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

[D Coyne + 305]

25 minutes ago, William Edwards said:

You have a correct picture of unilaterally withholding desired supplies to blackmail a price increase. That can physically occur and has occurred in the past. But you seem to have blinders on for the other, more common situation where a producer has more oil to sell than the market wants. Incidentally, that is the normal situation. In fact, I know of only one instance in recent history, around 1970, when supplies were physically snug versus demand, in spite of inaccurate commentary to the contrary. Check the BP data for validation.

Turning to today's situation where Aramco would like to produce 10 MMB/D and the market only wants 8 MMB/D, you will see up close and first hand the reason for my question. How, physically, can they pump more oil? Their tanks are already full. Into what do they pump? It is a physical containment situation. Price is immaterial at this point. Until you can understand this question and provide a sensible, realistic, practical (versus imaginary) answer any further discussion is pointless.

William,

I agree nobody can create demand for their oil that doesn't exist.  What makes you suggest the market only wants 8 Mb/d? I would suggest that I have not heard that the Saudis are pumping oil into the sea. Let's assume you are correct and that all of their storage facilities are full.  The Saudis produced 10 Mb/d of crude in Feb 2019 (March OPEC report), so I am unsure where you get the 8 Mb/d in your example.  I agree the only way to pump more is to claim they will increase output to their quota level (10.5 Mb/d), alternatively they could reduce their differential to the futures price and discount their oil, it seems this is not the way it is done.  A simple way to explain the "correct answer" is to give it.  You talk in circles and conundrums, and I agree it is fruitless. If you have knowledge to share then do so.

[Jan van Eck + 7,558]

13 minutes ago, Rasmus Jorgensen said:

William, 

I have read your post with great interest and mostly agree. But I think you are overlooking scrubber technology. Yes, they are expensive and nobody really knows the running costs. But the shipowners that can afford the CAPEX would get much lower OPEX.

Not really.  First up, scrubbers are long-lead-time items.  The clock is ticking fast.  Second, there is limited real estate on ships.  So the scrubbers have to crowd into the engine room and the stack, or the shipyard has to start cutting holes in places and eliminating other rooms, not so pleasant.  Third, ships do not have a very long life, the fleet gets scrapped in about 20 years.  Older ships are not going to see a real return on the installation.  Fourth, the scrubbers have to compete with ballast-water-treatment installations, also demanding scarce space.  Fifth, scrubbers are likely incompatible with slow steaming, as you need a certain heat in the exhaust stream to get them to work.  Sixth, you need to train the crews in their operation.  If the crews screw it up, you end up with damaged machinery.  Seventh, the ship has to go out of service and into a dockyard while that scrubber is installed, fitted and tested out.  And that costs lost revenues, at a time when shipowner margins are very, very tight.  Too many problems; better to demand the fuel suppliers provide a properly conditioned fuel. 

[D Coyne + 305]

23 minutes ago, Jan van Eck said:

Yet you do have to get away from genuflecting before free-market orthodoxy.  In oil, there is no real free market.  It is all being manipulated, and the market makers are motivated by lots of inputs, ranging from hatred of Israel to fury at being part of the left-behind world, backward and insular, as far as the Middle East goes, to  the huzzah mentality of the Texan oilfields.  And not to be ignored are the futures traders in there, motivated by greed and fear.  None of this is a pure market of willing buyers and willing sellers, that is a Friedmanesque fantasy. 

Once you get past Milton Friedman and his academic ideas, you are left with the realpolitik of Henry Kissinger and the brute force legacies of John Foster Dulles, Margaret Thatcher and Ronald Reagan.  If Canada is going to survive in that crowd, then it had better develop a domestic market for Alberta oil, and do so fast.  And that implies closing the borders to oil imports without special permits  (and then not handing out the permits).   Such is life in the (very rough) oil patch. If the Canadians want to avoid getting totally hammered, they have few options. 

Jan van Eck,

I disagree, but that is up to Canada, seems it would mean higher oil prices for Canadian consumers, not a popular policy I would think.  I will leave that for Canadians to decide.

[William Edwards + 708]

4 minutes ago, D Coyne said:

William,

I agree nobody can create demand for their oil that doesn't exist.  What makes you suggest the market only wants 8 Mb/d? I would suggest that I have not heard that the Saudis are pumping oil into the sea. Let's assume you are correct and that all of their storage facilities are full.  The Saudis produced 10 Mb/d of crude in Feb 2019 (March OPEC report), so I am unsure where you get the 8 Mb/d in your example.  I agree the only way to pump more is to claim they will increase output to their quota level (10.5 Mb/d), alternatively they could reduce their differential to the futures price and discount their oil, it seems this is not the way it is done.  A simple way to explain the "correct answer" is to give it.  You talk in circles and conundrums, and I agree it is fruitless. If you have knowledge to share then do so.

Like an oil producer, I can only share info if there is a competent receiver, both willing and able. I am guessing that you are able but unwilling, either because of pre-conceived barriers or laziness. OPEC's latest production report provides the 8 MMB/D figure, if you take the trouble to look it up. Or you can take my word (the wise choice) or continue to wallow in your preconceived inaccurate "conventional wisdom".  Your choice.

I tried!

[D Coyne + 305]

Just now, William Edwards said:

Like an oil producer, I can only share info if there is a competent receiver, both willing and able. I am guessing that you are able but unwilling, either because of pre-conceived barriers or laziness. OPEC's latest production report provides the 8 MMB/D figure, if you take the trouble to look it up. Or you can take my word (the wise choice) or continue to wallow in your preconceived inaccurate "conventional wisdom".  Your choice.

I tried!

For Saudi output it is 9787 kb/d for March 2019 from April 2019 report from OPEC,

Not sure what report you are looking at, perhaps you are referring to the exports of Saudi Crude, which in 2017 were about 7178 kb/d in 2017 according to BP, Saudi consumption of crude was 2816 kb/d (using OPEC production data minus BP export data for crude).  Note that I consider Saudi Arabia's own consumption of crude as part of demand, just as in the US I consider US demand for oil produced in the US as part of World demand for US crude oil.  Perhaps you look at this differently, it is not clear if you believe Saudi Output is 8 Mb/d, if so you are wrong or you have access to a report that I do not.

https://www.opec.org/opec_web/en/publications/338.htm

I used link above to download the report see page 58.

 

[William Edwards + 708]

57 minutes ago, D Coyne said:

For Saudi output it is 9787 kb/d for March 2019 from April 2019 report from OPEC,

Not sure what report you are looking at, perhaps you are referring to the exports of Saudi Crude, which in 2017 were about 7178 kb/d in 2017 according to BP, Saudi consumption of crude was 2816 kb/d (using OPEC production data minus BP export data for crude).  Note that I consider Saudi Arabia's own consumption of crude as part of demand, just as in the US I consider US demand for oil produced in the US as part of World demand for US crude oil.  Perhaps you look at this differently, it is not clear if you believe Saudi Output is 8 Mb/d, if so you are wrong or you have access to a report that I do not.

https://www.opec.org/opec_web/en/publications/338.htm

I used link above to download the report see page 58.

 

You are correct and I was wrong with my numbers. We are using the same OPEC table and I erred in my reporting. I can explain but not justify my mistake. I ask your forgiveness, and I will replace my inappropriate suggestion of laziness on your part with my acceptance of criticism for sloppy work on my part. 

As you report, the Saudis produced only 9,794 instead of their allowed quota of 10,311, or 500 instead of my erroneous 2000, but still significantly less than allowed. OPEC's total reduction in production was about 2000, not Aramco alone. You suggest that Aramco didn't want to produce the quota. I suggest that that story is spin and that customer demand limited production by the half-a-million barrels a day. The 8 MMB/D figure comes from al Falih in a news conference after the quota announcement, in which he stated that reducing output was not an unlimited option, for example 8 MMB/D was unacceptable.

Neither of us has the proof at this point regarding "want to or have to", but the continually growing inventory situation and empty tankers coming from the Middle East for US oil tells us something about demand for Saudi crude. I expect definitive proof soon. I will report then.

I might pass on one other hint about the Saudi "want to vs forced to" reduction. Al Falih already know what April production was and he also know what May's firm nominations are. So he is two month ahead of us on data. I submit that if he already know that demand fell short, he will be saying that they may cut back more in April and May. Keep the positive spin going. And when he hinted that the may favor continued cutback by OPEC for the second half, he is seeing the handwriting on the wall, and he wants others to cut more so that he doesn't have to cut as much. That foretells price weakness in the last half.

My apologies again for my error.

Edited May 1, 2019 by William Edwards

[D Coyne + 305]

11 hours ago, William Edwards said:

You are correct and I was wrong with my numbers. We are using the same OPEC table and I erred in my reporting. I can explain but not justify my mistake. I ask your forgiveness, and I will replace my inappropriate suggestion of laziness on your part with my acceptance of criticism for sloppy work on my part. 

As you report, the Saudis produced only 9,794 instead of their allowed quota of 10,311, or 500 instead of my erroneous 2000, but still significantly less than allowed. OPEC's total reduction in production was about 2000, not Aramco alone. You suggest that Aramco didn't want to produce the quota. I suggest that that story is spin and that customer demand limited production by the half-a-million barrels a day. The 8 MMB/D figure comes from al Falih in a news conference after the quota announcement, in which he stated that reducing output was not an unlimited option, for example 8 MMB/D was unacceptable.

Neither of us has the proof at this point regarding "want to or have to", but the continually growing inventory situation and empty tankers coming from the Middle East for US oil tells us something about demand for Saudi crude. I expect definitive proof soon. I will report then.

I might pass on one other hint about the Saudi "want to vs forced to" reduction. Al Falih already know what April production was and he also know what May's firm nominations are. So he is two month ahead of us on data. I submit that if he already know that demand fell short, he will be saying that they may cut back more in April and May. Keep the positive spin going. And when he hinted that the may favor continued cutback by OPEC for the second half, he is seeing the handwriting on the wall, and he wants others to cut more so that he doesn't have to cut as much. That foretells price weakness in the last half.

My apologies again for my error.

William,

Not a problem.  I agree, there is likely not demand for the oil at the current price level.  If there was such demand, and Saudi Arabia is capable of producing that oil for a sustained period (so far they have never produced at 10.6 Mb/d for two consecutive quarters) then the Saudis would produce and sell that oil.

Consider an alternative hypothesis, namely that the Saudis are producing below quota because they cannot produce 10.6 Mb/d sustainably at their present level of investment and that 10.4 Mb/d (or perhaps lower) is the best they can manage.  Until I see evidence of the Saudis maintaining 11 Mb/d for two consecutive quarters, I won't believe the supposed "spare capacity" numbers.

I do agree at 9.8 Mb/d, the Saudis were not seeing much demand in February at the prevailing price of oil, this might change with reduced Iranian exports in May.  On Tuesday May 14 we will have more OPEC data for March output (and revisions for earlier months).

Also on the lack of demand for Saudi crude, they often will claim the market is well supplied with crude.  This is no doubt the same as saying we like the current price level and there is no more demand for our crude at the present oil price level.

You have claimed that all Saudi storage tanks are full, do you have any evidence of this?  I see nothing about OPEC stock levels in the OPEC Oil Market report.  I assume OPEC nations have some ability to store oil, but data seems to be lacking.

[D Coyne + 305]

Mr Edwards,

Thanks for the conversation, I have learned much.

You suggested earlier that the BP data suggests demand is always less than supply (or most of the time.)

Think about mass balance and one would realize this cannot be the case unless there are storage tanks with infinite capacity.

The problem with the BP data is that the production data and consumption data include different things so it is difficult to compare consumption and production data.  Even if we use mass rather than volume, we don't have a good handle on additives in the refinery process, some of which may come from natural gas production rather than NGL.  Since 1983 the days of forward supply has been trending down when we use a mass balance of tonnes of production (including biofuel production) and tonnes of consumption using BP Statistical Review of World Energy.  See chart.  Stock levels have increased because the oil industry has become larger over time (more tonnes of oil produced, refined, and consumed, so more pipelines, storage tanks etc all of which tends to increase absolute storage levels.)

Edited May 2, 2019 by D Coyne

[William Edwards + 708]

2 hours ago, D Coyne said:

William,

Not a problem.  I agree, there is likely not demand for the oil at the current price level.  If there was such demand, and Saudi Arabia is capable of producing that oil for a sustained period (so far they have never produced at 10.6 Mb/d for two consecutive quarters) then the Saudis would produce and sell that oil.

Consider an alternative hypothesis, namely that the Saudis are producing below quota because they cannot produce 10.6 Mb/d sustainably at their present level of investment and that 10.4 Mb/d (or perhaps lower) is the best they can manage.  Until I see evidence of the Saudis maintaining 11 Mb/d for two consecutive quarters, I won't believe the supposed "spare capacity" numbers.

I do agree at 9.8 Mb/d, the Saudis were not seeing much demand in February at the prevailing price of oil, this might change with reduced Iranian exports in May.  On Tuesday May 14 we will have more OPEC data for March output (and revisions for earlier months).

Also on the lack of demand for Saudi crude, they often will claim the market is well supplied with crude.  This is no doubt the same as saying we like the current price level and there is no more demand for our crude at the present oil price level.

You have claimed that all Saudi storage tanks are full, do you have any evidence of this?  I see nothing about OPEC stock levels in the OPEC Oil Market report.  I assume OPEC nations have some ability to store oil, but data seems to be lacking.

One cannot undeniably exclude your suppositions that the Saudis might be blowing smoke on their spare capacity. However I will put my money on the probability that they can produce, from 250 billion barrels of reserves, more dependably and in greater quantities than the US can with one half that quantity of reserves, although, at the moment, our production is equal. We both realize that past performance does not distinguish between maximum capacity and maximum demand. Further, the concept of "spare capacity" is often misunderstood. As long as there is enough, it doesn't really matter how much more you might, theoretically, need. You will never use more than "enough". 

I suggest that we allow future events to instruct us on whether there is enough oil supply. (There will be. The law of conservation of matter requires supply and consumption to match.)

[William Edwards + 708]

2 hours ago, D Coyne said:

Mr Edwards,

Thanks for the conversation, I have learned much.

You suggested earlier that the BP data suggests demand is always less than supply (or most of the time.)

 Think about mass balance and one would realize this cannot be the case unless there are storage tanks with infinite capacity.

The problem with the BP data is that the production data and consumption data include different things so it is difficult to compare consumption and production data.  Even if we use mass rather than volume, we don't have a good handle on additives in the refinery process, some of which may come from natural gas production rather than NGL.  Since 1983 the days of forward supply has been trending down when we use a mass balance of tonnes of production (including biofuel production) and tonnes of consumption using BP Statistical Review of World Energy.  See chart.  Stock levels have increased because the oil industry has become larger over time (more tonnes of oil produced, refined, and consumed, so more pipelines, storage tanks etc all of which tends to increase absolute storage levels.)

I cannot get past this statement until I understand what you are saying.

"You suggested earlier that the BP data suggests demand is always less than supply (or most of the time.)

 Think about mass balance and one would realize this cannot be the case unless there are storage tanks with infinite capacity."

Thinking about mass balance is exactly the concept that proves my point. Infinite anything is impossible. Plesse describe the logic behind your statement.

 

[D Coyne + 305]

14 minutes ago, William Edwards said:

I cannot get past this statement until I understand what you are saying.

"You suggested earlier that the BP data suggests demand is always less than supply (or most of the time.)

 Think about mass balance and one would realize this cannot be the case unless there are storage tanks with infinite capacity."

Thinking about mass balance is exactly the concept that proves my point. Infinite anything is impossible. Plesse describe the logic behind your statement.

 

Mr Edwards,

I believe you said something to the effect that in the real oil market there is consistently too much supply and not enough demand and we could see that in the BP data.

Let us assume that since 1965 there was 500 kb/d more supply than demand every day.  That is 53 years times 365.25 days per year times 0.5 Mb/d=9679 Million barrels of storage capacity needed at the end of 2018.  So that would not be infinite for this example, but it is likely about twice as much as the World actually has in storage capacity, note that in this example I assumed no oil was stored in 1965, which is unlikely, if we assume 60 days of forward supply at the end of 1964 we would add another 1869 Mb to storage so we would need to have 11,548 Mb of oil stored at the end of 2018 to accommodate all the extra supply.

The logic is that there is not always excess supply at the prevailing price.  In fact my chart suggests why oil prices were high in 2011 to 2014 and why they were much lower in 2015-2017.

Edited May 2, 2019 by D Coyne

[William Edwards + 708]

2 minutes ago, D Coyne said:

Mr Edwards,

I believe you said something to the effect that in the real oil market there is consistently too much supply and not enough demand and we could see that in the BP data.

Let us assume that since 1965 there was 500 kb/d more supply than demand every day.  That is 53 years times 365.25 days per year times 0.5 Mb/d=9679 Million barrels of storage capacity needed at the end of 2018.  So that would not be infinite for this example, but it is likely about twice as much as the World actually has in storage capacity, note that in this example I assumed no oil was stored in 1965, which is unlikely, if we assume 60 days of forward supply at the end of 1964 we would add another 1869 Mb to storage so we would need to have 11,548 Mb of oil stored at the end of 2018 to accommodate all the extra supply.

The logic is that there is not always excess supply at the prevailing price. In fact my chart suggests why oil prices were high in 2011 to 2014 and why they were much lower in 2015-2017.

Please show me where I said that "there was consistently to much supply". There is never too much supply, just enough. There is always too much supply capability, whether that capability to oversupply is one barrel or ten million barrels. "Enough" is all that will ever be used. If anything that I ever said came across otherwise, particularly if if indicated anything different than "supply always equals consumption", then I either misspoke or you misunderstood. Mass balance is an irrevocable requirement.

To your statement "In fact my chart suggests why oil prices were high in 2011 to 2014 and why they were much lower in 2015-2017." No surprise her since historical data might "suggest" a lot of things to a lot of people, most of whom have not or cannot discriminately analyze the data. If you want to know the real explanation of why oil prices were lower in 2015 than 2013, I can tell you. But the data prove that inventory levels were not the cause, but the result.

[D Coyne + 305]

21 minutes ago, William Edwards said:

One cannot undeniably exclude your suppositions that the Saudis might be blowing smoke on their spare capacity. However I will put my money on the probability that they can produce, from 250 billion barrels of reserves, more dependably and in greater quantities than the US can with one half that quantity of reserves, although, at the moment, our production is equal. We both realize that past performance does not distinguish between maximum capacity and maximum demand. Further, the concept of "spare capacity" is often misunderstood. As long as there is enough, it doesn't really matter how much more you might, theoretically, need. You will never use more than "enough". 

I suggest that we allow future events to instruct us on whether there is enough oil supply. (There will be. The law of conservation of matter requires supply and consumption to match.)

William,

Yes the supply is equal to demand "law" is a tautology.  In 2025 we will see how much the Saudis produce, note also that the spare capacity of many other Persian Gulf producers is much less than Saudi Arabia and not proportional to the difference in reserves between those nations.  All OPEC nations inflate their reserves so their production quotas are larger, we don't really know what their reserves are we only know what they produce, if we take a look at their output levels over the 2011- 2014 period when oil prices were very high we can get an idea of their maximum output levels (Libya is an exception due to civil war).  Possibly there were some projects brought on line during that period which might have raised maximum output levels a bit, we will know more when oil prices rise to $90/b or more around 2022 when tight oil output nears its peak.  When World oil output peaks in 2024-2026 that is when we find out the real spare capacity of OPEC.

[William Edwards + 708]

6 minutes ago, D Coyne said:

William,

Yes the supply is equal to demand "law" is a tautology.  In 2025 we will see how much the Saudis produce, note also that the spare capacity of many other Persian Gulf producers is much less than Saudi Arabia and not proportional to the difference in reserves between those nations.  All OPEC nations inflate their reserves so their production quotas are larger, we don't really know what their reserves are we only know what they produce, if we take a look at their output levels over the 2011- 2014 period when oil prices were very high we can get an idea of their maximum output levels (Libya is an exception due to civil war).  Possibly there were some projects brought on line during that period which might have raised maximum output levels a bit, we will know more when oil prices rise to $90/b or more around 2022 when tight oil output nears its peak.  When World oil output peaks in 2024-2026 that is when we find out the real spare capacity of OPEC.

A doubting Thomas can always postpone the acceptance of reality -- for a time. Enjoy your denial! I do not know what your underlying motive is for what I see as an obvious denial of reality and sound logic, but I do not need to know. I just see the evidence thereof and include that assessment in my willingness to continue our dialog.

Edited May 2, 2019 by William Edwards

[D Coyne + 305]

17 hours ago, William Edwards said:

You have a correct picture of unilaterally withholding desired supplies to blackmail a price increase. That can physically occur and has occurred in the past. But you seem to have blinders on for the other, more common situation where a producer has more oil to sell than the market wants. Incidentally, that is the normal situation. In fact, I know of only one instance in recent history, around 1970, when supplies were physically snug versus demand, in spite of inaccurate commentary to the contrary. Check the BP data for validation.

Turning to today's situation where Aramco would like to produce 10 MMB/D and the market only wants 8 MMB/D, you will see up close and first hand the reason for my question. How, physically, can they pump more oil? Their tanks are already full. Into what do they pump? It is a physical containment situation. Price is immaterial at this point. Until you can understand this question and provide a sensible, realistic, practical (versus imaginary) answer any further discussion is pointless.

Note that the bold was added by Dennis Coyne.

Hi William,

The part in bold seems to imply that an oversupply of oil (that is "more oil to sell than the market wants...is the normal situation").

Would you care to explain what you were trying to say in that comment?  I guess I may have misunderstood.

I did indeed check the BP data and note that the 1965-1980 data seems to not be very good for consumption vs production data at the World level.  If we focus on 1980-2017 and days of forward supply we see that storage has increased as output has increased with the average days of forward supply being at about 60 days (similar to recent levels for the OECD).  Note that I arbitrarily set the storage level in 1980 for the World at 500 million tonnes of oil, we do not have actual storage level data for the World.

I chose a level that would give a similar level to OECD storage level in terms of Days of forward supply in 2017.  Using OECD data and days of forward supply and assuming the level for the World would be similar to the OECD we get the following chart. To match OECD data for 1990-2010 I assume World oil stocks are 780 million tonnes (5717 MMb) in 1980.

Edited May 2, 2019 by D Coyne

[William Edwards + 708]

1 minute ago, D Coyne said:

Hi William,

The part in bold seems to imply that an oversupply of oil (that is "more oil to sell than the market wants...is the normal situation").

Would you care to explain what you were trying to say in that comment?  I guess I may have misunderstood.

OK. We are making some progress. You physically cannot sell more oil than you have. You cannot physically consume more oil than the actual availability. Absolute! Those actual numbers are what BP reports. Now the suppliers' wish may be to sell more oil, but that wish cannot be fulfilled unless the consumer can and will take it. Likewise the consumer may wish to have more oil at a lower price, but the supplier makes that decision.

Usually suppliers provide enough capacity to supply, readily, all the oil that can be consumed. Good forward planning of capacity dictates that. In that way the supplier maintains the reputation of a "reliable supplier". (An unreliable supplier might be opportunistic and try to use supply availability "blackmail" on the consumers. OPEC has done this in the past. But that action is unidirectional --they can only restrain supply, not oversupply, because, as stated above, "You physically cannot sell more oil than you have"). Thus it is clear why there is always "more oil to sell than the market wants".

Does this help?

[Jan van Eck + 7,558]

4 minutes ago, D Coyne said:

William,

I agree nobody can create demand for their oil that doesn't exist.  What makes you suggest the market only wants 8 Mb/d? I would suggest that I have not heard that the Saudis are pumping oil into the sea. Let's assume you are correct and that all of their storage facilities are full.  The Saudis produced 10 Mb/d of crude in Feb 2019 (March OPEC report), so I am unsure where you get the 8 Mb/d in your example.  I agree the only way to pump more is to claim they will increase output to their quota level (10.5 Mb/d), alternatively they could reduce their differential to the futures price and discount their oil, it seems this is not the way it is done.  A simple way to explain the "correct answer" is to give it.  You talk in circles and conundrums, and I agree it is fruitless. If you have knowledge to share then do so.

Let me take a whack at this.  Oil is a good that economists describe as "inelastic."  It is a bit like kitchen salt.  You go down to the local store to buy a five-pound bag of salt, you really don't care if the price is $0.60 a lb., or if it is  $0.70 a lb.  You need the salt.  Same with oil: the users of oil - for example, the railroads with their diesel locomotives, they need that fuel, and they are not sensitive as to that price: they buy what they need, and they pay the price demanded  (OK, so they complain, but they buy it nonetheless). Your locomotive is not going to run without that diesel, and you need that locomotive to run.  So you buy the diesel. 

With inelastic goods, changes in the price are not going to produce large swings in the amount sold or consumed.  It is a "gotta have it" material.  Yes, over time, substitutes will evolve.  But right now, you buy what you need, and you are inelastic as to the price. 

For the supplier  (here, the producer), this is a bonanza.  The customer needs the product and will pay the cost of it, whatever you charge.  But - big but - when you attempt to reap a surcharge on your sales, the customer is likely to start "looking around" to find another supplier.  So in the oil business, if your diesel is $4 a gallon, and the customer can find a vendor t $3.65, he will bolt out the barn door.  Bye-bye customer. 

The problem thus facing the producer is that if he attempts to put more oil into the market, the only way it sells is if some other supplier is elbowed out of the market.  But at some point, somebody is going to not be in the market.  That entity will be whoever cannot elbow the others any more, and has to drop out.  Who might that be?  Logically, the last sales are done by the most desperate seller, who lowers his price to whatever bottom rung it takes to elbow that other supplier away. The ability to do that thus depends upon the cost of sales, or the cost of pumping (and delivering) that last amount of product.  At that point "somebody else" loses out and their wells or operations end up shut in. 

The argument that William Edwards makes here is that Canada is the highest-cost producer and the last entity able to withstand the elbowing process by lower-cost producers.  In open markets, he would be right.  But - big but - if Canada closes its oil market, then its Alberta producers (and the Newfoundland offshore producers) become the only producers in that market, and the customer cannot flee to yet another producer; those doors are closed by executive fiat. So yes, a government can force a demand upon the producers, as the end users are price inelastic.  You can actually produce and sell oil for more, even far more, than is available on the world market, IF you lock out the other players. 

[William Edwards + 708]

3 minutes ago, Jan van Eck said:

Let me take a whack at this.  Oil is a good that economists describe as "inelastic."  It is a bit like kitchen salt.  You go down to the local store to buy a five-pound bag of salt, you really don't care if the price is $0.60 a lb., or if it is  $0.70 a lb.  You need the salt.  Same with oil: the users of oil - for example, the railroads with their diesel locomotives, they need that fuel, and they are not sensitive as to that price: they buy what they need, and they pay the price demanded  (OK, so they complain, but they buy it nonetheless). Your locomotive is not going to run without that diesel, and you need that locomotive to run.  So you buy the diesel. 

With inelastic goods, changes in the price are not going to produce large swings in the amount sold or consumed.  It is a "gotta have it" material.  Yes, over time, substitutes will evolve.  But right now, you buy what you need, and you are inelastic as to the price. 

For the supplier  (here, the producer), this is a bonanza.  The customer needs the product and will pay the cost of it, whatever you charge.  But - big but - when you attempt to reap a surcharge on your sales, the customer is likely to start "looking around" to find another supplier.  So in the oil business, if your diesel is $4 a gallon, and the customer can find a vendor t $3.65, he will bolt out the barn door.  Bye-bye customer. 

The problem thus facing the producer is that if he attempts to put more oil into the market, the only way it sells is if some other supplier is elbowed out of the market.  But at some point, somebody is going to not be in the market.  That entity will be whoever cannot elbow the others any more, and has to drop out.  Who might that be?  Logically, the last sales are done by the most desperate seller, who lowers his price to whatever bottom rung it takes to elbow that other supplier away. The ability to do that thus depends upon the cost of sales, or the cost of pumping (and delivering) that last amount of product.  At that point "somebody else" loses out and their wells or operations end up shut in. 

The argument that William Edwards makes here is that Canada is the highest-cost producer and the last entity able to withstand the elbowing process by lower-cost producers.  In open markets, he would be right.  But - big but - if Canada closes its oil market, then its Alberta producers (and the Newfoundland offshore producers) become the only producers in that market, and the customer cannot flee to yet another producer; those doors are closed by executive fiat. So yes, a government can force a demand upon the producers, as the end users are price inelastic.  You can actually produce and sell oil for more, even far more, than is available on the world market, IF you lock out the other players. 

Nicely put, Jan. Soundly stated. But you neglected to mention the limitation imposed by quantity of consumption. This limitation restricts the government's ability to impose the high price to the maximum quantity that the nation can consume. And in the current case of Canada, that number may be lower than the oil sands availability. I lear[ve it to your greater knowledge of the situation to advise on the maximum quantity.

But it still appears that this approach is trying to pull one up with his own bootstraps. Does that work?

[Jan van Eck + 7,558]

2 minutes ago, William Edwards said:

Nicely put, Jan. Soundly stated. But you neglected to mention the limitation imposed by quantity of consumption. This limitation restricts the government's ability to impose the high price to the maximum quantity that the nation can consume. And in the current case of Canada, that number may be lower than the oil sands availability. I lear[ve it to your greater knowledge of the situation to advise on the maximum quantity.

But it still appears that this approach is trying to pull one up with his own bootstraps. Does that work?

But not to forget that Canada still has those export customers.  Currently likely well over 90% of oilsands oil is exported.  Those customers are still out there.  Unless other sources are developed, that would elbow the Canadian product out of the market, you would have both that export business and the walled-off domestic business.  At that point, you would be processing whatever the oilsands are having as output today  (which would motivate the processors to expand, no doubt!).  

Is it pulling ones self up by the proverbial bootstraps?  Sure it is.  It is a totally cynical way to force a market for Alberta oil.  Can it be done?  Well, in all candor, the alternatives are not particularly appetizing.  Seeing the Loonie drop to 55 cents and the housing market collapse to 50% or 45% is not quite appetizing, either.  At some point, very tough decisions have to be made.  Will the Canadians do it?  Probably not.  But that is more allocated to govt managerial incompetence than any flaw in this analysis. 

[William Edwards + 708]

16 minutes ago, Jan van Eck said:

But not to forget that Canada still has those export customers.  Currently likely well over 90% of oilsands oil is exported.  Those customers are still out there.  Unless other sources are developed, that would elbow the Canadian product out of the market, you would have both that export business and the walled-off domestic business.  At that point, you would be processing whatever the oilsands are having as output today  (which would motivate the processors to expand, no doubt!).  

Is it pulling ones self up by the proverbial bootstraps?  Sure it is.  It is a totally cynical way to force a market for Alberta oil.  Can it be done?  Well, in all candor, the alternatives are not particularly appetizing.  Seeing the Loonie drop to 55 cents and the housing market collapse to 50% or 45% is not quite appetizing, either.  At some point, very tough decisions have to be made.  Will the Canadians do it?  Probably not.  But that is more allocated to govt managerial incompetence than any flaw in this analysis. 

Might I remind you that the beginning of my analysis is the regulation that the mass balance of the world will require 13,000 T/D of sulfur to be removed from the marine fuel "burning" system at the stroke of midnight in eight months. The only physical way that I see for that quantity of reduction, that quickly, will include leaving a large portion of that sulfur in the ground, un-produced, and still stuck in its mother, the heavy sour crude. Therefore a large portion of the oil sands exports will be suddenly rejected in favor of US light, sweet crude CONTAINING NO SULFUR! Much of the oil sands export option will vanish overnight on Jan 1, 2020.

Now if there is something significant that I am missing, and you have a magic way to eliminate the 13,000 T/D of sulfur from the atmosphere, instantly, by other means, please inform me.

As a side note, today's oil futures  price  reaction to the anticipated problem of too much OPEC supply trying to elbow its way into the market gives a good preview of the Canadian price expectation at the end of this year as oil sands supply is rejected.

Edited May 2, 2019 by William Edwards

[D Coyne + 305]

1 hour ago, William Edwards said:

OK. We are making some progress. You physically cannot sell more oil than you have. You cannot physically consume more oil than the actual availability. Absolute! Those actual numbers are what BP reports. Now the suppliers' wish may be to sell more oil, but that wish cannot be fulfilled unless the consumer can and will take it. Likewise the consumer may wish to have more oil at a lower price, but the supplier makes that decision.

Usually suppliers provide enough capacity to supply, readily, all the oil that can be consumed. Good forward planning of capacity dictates that. In that way the supplier maintains the reputation of a "reliable supplier". (An unreliable supplier might be opportunistic and try to use supply availability "blackmail" on the consumers. OPEC has done this in the past. But that action is unidirectional --they can only restrain supply, not oversupply, because, as stated above, "You physically cannot sell more oil than you have"). Thus it is clear why there is always "more oil to sell than the market wants".

Does this help?

Yes agree 100%.  Your previous comment used the term "more oil to sell" which I understood to mean the oil that had been produced. It is clear now that you meant the potential to produce more oil than the consumer is willing to purchase.  In other words, producers do not always produce at capacity.  So a slightly different understanding between us for what it means to have "oil to sell".  I take "oil to sell" as oil that has been produced, stored and is awaiting delivery to a customer.  You seem to equate the ability to produce oil in the future, "call it potential output" with what I call oil supply.  Our different uses of these terms has us talking past one another, I think.

It is clear now, thanks.  I appreciate your patience.

[William Edwards + 708]

8 minutes ago, D Coyne said:

Yes agree 100%.  Your previous comment used the term "more oil to sell" which I understood to mean the oil that had been produced. It is clear now that you meant the potential to produce more oil than the consumer is willing to purchase.  In other words, producers do not always produce at capacity.  So a slightly different understanding between us for what it means to have "oil to sell".  I take "oil to sell" as oil that has been produced, stored and is awaiting delivery to a customer.  You seem to equate the ability to produce oil in the future, "call it potential output" with what I call oil supply.  Our different uses of these terms has us talking past one another, I think.

It is clear now, thanks.  I appreciate your patience.

I am pleased that we are getting on the same page with our terminology. That is important.

[Jan van Eck + 7,558]

44 minutes ago, William Edwards said:

As a side note, today's oil futures  price  reaction to the anticipated problem of too much OPEC supply trying to elbow its way into the market gives a good preview of the Canadian price expectation at the end of this year as oil sands supply is rejected.

Take a gander at today's Oilprice headline, reading:  Canadian Oil Driller shuts down, abandons 4,700 wells."  

It seems that Trident Exploration Ltd is totally out of business.  The article states that   "Trident does not have the funds to operate its infrastructure or enter into creditor protection. As a result, they have decided to walk away, leaving more than 4,400 licensed sites, many of them active, without an operator."   That last part, about not having even the funds to declare bankruptcy, is ominous.  It indicates a structural weakness in the Alberta oil patch.  

The article goes on to state that there are now 170,000 wells shut down in the oilpatch.  Some are sealed.  Some obviously not.  There are some 7,700 wells "awaiting remediation," at a cost estimate of $8 billion, out there; that is fully 1/3 of all of Alberta's wells.  Again, that is ominous.  Yet, Canada is sending crude via Enbridge to Sarnia and Montreal, so Alberta oil can be extracted and consumed - as long as there is a closed market.  Will the Canadian govt rise to the occasion?  Probably not.

[ceo_energemsier + 1,818]

5 minutes ago, Jan van Eck said:

Take a gander at today's Oilprice headline, reading:  Canadian Oil Driller shuts down, abandons 4,700 wells."  

It seems that Trident Exploration Ltd is totally out of business.  The article states that   "Trident does not have the funds to operate its infrastructure or enter into creditor protection. As a result, they have decided to walk away, leaving more than 4,400 licensed sites, many of them active, without an operator."   That last part, about not having even the funds to declare bankruptcy, is ominous.  It indicates a structural weakness in the Alberta oil patch.  

The article goes on to state that there are now 170,000 wells shut down in the oilpatch.  Some are sealed.  Some obviously not.  There are some 7,700 wells "awaiting remediation," at a cost estimate of $8 billion, out there; that is fully 1/3 of all of Alberta's wells.  Again, that is ominous.  Yet, Canada is sending crude via Enbridge to Sarnia and Montreal, so Alberta oil can be extracted and consumed - as long as there is a closed market.  Will the Canadian govt rise to the occasion?  Probably not.

Trident is not an oil player, they have been a shallow natgas and cbm driller producer, so that takes them out of the actual oil production game. Still the takeaway capacity seems to have been their major cause of the downfall. Given the right conditions being available, some other company/investor may come along and get these assets for pennies on the $.

_____________

 

 

" Trident Exploration Corp. (“Trident”) is a private, independent natural gas production company, principally focused on the exploration for and exploitation of natural gas resources in the Western Canadian Sedimentary Basin ("WCSB"). Trident’s operations are in Alberta, Canada and substantially target coalbed methane (“CBM”) as well as conventional shallow gas. Trident’s operations are focused in two core areas – Shallow Cretaceous Gas (“Cretaceous Gas”) concentrating in the Central Alberta shallow upper Cretaceous deposits within the WCSB; and the Mannville CBM operating area consisting primarily of gas production from Mannville CBM deposits in northern Alberta. "

April 30, 2019

Trident Exploration Corp. Ceases Operations

 

Calgary, Alberta - We regret to announce that Trident Exploration Corp. (“Trident”) ceased operations effective today, April 30, 2019. All 33 employees and 61 contractors have been terminated and approximately 4,700 wells are being transitioned to the care of the AER. Trident’s total estimated abandonment and reclamation obligations are approximately $329 million. Behind these obligations, we do not anticipate any recovery for shareholders and unsecured creditors. Likewise, any recovery for secured lenders is highly uncertain. 

 

We had been working openly and collaboratively with our lenders and the Alberta Energy Regulator (“AER”) since February. The combination of extremely low natural gas prices and high surface lease and property tax payments (totaling $0.72 C$/GJ) has exhausted the liquidity of the company. These challenges reached a tipping point with persistent, unaddressed capacity constraints on TransCanada’s NGTL system leading to April AECO prices averaging $0.81 C$/GJ and summer prices currently averaging $1.00 C$/GJ. Further, and despite our extensive efforts, Alberta has no mechanism to allow a struggling energy company such as Trident to address its inflated surface lease and property tax obligations. 

 

Although we had substantially settled the terms on a financing solution with our primary creditors for an orderly restructuring and sales process, we were unable to secure AER support for a restructuring in a timely fashion. Ultimately, the recent Redwater decision, regulatory uncertainty and a lack of egress has created a treacherous environment for energy investors that dare to risk their capital in Canada. 

 

As many have speculated and we have now unfortunately proven, the Redwater decision has had the unintended consequence of intensifying Trident’s financial distress and accelerating unfunded abandoned well obligations. Without regulatory collaboration and clarity, Trident is unable to address its near-term liquidity needs and has no financial ability to continue operating. We fear that many other companies may falter without clear, sound policy making post-Redwater. In the face of this extended uncertainty, lenders and investors may flee Canada and further job losses will occur. Without access to financing, we expect that the Orphaned Well Association may grow exponentially. 

 

We are incredibly grateful to everyone who has worked hard to help Trident grow over its history. Trident remains especially proud of its strong environmental, health, and safety record. 

 

About Trident Exploration Corp. 

 

Trident Exploration Corp. is an Alberta-based natural gas producer. Trident produces approximately 67,500 mcfe/d (4% liquids) and operates approximately 4,700 wells. As of its 2018 reserve audit, Trident has approximately 458 billion cubic feet equivalent of proved reserves.

 

[D Coyne + 305]

2 hours ago, William Edwards said:

A doubting Thomas can always postpone the acceptance of reality -- for a time. Enjoy your denial! I do not know what your underlying motive is for what I see as an obvious denial of reality and sound logic, but I do not need to know. I just see the evidence thereof and include that assessment in my willingness to continue our dialog.

William,

So I guess you have confidence in the OPEC reserves, with no independent audits since 1979, your faith is surprising.  It will be interesting to see how much spare capacity really exists for OPEC.  So far the maximum trailing 12 month average output for OPEC was in Sept 2017 at 34,138 kb/d (C+C output from EIA data).  This might be surpassed in the future if Libya, Venezuela, and Nigeria get their acts together and there is not too much decline from the very mature Middle east Supergiant fields, we will have to wait and see.