is highly visible but is a small part of oil storage facilities worldwide.  I don't think traders have very good visibility of the storage level for crude and petroleum products worldwide, though there may be proprietary databases that I do not have access to that give traders more knowledge than I am aware of.  I believe Mr Edwards would be aware of those databases and he seems highly skeptical of the argument that stock levels of crude and petroleum products has much influence on the futures price of oil.

And see also Mr Edwards astute comment above (as usual), Cushing is less important than it was before the export ban was lifted.

Edited May 3, 2019 by D Coyne

[wrs + 893]

2 minutes ago, D Coyne said:

wrs,

Interesting analysis, one problem is that the oil market is affected by storage levels throughout the World, Cushing is highly visible but is a small part of oil storage facilities worldwide.  I don't think traders have very good visibility of the storage level for crude and petroleum products worldwide, though there may be proprietary databases that I do not have access to that give traders more knowledge than I am aware of.  I believe Mr Edwards would be aware of those databases and he seems highly skeptical of the argument that stock levels of crude and petroleum products has much influence on the futures price of oil.

WTI is the trading index for US oil and so Cushing is key to pricing that because it's the settlement hub so they pay close attention to it. OECD stocks are in the middle of the 5 year range right now.

[William Edwards + 708]

19 minutes ago, wrs said:

WTI is the trading index for US oil and so Cushing is key to pricing that because it's the settlement hub so they pay close attention to it. OECD stocks are in the middle of the 5 year range right now.

OECD stocks are ALWAYS in the middle of the range. Just allow a bit of latitude in defining the width of "middle".

And to venture into reality, please tell me how the OECD stock level number, available only three months after the fact and quite suspect in accuracy, can be used in any reasonable fashion to determine a trade made today. Sounds like so much fiction to me. And only believed by the non-discriminating, non-thinking dreamer. Essentially equivalent to reading "Someone said".

[wrs + 893]

4 minutes ago, William Edwards said:

OECD stocks are ALWAYS in the middle of the range. Just allow a bit of latitude in defining the width of "middle".

And to venture into reality, please tell me how the OECD stock level number, available only three months after the fact and quite suspect in accuracy, can be used in any reasonable fashion to determine a trade made today. Sounds like so much fiction to me. And only believed by the non-discriminating, non-thinking dreamer. Essentially equivalent to reading "Someone said".

True, they are delayed enough to not be useful for trading.  However, if they are to be believed at least in retrospect, the chart I looked at showed the level in a zig zag around the 5 yr average.  I don't think oil really trades on that number but I know WTI trades on Cushing and the US inventory data which is updated weekly and I believe is reasonably accurate.  I know there are some services that use satellite imagery to analyze global storage levels and sell that data to traders so I presume they try to use the most accurate storage analysis they can get.

[D Coyne + 305]

21 minutes ago, wrs said:

WTI is the trading index for US oil and so Cushing is key to pricing that because it's the settlement hub so they pay close attention to it. OECD stocks are in the middle of the 5 year range right now.

wrs,

Yes cushing will impact WTI, which is less important in World markets than in the past, most focus on Brent or the OPEC Basket for World oil price.  You are correct that OECD stocks (in absolute terms) are in the middle of the 5 year range, if we consider days of forward cover in the OPEC MOMR we find the recent stock levels are close to the late 2013 level of 92 days for the fourth quarter of 2018, for Jan and Feb 2019 the stock levels were a bit above 2018Q4, but stocks for the OECD remain relatively low relative to forward demand.

[D Coyne + 305]

28 minutes ago, William Edwards said:

OECD stocks are ALWAYS in the middle of the range. Just allow a bit of latitude in defining the width of "middle".

And to venture into reality, please tell me how the OECD stock level number, available only three months after the fact and quite suspect in accuracy, can be used in any reasonable fashion to determine a trade made today. Sounds like so much fiction to me. And only believed by the non-discriminating, non-thinking dreamer. Essentially equivalent to reading "Someone said".

Hi Mr. Edwards,

I am not a futures trader, but I imagine they have access to proprietary data bases that give better visibility into storage levels, they also look at OPEC and IEA forecasts for supply and demand, their own analysis and they have the incentive to make money on their trades.

If they get it right, they can profit handsomely and not everyone is less intelligent than you, despite what you imagine.    The system is by no means perfect, but oil companies would not be able to hedge without a futures market and it's existence helps to mitigate risk (at least in theory with a decent trader deciding on a hedging strategy).

Edited May 3, 2019 by D Coyne

[William Edwards + 708]

41 minutes ago, D Coyne said:

Hi Mr. Edwards,

I am not a futures trader, but I imagine they have access to proprietary data bases that give better visibility into storage levels, they also look at OPEC and IEA forecasts for supply and demand, their own analysis and they have the incentive to make money on their trades.

If they get it right, they can profit handsomely and not everyone is less intelligent than you, despite what you imagine.    The system is by no means perfect, but oil companies would not be able to hedge without a futures market and it's existence helps to mitigate risk (at least in theory with a decent trader deciding on a hedging strategy).

Hedging merely changes the date of your price selection, therefore the price. If you are lucky, it helps. If  you are unlucky it hurts. In reality it only helps the financial world to stay in business. It does little, fundamentally, for the industry. But it helps the banks.

[D Coyne + 305]

41 minutes ago, William Edwards said:

Hedging merely changes the date of your price selection, therefore the price. If you are lucky, it helps. If  you are unlucky it hurts. In reality it only helps the financial world to stay in business. It does little, fundamentally, for the industry. But it helps the banks.

Mr. Edwards,

Yes there is risk even with hedges and it only helps if one guesses correctly on future prices (which seems unlikely to better than a 50/50 bet).  In short I agree, the futures market helps only the financial industry and not the Oil industry.  I also tend to agree that the futures market seems to be wrong as often as it is correct, so it is not all that useful a way to decide on the real price of oil.

Can you explain how the RRC allowables worked back in the day?  I was under the impression they controlled prices by limiting output in Texas.  If that is wrong, is there a brief way to explain what actually occurred?

According to Wikipedia, the RRC tried to match oil supply with demand, it seems OPEC attempts to do something similar (though with less success at keeping prices relatively stable).

Edited May 3, 2019 by D Coyne

[William Edwards + 708]

1 hour ago, D Coyne said:

Mr. Edwards,

Yes there is risk even with hedges and it only helps if one guesses correctly on future prices (which seems unlikely to better than a 50/50 bet).  In short I agree, the futures market helps only the financial industry and not the Oil industry.  I also tend to agree that the futures market seems to be wrong as often as it is correct, so it is not all that useful a way to decide on the real price of oil.

Can you explain how the RRC allowables worked back in the day?  I was under the impression they controlled prices by limiting output in Texas.  If that is wrong, is there a brief way to explain what actually occurred?

According to Wikipedia, the RRC tried to match oil supply with demand, it seems OPEC attempts to do something similar (though with less success at keeping prices relatively stable).

The Texas RRC matched production with requested supplies, or demand. Price is a separate entity. By establishing an easy balance between supply and requirements, the price pressure, in either direction, was removed. But the price still had to be established. The major oil companies performed that function for forty years and the price was stable. The RRC did not control, set or even influence prices. They just removed the desperation (and foolish actions) out of an oversupplied system.

That same two-pronged system would work today for global prices if Aramco is substituted for the major oil companies and a coordination group were established to guide the supply vs requirements balance to replace the RRC.

Edited May 3, 2019 by William Edwards

[Osama + 248]

On 5/1/2019 at 11:17 AM, specinho said:

I'm not sure if the right questions have been addressed......... US would like Saudi to decrease output so that the price would go higher than the used to be $40++.......... no?? If increase oil price per barrel is the aim and US is the largest producer now then..... there might be no intention to let the price drop nor to let others increase in the output to have maximal desirable outcome in any biz no?? Here's the best chance to maximize export earning ....... from oil..... in this context.... no?

2. shall there be a concern of oil price at consumer end when the price keeps increasing..?? Inflation and all would not be a good sign for the coming election. 

Hence... a neutral path of status quo or slightly lower price would probably be in consideration??

As explained the fact that U.S. now is the largest oil producer does not mean that it will also support higher oil prices (beyond a certain level) and the reasons for that are given in the piece. Yes...we can ask what will that be specific level...that is another debate. Mr. William and many others have contributed much on this topic in this thread....if you are interested to read,

.

[Osama + 248]

Well well well...

SAUDI PLANS LEAK: RIYADH MAY RAISE PRODUCTION but will not increase exports

Link: https://oilprice.com/Energy/Crude-Oil/Saudi-Plans-Leak-Riyadh-May-Raise-Oil-Production-But-Not-Exports.html

"Saudi Arabia may pump more oil next month but this does not necessarily mean it will raise exports as well, Reuters reports, citing sources familiar with Riyadh’s plans. The additional production, the sources said, will likely be used for power generation in the Kingdom.This may disappoint Washington as President Trump has urged Saudi Arabia to step up production to avoid a price spike now that the Iranian sanction waivers to eight large oil importers have ended."

 

@William Edwards: We were discussing that KSA has already reduced the production more than was required form it and that it can easily increase exports by 500k bpd (If my memory serves me well) without increasing production. Do markets behave this rationally? AS if this happens will the traders see this nuanced manipulation and react accordingly? When oil touched $66 recently I guessed that it will come down from here...it seems, and it is most of the times, that traders and speculators move in a certain way before and after and event---if that is true then is it so easy to decode this perpetually-fluctuating market? If not---is it impossible to know where oil prices will go in the medium to longer run?

[William Edwards + 708]

22 minutes ago, Osama said:

Well well well...

SAUDI PLANS LEAK: RIYADH MAY RAISE PRODUCTION but will not increase exports

Link: https://oilprice.com/Energy/Crude-Oil/Saudi-Plans-Leak-Riyadh-May-Raise-Oil-Production-But-Not-Exports.html

"Saudi Arabia may pump more oil next month but this does not necessarily mean it will raise exports as well, Reuters reports, citing sources familiar with Riyadh’s plans. The additional production, the sources said, will likely be used for power generation in the Kingdom.This may disappoint Washington as President Trump has urged Saudi Arabia to step up production to avoid a price spike now that the Iranian sanction waivers to eight large oil importers have ended."

 

@William Edwards: We were discussing that KSA has already reduced the production more than was required form it and that it can easily increase exports by 500k bpd (If my memory serves me well) without increasing production. Do markets behave this rationally? AS if this happens will the traders see this nuanced manipulation and react accordingly? When oil touched $66 recently I guessed that it will come down from here...it seems, and it is most of the times, that traders and speculators move in a certain way before and after and event---if that is true then is it so easy to decode this perpetually-fluctuating market? If not---is it impossible to know where oil prices will go in the medium to longer run?

The answer to your question "is it impossible to know where oil prices will go in the medium to longer run?" is "No, it is not impossible, within bounds, and recognizing the white swan population. Traders runs as a herd, with common tendencies, so their movements are somewhat predictable -- having nothing to do with the business of oil, of course.

Regarding the Saudi supply situation, once the oil is transferred from the ground to a tank, tank limitations come into play, regardless of where it is burned.

Edited May 3, 2019 by William Edwards

[Osama + 248]

2 minutes ago, William Edwards said:

The answer to your question "is it impossible to know where oil prices will go in the medium to longer run?" is "No, it is not impossible, within bounds, and recognizing the white swan population. Traders runs as a herd, with common tendencies, so their movements are somewhat predictable -- having nothing to do with the business of oil, of course.

Regarding the Saudi supply situation, once the oil is transferred from the ground to a tank, tank limitations come into play, regardless of where it is burned.

and we are already seeing some inventory builds!!

[William Edwards + 708]

Just now, Osama said:

and we are already seeing some inventory builds!!

Data arrive with a lag time, but the indications are "Yes".

[D Coyne + 305]

3 hours ago, William Edwards said:

The Texas RRC matched production with requested supplies, or demand. Price is a separate entity. By establishing an easy balance between supply and requirements, the price pressure, in either direction, was removed. But the price still had to be established. The major oil companies performed that function for forty years and the price was stable. The RRC did not control, set or even influence prices. They just removed the desperation (and foolish actions) out of an oversupplied system.

That same two-pronged system would work today for global prices if Aramco is substituted for the major oil companies and a coordination group were established to guide the supply vs requirements balance to replace the RRC.

Thanks.  So the majors set the price at "cost plus some reasonable profit margin" I assume and the RRC provided stability by matching supply and demand.  I guess you complaint today is that OPEC let's the futures market dictate the oil price and instead they should play the role that the oil majors once did and simply set a price and then adjust production so the supply and demand is matched.  Or that is what I glean from your comments.  

Edited May 3, 2019 by D Coyne

[Jan van Eck + 7,558]

32 minutes ago, D Coyne said:

Thanks.  So the majors set the price at "cost plus some reasonable profit margin" I assume and the RRC provided stability by matching supply and demand.  I guess you complaint today is that OPEC let's the futures market dictate the oil price and instead they should play the role that the oil majors once did and simply set a price and then adjust production so the supply and demand is matched.  Or that is what I glean from your comments.  

I am left with the impression that your analysis remains incorrect.  You seem to conclude that there is this "matching" between supply and demand, and that in turn correlates to pricing.  I don't think this is correct. There is always more supply than demand, both in crude sales and in retail finished-product sales  (with the exception of politics-induced embargoes).  Further, the "demand" is an inelastic good; the amount being consumed is largely independent to the price.  In that, oil very much mirrors salt, another commodity that is price-inelastic. 

Without looking at the numbers, I suspect that what props up the demand end of the relationship is the demands of the expanding economies of India and China.  Yet these are in large part "derived demands," in that their demands are a function of their trade with the West.  Absent their cheap labor, that demand would not be there.  As for the West, that demand per person I suspect is declining, and will continue to decline.  The aggregate decline will stem from the sum of the individual decisions made to reduce their oil-use inputs.  As houses switch to gas or wood-pellet stove heat, demand for fuel oil drops.  As autos go to hybrid or variable-valve timing, those demands drop.  I think the drops are going to come a lot faster and harder than the oil industry appreciates. 

Meanwhile you have these producer countries that stand ready to supply whatever the demand might be. There is always a surplus. Do refineries shut down for lack of crude?  Nope.  When was the last time you called up your heating-oil supplier and told they could not fill up your tank?  Never?   Everybody in the industry stands ready to sell you whatever you want to buy, from refiner to retail.  Thus, there is always more supply than demand. 

As has been pointed out, the actual pricing, up and down the chain, gets established by the "oil traders," these intermediaries that pump funding liquidity into the oil system.  But they do not really understand either markets or what they are doing. While they provide liquidity, they also create volatility - by their own trading behavior.  Now what will happen is that, if one producer gets desperate to sell his product, he will attempt to elbow out the higher-cost producer, in a substitution of supply. You see this at retail where those gasoline stations post prices in large billboards right at the street edge, attempting to entice buyers in.  You also see it in the price competition among retailers to grab customers for heating oil.  Where you don't see that is at the producer level where the sellers have made their contracts a function of some trading price; however, even there, the sellers will compete and elbow by dropping the spread from the day trade price to their base price. And a seller insistent on holding onto market share, to avoid being shut out, will even go negative to that trading price.  But that is not because there is "over-supply" - there is always over-supply - but because the producer is not prepared to suffer loss of product sales. 

Where does all this leave us?  I predict that overall aggregate demand for goods from Indian and China will decrease in the West - while Europe will retain a volume not too influenced by demand fluctuation, the USA and Canada will progressively be distancing themselves from imports from low-wage, developing countries.  And the reason is that they are recognizing (in large part due to Mr. Trump's bold moves) that those trades inflict hurt on the civilian population, and unallocated costs including unemployment insurance and retraining charges.  As manufacturing moves back to the West, you will see drops in use of oil for shipping.  And you will see drops in the real standard of living in China and India.  All of that results in a lessening of aggregate oil demand. 

Now that, in turn, will cause some producers to get antsy.  Who is going to shut in their production?  Nobody wants to. Somebody will start by attempting to pirate away the customers of another producer. As direct contracts for product at lower and lower prices hit, the traders will go into their "dump" mode and the futures prices will tank.  How low?  Below $20?  Hey, could be. 

Mr. Edwards thinks this will lead to several million bbl/day ending up shut in.  He predicts Canada (and likely Venezuela) as the first targets.  Left alone, that is likely.  Predictably Canada will react by creating a closed internal market.  That leaves other countries without homes for their product.  Remember, there is always over-supply. 

Some of these countries are headed for lots of internal turmoil.  I pick Nigeria as one.  Possibly Angola. Libya?  Iraq? It is a bit of a guessing game.  But if KSA succumbs to internal warfare, it is a whole new ball game. 

[William Edwards + 708]

22 minutes ago, Jan van Eck said:

I am left with the impression that your analysis remains incorrect.  You seem to conclude that there is this "matching" between supply and demand, and that in turn correlates to pricing.  I don't think this is correct. There is always more supply than demand, both in crude sales and in retail finished-product sales  (with the exception of politics-induced embargoes).  Further, the "demand" is an inelastic good; the amount being consumed is largely independent to the price.  In that, oil very much mirrors salt, another commodity that is price-inelastic. 

Without looking at the numbers, I suspect that what props up the demand end of the relationship is the demands of the expanding economies of India and China.  Yet these are in large part "derived demands," in that their demands are a function of their trade with the West.  Absent their cheap labor, that demand would not be there.  As for the West, that demand per person I suspect is declining, and will continue to decline.  The aggregate decline will stem from the sum of the individual decisions made to reduce their oil-use inputs.  As houses switch to gas or wood-pellet stove heat, demand for fuel oil drops.  As autos go to hybrid or variable-valve timing, those demands drop.  I think the drops are going to come a lot faster and harder than the oil industry appreciates. 

Meanwhile you have these producer countries that stand ready to supply whatever the demand might be. There is always a surplus. Do refineries shut down for lack of crude?  Nope.  When was the last time you called up your heating-oil supplier and told they could not fill up your tank?  Never?   Everybody in the industry stands ready to sell you whatever you want to buy, from refiner to retail.  Thus, there is always more supply than demand. 

As has been pointed out, the actual pricing, up and down the chain, gets established by the "oil traders," these intermediaries that pump funding liquidity into the oil system.  But they do not really understand either markets or what they are doing. While they provide liquidity, they also create volatility - by their own trading behavior.  Now what will happen is that, if one producer gets desperate to sell his product, he will attempt to elbow out the higher-cost producer, in a substitution of supply. You see this at retail where those gasoline stations post prices in large billboards right at the street edge, attempting to entice buyers in.  You also see it in the price competition among retailers to grab customers for heating oil.  Where you don't see that is at the producer level where the sellers have made their contracts a function of some trading price; however, even there, the sellers will compete and elbow by dropping the spread from the day trade price to their base price. And a seller insistent on holding onto market share, to avoid being shut out, will even go negative to that trading price.  But that is not because there is "over-supply" - there is always over-supply - but because the producer is not prepared to suffer loss of product sales. 

Where does all this leave us?  I predict that overall aggregate demand for goods from Indian and China will decrease in the West - while Europe will retain a volume not too influenced by demand fluctuation, the USA and Canada will progressively be distancing themselves from imports from low-wage, developing countries.  And the reason is that they are recognizing (in large part due to Mr. Trump's bold moves) that those trades inflict hurt on the civilian population, and unallocated costs including unemployment insurance and retraining charges.  As manufacturing moves back to the West, you will see drops in use of oil for shipping.  And you will see drops in the real standard of living in China and India.  All of that results in a lessening of aggregate oil demand. 

Now that, in turn, will cause some producers to get antsy.  Who is going to shut in their production?  Nobody wants to. Somebody will start by attempting to pirate away the customers of another producer. As direct contracts for product at lower and lower prices hit, the traders will go into their "dump" mode and the futures prices will tank.  How low?  Below $20?  Hey, could be. 

Mr. Edwards thinks this will lead to several million bbl/day ending up shut in.  He predicts Canada (and likely Venezuela) as the first targets.  Left alone, that is likely.  Predictably Canada will react by creating a closed internal market.  That leaves other countries without homes for their product.  Remember, there is always over-supply. 

Some of these countries are headed for lots of internal turmoil.  I pick Nigeria as one.  Possibly Angola. Libya?  Iraq? It is a bit of a guessing game.  But if KSA succumbs to internal warfare, it is a whole new ball game. 

You have definitely captured the essence of the picture --  that there is always more-than-enough supply, and producers must fight to get their share. Any producer who thinks that he can expect to be paid an unreasonably high profit to provide his share must also expect to have his cost substantially lower than most. Of course, you speak strongly against prices unreasonably high prices, too. What is too high? Probably anything above a nominal return for the majority of production. Aramco supposes $40/B for that figure. 

But stability of the industry does not seem too likely. Turmoil seems to be the watchword.

[William Edwards + 708]

1 hour ago, D Coyne said:

Thanks.  So the majors set the price at "cost plus some reasonable profit margin" I assume and the RRC provided stability by matching supply and demand.  I guess you complaint today is that OPEC let's the futures market dictate the oil price and instead they should play the role that the oil majors once did and simply set a price and then adjust production so the supply and demand is matched.  Or that is what I glean from your comments.  

That is pretty much in line with my thoughts on achieving some price stability, which I think would benefit the energy and the efficiency of the economy.

[specinho + 467]

On 4/25/2019 at 6:18 PM, Osama said:

Has Trump Given Up On Keeping Oil Prices Low?

Below are my thoughts on the on-going conditions in market---relevant to this thread as well:

https://oilprice.com/Energy/Energy-General/Has-Trump-Given-Up-On-Keeping-Oil-Prices-Low.html

"Oil prices have rallied more than 2 percent this week after the Trump Administration canceled the waivers given to major consumers of Iranian oil - including both China and India which together account for almost 50 percent of the Islamic Republic’s exports. Trump’s decision will undoubtedly have unforeseen consequences for the oil market. However, in the short term, there are two key questions that must be addressed: One, now that the United States is the largest producer of oil in the world, will Trump ignore higher oil prices and focus less of forcing Saudi Arabia to increase output? And, two, if the United States does continue to press the Saudi Kingdom to make up for lost oil exports by Iran; will Saudi Arabia acquiesce to Trump’s demands?"

Cc: @Tom Kirkman, @William Edwards, @ceo_energemsier, @Marina Schwarz, @Jan van Eck, @Enthalpic

 

I'm not sure if the right questions have been addressed......... US would like Saudi to decrease output so that the price would go higher than the used to be $40++.......... no?? If increase oil price per barrel is the aim and US is the largest producer now then..... there might be no intention to let the price drop nor to let others increase in the output to have maximal desirable outcome in any biz no?? Here's the best chance to maximize export earning ....... from oil..... in this context.... no?

2. shall there be a concern of oil price at consumer end when the price keeps increasing..?? Inflation and all would not be a good sign for the coming election. 

Hence... a neutral path of status quo or slightly lower price would probably be in consideration??

22 hours ago, Osama said:

As explained the fact that U.S. now is the largest oil producer does not mean that it will also support higher oil prices (beyond a certain level) and the reasons for that are given in the piece. Yes...we can ask what will that be specific level...that is another debate. Mr. William and many others have contributed much on this topic in this thread....if you are interested to read,

Quote

Summary of your article:

"A fair-minded observer may conclude that Trump will lobby against higher oil prices and will, therefore, press Saudi Arabia to play its traditional role as OPEC’s “swing producer” to stabilize the global market in crude."

"U.S. Secretary of State Mike Pompeo assured, when announcing the cancelation of waivers, that “other suppliers” will increase production to make up for the Iranian crude withdrawn from trading."

.

You might have not understand my statement correctly. The two questions that you have is based on the two assumptions that you have (as quoted in the summary of your article)....

What I was trying to say is: your target of questions is improper.......... or skewed........... here's why:

1. you assume Trump is observed to lobby against higher oil prices and hence will press Saudi to increase production. Therefore you ask if Trump would ignore the high price and not so taxing on Saudi to increase production.

2. and you assume other countries will increase production because of the statement shown.

My answer to you was (rephrasing the orignal text): when the oil price was around $40++ for months... Saudi was asked to reduce the output to increase the price.  If the aim in oil trading is to maximize profit. Hence high oil price is a welcoming sign. The fewer the number of suppliers and contrinuting volume in the market the higher the price.

Therefore.......... the whole condition is porbably NOT about ignoring the high price or taxing Saudi or other countries to vomit out the loss volume caused by sanction to Iran.......... It's about HOW to profit sustainably making voters happy while maintaing a status quo (in volume and in price) or slightly lower in price for consumers.......

For your info..........(If you want to know)..... I have read most if not all the replies (except when it gets too subjectively technical) before I decided to reply. just to prevent being redundant in my comment..........

Edited May 4, 2019 by specinho

[D Coyne + 305]

On 5/3/2019 at 5:30 PM, Jan van Eck said:

I am left with the impression that your analysis remains incorrect.  You seem to conclude that there is this "matching" between supply and demand, and that in turn correlates to pricing.  I don't think this is correct. There is always more supply than demand, both in crude sales and in retail finished-product sales  (with the exception of politics-induced embargoes).  Further, the "demand" is an inelastic good; the amount being consumed is largely independent to the price.  In that, oil very much mirrors salt, another commodity that is price-inelastic. 

Without looking at the numbers, I suspect that what props up the demand end of the relationship is the demands of the expanding economies of India and China.  Yet these are in large part "derived demands," in that their demands are a function of their trade with the West.  Absent their cheap labor, that demand would not be there.  As for the West, that demand per person I suspect is declining, and will continue to decline.  The aggregate decline will stem from the sum of the individual decisions made to reduce their oil-use inputs.  As houses switch to gas or wood-pellet stove heat, demand for fuel oil drops.  As autos go to hybrid or variable-valve timing, those demands drop.  I think the drops are going to come a lot faster and harder than the oil industry appreciates. 

Meanwhile you have these producer countries that stand ready to supply whatever the demand might be. There is always a surplus. Do refineries shut down for lack of crude?  Nope.  When was the last time you called up your heating-oil supplier and told they could not fill up your tank?  Never?   Everybody in the industry stands ready to sell you whatever you want to buy, from refiner to retail.  Thus, there is always more supply than demand. 

As has been pointed out, the actual pricing, up and down the chain, gets established by the "oil traders," these intermediaries that pump funding liquidity into the oil system.  But they do not really understand either markets or what they are doing. While they provide liquidity, they also create volatility - by their own trading behavior.  Now what will happen is that, if one producer gets desperate to sell his product, he will attempt to elbow out the higher-cost producer, in a substitution of supply. You see this at retail where those gasoline stations post prices in large billboards right at the street edge, attempting to entice buyers in.  You also see it in the price competition among retailers to grab customers for heating oil.  Where you don't see that is at the producer level where the sellers have made their contracts a function of some trading price; however, even there, the sellers will compete and elbow by dropping the spread from the day trade price to their base price. And a seller insistent on holding onto market share, to avoid being shut out, will even go negative to that trading price.  But that is not because there is "over-supply" - there is always over-supply - but because the producer is not prepared to suffer loss of product sales. 

Where does all this leave us?  I predict that overall aggregate demand for goods from Indian and China will decrease in the West - while Europe will retain a volume not too influenced by demand fluctuation, the USA and Canada will progressively be distancing themselves from imports from low-wage, developing countries.  And the reason is that they are recognizing (in large part due to Mr. Trump's bold moves) that those trades inflict hurt on the civilian population, and unallocated costs including unemployment insurance and retraining charges.  As manufacturing moves back to the West, you will see drops in use of oil for shipping.  And you will see drops in the real standard of living in China and India.  All of that results in a lessening of aggregate oil demand. 

Now that, in turn, will cause some producers to get antsy.  Who is going to shut in their production?  Nobody wants to. Somebody will start by attempting to pirate away the customers of another producer. As direct contracts for product at lower and lower prices hit, the traders will go into their "dump" mode and the futures prices will tank.  How low?  Below $20?  Hey, could be. 

Mr. Edwards thinks this will lead to several million bbl/day ending up shut in.  He predicts Canada (and likely Venezuela) as the first targets.  Left alone, that is likely.  Predictably Canada will react by creating a closed internal market.  That leaves other countries without homes for their product.  Remember, there is always over-supply. 

Some of these countries are headed for lots of internal turmoil.  I pick Nigeria as one.  Possibly Angola. Libya?  Iraq? It is a bit of a guessing game.  But if KSA succumbs to internal warfare, it is a whole new ball game. 

Jan,

I disagree that there is always oversupply, by your logic the price should fall to zero if that were the case.  Yes there is oil stored so that orders can be filled, that simply means there is the correct amount of supply, if this were not the case and orders could not be filled then clearly there would be an under supply.  So think of it as follows, we have a big tank filled with the World's oil in storage and a red line in the middle of the tank indicating the correct level where supply and demand are equal, we have a big hose filling the tank from oi produced and another draining the tank that goes to consumers, those flow rates will be equal in a market that is balanced.  If the flow of oil into the tank becomes higher than the oil consumed, price will fall so that consumers consume more and producers produce less and the reverse will be true when oil flows out faster than into the tank.

The short term elasticity of supply and demand will be low, but in the medium and long term it will be higher.  Consumers will buy more efficient vehicles if oil prices are high and producers will develop resources more quickly, the reverse will be true when oil prices are low.

I had not realized that Mr Edwards expects a lack of demand, but that makes sense as he is often pointing to a near term economic disaster which would cause demand to drop.  I expect World demand will continue to rise by 800 to 900 kb/d annually until the demand cannot be met with supply at $70/b, oil prices will gradually rise to balance supply and demand.  Over time after the peak in 2025 when oil prices are likely to rise to at least $80/b (2018$) and probably higher the demand for oil will gradually wane and eventually we might see the $20/b that Mr Edwards expects, but I don't believe we reach that point until 2040 at the earliest and more likely it will be 2050 or later as I expect demand for C+C from air and water transport will continue to rise and I do not expect the demand will be met at $20/b in 2018$ for Brent crude before 2050.

[D Coyne + 305]

On 5/3/2019 at 6:05 PM, William Edwards said:

That is pretty much in line with my thoughts on achieving some price stability, which I think would benefit the energy and the efficiency of the economy.

Agreed.

[ceo_energemsier + 1,818]

US Oil, Gas Industry Sets Production, Export Records

May 2, 2019 Alex Mills

Texas has a reputation of being a leader in energy production from coast-to-coast. That reputation has grown internationally as Texas leads the nation with dramatic increases in oil and natural gas production and exports.

The International Energy Agency (IEA) recently called the rise in production in Texas and the U.S. “the standout champion of global supply growth” and it expects the trend to continue.

“The second wave of the U.S. shale revolution is coming,” IEA Executive Director Faith Birol was quoted in the April issue of the American Oil and Gas Reporter. “It will see the United States account for 70 percent of the rise in global oil production and some 75 percent of the expansion in liquefied natural gas trade over the next five years. This will shake up international oil and gas trade flows, with profound implications for the geopolitics of energy.”

The U.S. Department of Energy’s Energy Information Administration (EIA) reports both oil and dry natural gas production set U.S. records in February. Oil production hit 12.1 billion barrels per day, Natural gas soared to 89.2 billion cubic feet per day, the highest for any month since EIA began tracking monthly dry natural gas production in 1973.

Crude oil, refined petroleum products, and natural gas exports from the U.S. continue to increase and imports continue to decline.

 

EIA reports U.S. net petroleum imports fell 1.5 million barrels per day in 2018 to an average of 2.3 million barrels per day, the lowest level in more than 50 years. EIA projects net oil and petroleum imports will continue to fall to an average of 1.0 million barrels per day in 2019 and will become a net exporter in 2020.

“And the same story line is playing out for natural gas and natural gas liquids (NGLs), too,” the American Oil and Gas Report stated. “Consequently, exports of everything from natural gas to gasoline, and from distillate fuel oil to propane and ethane, are at unprecedented levels.”

The volumes of petroleum increases have been created through technological developments in drilling, completion, and production techniques developed in Texas and throughout the U.S. that has been blessed with ultralow-permeability source rocks that has held massive amounts of hydrocarbons. The multiple pay zones in the Permian Basin of West Texas have been the leading target, which has produced a multiple mix of liquid and gas hydrocarbons.

“Greater U.S. exports to global markets strengthen oil security around the world,” Birol said. “Buyers of crude oil, particularly in Asia, where demand is growing fastest, have a wider choice of suppliers. This gives them more operational and trading flexibility, reducing their reliance on traditional long-term supply contracts.”

Alex Mills is the former President of the Texas Alliance of Energy Producers. The opinions expressed are solely of the author.

[ceo_energemsier + 1,818]

https://www.shell.com/business-customers/marine/imo-2020.html

 

https://www.benzinga.com/government/19/05/13668989/lawmakers-pressure-white-house-on-imo-2020-implementation

 

 

https://www.mckinsey.com/industries/oil-and-gas/our-insights/imo-2020-and-the-outlook-for-marine-fuels

 

https://www.mckinsey.com/industries/oil-and-gas/our-insights/imo-2020-and-the-outlook-for-marine-fuels

Opportunities for different sectors

A market shift of this magnitude creates both threats and opportunities for players across the value chain:

• HSFO marketing. Current producers of high-sulfur bunker fuel will need to look for alternative end uses, but there will be strong competition to capture the opportunities for power generation and other industrial uses. Some end uses—like substitution against direct crude burn and against coal—may currently be considering fuel oil as an option and could become viable should differentials widen significantly.
• Low-sulfur fuel oil blending. If reliable supplies materialize, demand for 0.5 percent resid should grow. Capturing this opportunity will require segregating and aggregating existing volumes of low-sulfur resid material from refiners that are currently feeding it to conversion. This will likely require new commercial agreements and some investment in tankage and logistics.
• Refinery investment. Much wider differentials should make investments in conversion (such as coking) attractive, but the time to capitalize on this opportunity has likely passed, given how long it takes to complete a project. History would suggest that a wave of investments is likely to follow a widening of differentials, but many of the projects will come online too late to capture the full upside potential.
• Bunker-fuel sourcing. Shippers will face a growing array of options for fueling their fleets, including shifting to marine gasoil, sourcing low-sulfur resid, and investing in scrubbers or LNG. Making the right move at the right time should have big economic consequences.

This article appeared in the September 2018 edition of Tank Storage Magazine and is reprinted here by permission.

 

 

 

http://www.seatrade-maritime.com/images/PDFs/SOMWME-whitepaper_Sulphur-p2.pdf

 

 

https://www.forbes.com/sites/flexport/2019/04/08/imo-2020-what-shippers-need-to-know-now/#13df8e004812

 

 

https://www.woodmac.com/nslp/imo-2020-guide/

 

 

 

https://www.hapag-lloyd.com/en/about-us/sustainability/imo-2020.html

 

 

 

6/05/2019

 

Ship owners and refiners are scrambling to prepare for an international rule that will lower sulphur limits in marine fuel.

IMO 2020 is half a year away from implementation, yet the fuel that’s set to lose the bulk of its market share is surging in value. Globally, first quarter refining margins were weaker than usual for gasoline, naphtha and LPG, and stronger than normal for middle distillates. This trend corresponds to market expectations, as middle distillates will grab more market share in the IMO 2020 transition.

What’s stunning is the exceptional outperformance of fuel oil. Crack spreads hit 20-year highs in some regions, and outperformed margins for gasoline, which is typically the highest-performing refined fuel. How did it happen?

The global crude slate is lightening
Traditional relationships between light and heavy crude are skewed in today’s marketplace. US crude output growth of light, sweet crude is outpacing the production of heavier, sour oil that comes from countries are struggling with output.

Geopolitics’ outsized influence
Supply shortages of heavy oil are emerging around the globe. Venezuela’s electric grid is unreliable and contributing to oil production losses on top of new US sanction. Now President Trump put an end to Iranian sanction waivers, cutting off access to sulphur-rich crude that is commonly used to make the fuel oil that powers ships.

Refinery investments are geared to IMO 2020
As part of the preparations for IMO 2020, refiners around the world have geared up by investing in upgrades to coking and hydrocracking capacity. These refinery units are designed to break down heavy oil into lighter products, serving to reduce production of fuel oil.

Looking ahead to next quarter’s refining margins, we’re bullish. Summer products demand will combine with stronger diesel needs ahead of the IMO bunker specification change at the turn of 2020.

IMO 2020 insights hub
How will IMO 2020 affect the crude market and fuel prices? Who will be affected and what does this mean for your business?

The IMO 2020 Insights hub provides you with latest and thought-provoking insights to understand how IMO standards will affect fuel markets and evaluate potential new opportunities. Our trusted market intelligence across sectors, proprietary tools and expert analysis helps you plan and strategise for a post-IMO 2020 reality.
Source: Wood Mackenzie

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Oil firms struggle to meet IMO 2020 clean fuel for ships

in International Shipping News 06/05/2019

 

Barely eight months to the take-off of the new shipping fuel regulations by the International Maritime Organisation (IMO), oil firms and refiners have begun jostling for significant share of the new fuel market created by the shipping sector.To this end, some of the leading oil companies have introduced new sulphur-content-compliant oil, while others are wooing shipping firms to Liquefied Natural Gas (LNG) for vessels under the new regime.

By The Guardian’s evaluation, the shipping firms appear on top of the game, as they continue to weigh the options; the costs and market implications. The shippers are worried about the cost of shipping. Maritime nations are shaping strategies for smooth compliance. But the oil firms are smiling and working hard to break new grounds.The first in the race is Petrobras (the Brazilian oil giant), which has just produced and supplied its first batch of IMO 2020-compliant marine fuel.

The fuel oil was produced in the 45,000-barrel per day (bpd) Isaac Sabba Refinery in Manaus, Brazil. According to Petrobras, it has 0.34pc sulphur content, viscosity of 323cst at 50°C, and density of 932.7 kg/m3 at 15°C. A batch of 618t was supplied on April 21st to a vessel it chartered.

However, Petrobras is yet to determine how it will price its IMO 2020-compliant fuel, while awaiting more clarity in the market.
Also, other Petrobras’ Brazilian refineries are testing production of IMO 2020-compliant fuel oil, even as the company does not plan to market high-sulphur fuel oil to vessels with scrubbers after the marine fuel regulation begins next year Industry sources said refiners are now testing a series of blends of low sulphur fuels, and trial results are expected to be available over the next several weeks.

Barring any unforeseen circumstances, the IMO’s bunker fuel regulations come into effect on January 1, 2020. The sulfur content limits in bunker fuels used outside the designated Emission Control Areas (ECAs) will be reduced to 0.5% (from 3.5%) to reduce air emissions from shipping.

High sulphur fuel oil (HSFO) currently represents nearly 80% (approx. 3.84 million bpd) of the 5.0 million bpd global bunker demand, which will become non-compliant. Essentially, ship owners have three options: 1) Switch to compliant fuels, such as oil products with low sulphur content or alternative fuels such as LNG; 2) Install SOx scrubbers (exhaust gas cleaning systems); or 3) Fail to comply with regulations (non-compliance).

In preparation for IMO 2020, Shell Marine has also introduced Shell Alexia 4, a new two-stroke engine cylinder oil specifically for use with engines running on 0.5% sulphur content or very low sulphur fuel oil (VLSFO). With a base number of 40, Shell’s Alexia 40 has been developed to optimise equipment performance and condition as ship owners and charterers prepare for the IMO’s 0.50% global sulphur limit for marine fuels in 2020.Shell Marine expects most of the world’s shipping fleet will aim to comply with IMO 2020, by switching to fuels with a sulphur content of 0.5% and below.

Shell Marine Global General Manager, Joris van Brussel, said: “Shell Marine can help ship owners and charterers be prepared, as the world moves to a low emissions future. As a trusted partner, we will help our customers to have the right lubricants in the right place at the right time to take the uncertainty out of fuel selection.”

After extensive testing at Shell’s Marine & Power Innovation Centre in Hamburg, and working closely with original equipment manufacturers, Shell Alexia 40 has undergone thousands of hours of trials on board four ships with the latest engine types, using representative IMO 2020-compliant fuels, to verify performance at sea.

The new product will be available for use in Singapore from June 1, 2019, and will be gradually introduced to other main supply ports within the Shell Marine global network such as the U.S., China, United Arab Emirates, and the Netherlands before January 1, 2020.
Meanwhile, the DNV GL and Keppel Marine and Deepwater Technology (KMDTech), a subsidiary of Keppel Offshore & Marine (Keppel O&M), have signed a framework agreement to boost the uptake of liquefied natural gas (LNG) as ship fuel.The agreement, according to the partners, covers potential new building projects including LNG bunker vessels, small-scale LNG carriers and floating storage regasification units (FSRUs), as well as LNG related assets employing battery and hybrid technologies. Raystad Energy Research and Analysis estimated that around 700,000 bpd of VLSFO will be available in 2020, rising sharply to 1.3 million bpd in 2025.“In 2020, we estimate that another 600,000 bpd of marine fuel demand will be satisfied by blends manufactured from existing low-sulphur fuels, middle distillates and high sulphur fuel oil.