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

[ronwagn + 6,290]

That is beyond my ken but you sound like you are content to use a dirtier fuel that is more expensive because it is more profitable for the industry. I am concerned about using the best fuel that is the cleanest the least expensive and the most abundant.  Diesel air pollution is heavy in particulates and is a known carcinogen. They can pump it back into the ground and save it for whenever it might be needed rather than flaring off a better fuel.  

I realize it is a revolutionary and undesired idea for most in the industry. It is consumer oriented and saves the transportation industry money, therefore it saves the consumer money. 

Edited April 28, 2019 by ronwagn

[ronwagn + 6,290]

13 hours ago, William Edwards said:

The beauty of LNG is that it contains essentially no sulfur, so no need to remove the minuscule quantity contained therein. The downside is the difficulty and expense of transporting and handling. Topped low sulfur crude is much simpler, requires very cheap processing, and can happen much more quickly. LNG has little chance or penetrating the market for the lowest cost BTU's at the burner.

I think LNG can beat the price of diesel easily, especially where it is nearby or piped natural gas is available. It can be compressed as CNG for a lower price or used as LNG at a greater expense but still less than diesel. I do not think that LNG is needed except for ships or locomotives. New pipelines are being rapidly built as are ships that can carry LNG directly from offshore facilities to any port in the world that is set up to receive it. All this is well underway as seen on NGV Global http://www.ngvglobal.com/ and thousands of links that I have collected. 

https://docs.google.com/document/d/1_QZTgxCECgIj7EItX9P6Q2J4BjsSt_nPyrDG1zAl4b0/edit

Edited April 28, 2019 by ronwagn

[William Edwards + 708]

7 minutes ago, ronwagn said:

That is beyond my ken but you sound like you are content to use a dirtier fuel that is more expensive because it is more profitable for the industry. I am concerned about using the best fuel that is the cleanest the least expensive and the most abundant.  Diesel air pollution is heavy in particulates and is a known carcinogen. They can pump it back into the ground and save it for whenever it might be needed rather than flaring off a better fuel.  

I realize it is a revolutionary and undesired idea for most in the industry. It is consumer oriented and saves the transportation industry money, therefore it saves the consumer money. 

I think that we are on different pages. I thought that we were discussing the replacement of the only significant sulfur containing fuel, bunker fuel, with low sulfur oil. Automotive and truck diesel have already had all the sulfur removed, so that seems to be a non-issue. If trucker economics dictate LNG over diesel, then that will happen. But the tanker fuel issue is an entirely different matter. So far no light product can compete with the BTU value of heavy residual.

[ronwagn + 6,290]

1 hour ago, William Edwards said:

I think that we are on different pages. I thought that we were discussing the replacement of the only significant sulfur containing fuel, bunker fuel, with low sulfur oil. Automotive and truck diesel have already had all the sulfur removed, so that seems to be a non-issue. If trucker economics dictate LNG over diesel, then that will happen. But the tanker fuel issue is an entirely different matter. So far no light product can compete with the BTU value of heavy residual.

You are an expert and I defer to your knowledge of the heavy residual oil. Do we have a price so I can compare? I am addressing the new low suffer guidelines. Sorry for not making that clear. I have heard the term bunker oil and that it is VERY dirty. Is that not true?

https://shipandbunker.com/prices

https://www.platts.com/IM.Platts.Content/ProductsServices/ConferenceAndEvents/2012/pc251/presentations/Manuel_Carlier.pdf Great must see graphs here. Two to four year payback for LNG and new builds versus diesel ships. There is also a dual fuel option. 

Part Eleven of Natural Gas News https://docs.google.com/document/d/1_QZTgxCECgIj7EItX9P6Q2J4BjsSt_nPyrDG1zAl4b0/edit

Edited April 28, 2019 by ronwagn
addition

[William Edwards + 708]

2 minutes ago, ronwagn said:

You are an expert and I defer to your knowledge of the heavy residual oil. Do we have a price so I can compare? I am addressing the new low suffer guidelines. Sorry for not making that clear. I have heard the term bunker oil and that it is VERY dirty. Is that not true?

Bunker fuel is very dirty. It is the refiners' garbage stream. It is very cheap. It contains about 100 times as much sulfur as low sulfur diesel. Also, because it is a low gravity, it has a high heat content per barrel. Its price is almost always below the price of crude oil, whereas diesel fuel is often 1.5 times the price of crude. The preference of ship owners for residual oil as fuel is a no-brainer as long as the residual fuel can meet the sulfur spec. The change in the sulfur spec that has been mandated for January 1, 2020, reduces the allowable sulfur content from 3.5% S to 0.5% S. While that change still allows more than then times the sulfur content of diesel fuel, removing that quantity of sulfur from the garbage stream is quite a challenge. The crude producers whose crude produces high sulfur garbage have a steep hill to climb, starting in only a few months. The impact of the crude switches made necessary because of this spec change will surprise the elite traders of the world and shock the industry with the price impact -- unfavorably.

 

[ronwagn + 6,290]

Thanks for the great information! I am following this with great hopes for a move toward natural gas, sometime in the future. 

[William Edwards + 708]

9 minutes ago, ronwagn said:

Thanks for the great information! I am following this with great hopes for a move toward natural gas, sometime in the future. 

The supply glut of crude that will result from the sour crude producers' need for revenue beginning next year will present some stiff competition for natural gas that must bear the expense of liquefaction, which adds about the equivalent of $20/B on a BTU basis. If the price of crude drops below $30/B, that doesn't leave much room for the wellhead price of gas.

[ronwagn + 6,290]

1 minute ago, William Edwards said:

The supply glut of crude that will result from the sour crude producers' need for revenue beginning next year will present some stiff competition for natural gas that must bear the expense of liquefaction, which adds about the equivalent of $20/B on a BTU basis. If the price of crude drops below $30/B, that doesn't leave much room for the wellhead price of gas.

Well, at least it works out financially for the transportation industry and the consumer. 

[Osama + 248]

So this article expects no production increase in June:

"Saudi Arabia, for example, could increase production by another 500,000 bpd without going over its OPEC-imposed quota. If OPEC members, and Russia, are able to constrain their own eagerness to take over Iran’s market share, the market will be kept stable for longer. No news should be expected ahead of the June meeting in Vienna, not even during the OPEC+ ministerial monitoring meeting on May 19^th. Trump will soon need to find a way to explain to his voters why he can’t keep gasoline prices in check."

Link: https://oilprice.com/Energy/Energy-General/Why-An-OPEC-Oil-Supply-Surge-Wont-Happen.html

Some strong points!

[William Edwards + 708]

6 hours ago, Osama said:

So this article expects no production increase in June:

"Saudi Arabia, for example, could increase production by another 500,000 bpd without going over its OPEC-imposed quota. If OPEC members, and Russia, are able to constrain their own eagerness to take over Iran’s market share, the market will be kept stable for longer. No news should be expected ahead of the June meeting in Vienna, not even during the OPEC+ ministerial monitoring meeting on May 19^th. Trump will soon need to find a way to explain to his voters why he can’t keep gasoline prices in check."

Link: https://oilprice.com/Energy/Energy-General/Why-An-OPEC-Oil-Supply-Surge-Wont-Happen.html

Some strong points!

In the referenced article, the author reflects the appearance that he does not understand the fundamentals of supply and demand, although an alternate explanation is because he is a paid defender of Middle Eastern producer interests. As is obvious, if one thinks through the matter with intelligence, the Saudis are producing 500 MBB/D less than the quota because consumer demand has fallen short of their expectations. Now you can spin that fact to say "We are really doing a good job of cutting back supply", and the dummies of the world might believe it, but the accurate statement would be "The world didn't want our oil because others offered a better deal and there is a limit to demand." Same supply/demand data but opposite descriptions of the underlying causes. That can happen if you get the cart before the horse. Remember, producers cannot push oil into the market based upon their wishes, they can pump oil out AFTER the consumer sends in a vessel to receive the quantity of oil that the consumer has decided to buy. Consumers, not producers, set production levels.

[Osama + 248]

17 minutes ago, William Edwards said:

Consumers, not producers, set production levels

Very well said, Mr. Edwards!!

 

I agree with your analysis. As you observed in various posts above---there is enough supply in the world and oil prices have already started to cool down i.e. come down.

[John Foote + 1,135]

On 4/27/2019 at 1:53 AM, Osama said:

Well "Regime Change" has not worked out in many cases e.g., Iraq. Vietnam another example. Afghanistan too.

But that certainly doesn't stop the attempts, or the belief it works. 

[D Coyne + 305]

1 hour ago, Osama said:

Very well said, Mr. Edwards!!

 

I agree with your analysis. As you observed in various posts above---there is enough supply in the world and oil prices have already started to cool down i.e. come down.

Osama,

The interaction between consumers and producers sets the price at which a transaction occurs.  While it is true that a producer cannot sell what a consumer is unwilling to buy, likewise it is true that a consumer cannot buy a good that is not produced.

If the producer wants to sell a product that cannot find a buyer at price P, they offer the product at a lower price P'.

Saudi Arabia likes price P and chooses not to produce more oil which would result in a lower price.

Some simple math 10 Mb/d at 65/b vs 9.5 Mb/d at 70/b or 650 million $/d vs 665 million $/d.  I would choose the lower output and higher price if I were running Aramco, it seems they have made the same choice.  As far as weak demand, the IEA forecasts an increase in demand in 2019Q2 of about 1.6 Mb/d over 2018Q2, so we have to consider demand in relation to the price.

https://www.iea.org/media/omrreports/tables/2019-04-11.pdf

[William Edwards + 708]

3 minutes ago, D Coyne said:

Osama,

The interaction between consumers and producers sets the price at which a transaction occurs.  While it is true that a producer cannot sell what a consumer is unwilling to buy, likewise it is true that a consumer cannot buy a good that is not produced.

If the producer wants to sell a product that cannot find a buyer at price P, they offer the product at a lower price P'.

Saudi Arabia likes price P and chooses not to produce more oil which would result in a lower price.

Some simple math 10 Mb/d at 65/b vs 9.5 Mb/d at 70/b or 650 million $/d vs 665 million $/d.  I would choose the lower output and higher price if I were running Aramco, it seems they have made the same choice.  As far as weak demand, the IEA forecasts an increase in demand in 2019Q2 of about 1.6 Mb/d over 2018Q2, so we have to consider demand in relation to the price.

https://www.iea.org/media/omrreports/tables/2019-04-11.pdf

Your presumption that a $5/B increase in price reduces demand by 0.5 Mb/d is the key to your simple arithmetic. But historical data are not available to justify that correlation. So your assessment may not be so simple. And since your assumption on the quantitative impact of price on demand is your own private assessment, rather than data-based, you can readily see how the Saudis might imagine a different correlation as they make their assessment. In addition, they must also consider the long term impact of deciding how much of their reserves will stay in the ground permanently because they chose to hold rather than to sell while the selling was good. In actuality, the decision is not as simple as you suggest.

[ceo_energemsier + 1,818]

On 4/27/2019 at 8:27 AM, William Edwards said:

There are two or three major differences in our understanding. First, if the Saudis, or OPEC, could prevent the price from dropping to $20, why did they spend 15 years trying to get the price above the $20 range (in current dollars) in the eighties and nineties? The answer is that they, like you, have an incorrect understanding of the pricing mechanism. Without a correct understanding they have been unable to actually set the price at a predetermined level, or even keep it within pre-selected bounds. The just keep hoping that the CME will establish a desirable price. That "stable" price has varied from $20/B to $150/B, randomly, without conforming to correlatable fundamental driving forces. 

Stable price is relative to the time period it is being discussed for. In the 80s and 90s with the world markets, economies, demand, supply, competition, geopolitical forces and events dictated that the oil prices be range bound in the 20-30$/bbl range which also continued into the 90s and at one point the oil prices were down to 10$/bbl in the late 90s. Demand destruction from  very weak global economy due to the Asian market scares. You must have some expertise in judging a major oil producer , producing over 9mmbpd of crude oil and claiming that unlike you , they do not have a "correct understanding" of the pricing mechanism? Obviously they have lost out on what a trillion $ of profits by now if not more due to their flawed pricing mechanism? CME didnt exist till recent times for them to have based or relied upon for pricing guidance.

I do not know if I should say that you come across arrogant or not on the subject of understanding the pricing mechanism but according to my understanding and long time experience , it appears to be somewhat misguided. Bluntness is appropriate when it is relevant.

The price mechanism that has been in existence for the past 50 years as you say, and it has worked for just about everyone, except for your displeasure with it. The entire world's producers and buyers have been happy and content with it, buying , selling trading based on those pricing formulae.

You say "if you are allowed to make changes to your wording" and yet you go ahead and do it anyways? without actually first asking? LOL .

According to you, KSA does have a choice in being a swing producer and so on. KSA cannot stand by and watch the world go past them if they do not act in situations that call for them to act either to stem the production or ramp up production, if they do not act in either one of those situations, they will be labelled as unreliable by consumers and by producers. 40 years ago, global oil trade was transparent but not readily available to everyone outside of the trade and business of buying and selling, refining crude oil, shipping etc and was based on a few select benchmarks and was not as transparent as today. Yes there are many publications and industry media services, exchange houses, giving real time , timely and much more relevant and widespread data on actual deals , price structures, trade bids, closings, cargo movements , quality related matters covering a wide range of global/regional and local markets for a wide range or crude oil streams and related hydrocarbons. Argus, Platts, TOCOM, NYMEX, CME, DME,ICIS, Shanghai International Energy Exchange,  etc

I do agree that there is a divergence between futures prices and the crude oil prices realized from the physical sale of the various crude oil streams by producers of all sizes and structures, indies, state owned, integrated, majors, traders... And I also am not aware of your experience and accomplishments in the world of crude oil sales, marketing, trading, producing and managing drilloing/development and production plans/investment scope etc. So you may have an experience and have a different angle and approach to the world pricing than I may have.

Too many executives base their corporate budgets for oil and gas based on a futures benchmark and then end up losing $$$ on their regional crude oil being produced and not getting that value on paper. Specially true for produces in the US , with regional crude oils for example for Bakken getting a certain price that is removed from WTI or NYMEX or IL Basin crude, WY crude, Mid-Con crude, Appalachian Basin crude , Eagle Ford, Permian so on, while North sea crude oils are mostly based on the dwindling Brent stream.

In the end, producers will produce (most of them) as much volume of the commodity as the consumer wants to keep the balance in supply and demand and therefore the prices.

Re. the IMO: KSA can start upgrading their crude oils to lighter , lower sulphur sweeter crude oils or start blending their sour crude oil streams with their Super Light and or condensate streams. The latter will be cheaper and quicker, however for the long term, they will need to invest in crude oil upgrading techs and facilities. They already had mountains of sulphur piled up in the 90s and that I saw but there has been demand for that across various industries, with the added sulphur reduction from the industry to comply with IMO requirements, it will push down the sulphur prices. KSA can also form JV's with US producers and start blending operations of US shale crudes, condensates with their own , sour , heavier crude oils for EU markets. Will help us all out LOL.

KSA as it exists today, will not be able to survive a 20$/bbl oil price environment for an extended time period. The Royal house will collapse and the region will be thrust into chaos. The KSA Gov. as it stands , cannot survive a 20$/bbl market, all their programs to sustain them within their borders, and keeping a majority of their populace content with them , simply wont be tolerated for extended periods.

 

 

 

[D Coyne + 305]

1 hour ago, William Edwards said:

Your presumption that a $5/B increase in price reduces demand by 0.5 Mb/d is the key to your simple arithmetic. But historical data are not available to justify that correlation. So your assessment may not be so simple. And since your assumption on the quantitative impact of price on demand is your own private assessment, rather than data-based, you can readily see how the Saudis might imagine a different correlation as they make their assessment. In addition, they must also consider the long term impact of deciding how much of their reserves will stay in the ground permanently because they chose to hold rather than to sell while the selling was good. In actuality, the decision is not as simple as you suggest.

William,

I agree it is not simple.  What we know is that Saudi Arabia has chosen to produce 500 kb/d less than their quota.  It may be that their assessment of the market was such that their net revenue would be lower if they produced 500 kb/d more oil.  I can only guess.

Do you have a suggestion for why they chose to produce less oil?  I am open to an alternative hypothesis.  If there was a lack of demand at their offer price, why not change to a lower offer price so they could produce at their quota level?

[William Edwards + 708]

12 minutes ago, D Coyne said:

William,

I agree it is not simple.  What we know is that Saudi Arabia has chosen to produce 500 kb/d less than their quota.  It may be that their assessment of the market was such that their net revenue would be lower if they produced 500 kb/d more oil.  I can only guess.

Do you have a suggestion for why they chose to produce less oil?  I am open to an alternative hypothesis.  If there was a lack of demand at their offer price, why not change to a lower offer price so they could produce at their quota level?

Your statement "What we know is that Saudi Arabia has chosen to produce 500 kb/d less than their quota. " tells us all we need to know regarding the difference in our perspectives. Simply stated, they sold 500 MB/D less oil because they had no buyer willing to take the oil, not because they refused to sell. They reduced production because they were forced to. It was not their first choice. That fact puts an entirely different perspective on the matter. And you answer your own solicitation of an alternative for insufficient demand. "why not change to a lower offer price so they could produce at their quota level?" That, my friend, is the obvious answer. It is also the only unilateral control that they have -- price, not production. And that fact is the underlying reason that price wars occur. Too many suppliers and too little demand. Why is it so difficult for suppliers, analysts, media and commentators to forget that you cannot put ten gallons of oil in a five gallon bucket AT ANY PRICE! Mass balance is overriding!

[ceo_energemsier + 1,818]

10 minutes ago, William Edwards said:

Your statement "What we know is that Saudi Arabia has chosen to produce 500 kb/d less than their quota. " tells us all we need to know regarding the difference in our perspectives. Simply stated, they sold 500 MB/D less oil because they had no buyer willing to take the oil, not because they refused to sell. They reduced production because they were forced to. It was not their first choice. That fact puts an entirely different perspective on the matter. And you answer your own solicitation of an alternative for insufficient demand. "why not change to a lower offer price so they could produce at their quota level?" That, my friend, is the obvious answer. It is also the only unilateral control that they have -- price, not production. And that fact is the underlying reason that price wars occur. Too many suppliers and too little demand. Why is it so difficult for suppliers, analysts, media and commentators to forget that you cannot put ten gallons of oil in a five gallon bucket AT ANY PRICE! Mass balance is overriding!

From an international trading and investment perspective, I will disagree with you , on your statement that KSA had no willing buyer for their 500kb/d. Even at that price at that given time, there were buyers willing to buy it.. China would have been more than happy to buy that crude oil and stash it away in their storage. They may have not purchased all of the 500kb/pd , but they would have bought maybe 150k/bpd. Heck, I would have bought and kept on buying 100k/bpd as well for some time under a term contract for purely a strategically timed investment move that would cover 2 future supply requirements.

[D Coyne + 305]

23 minutes ago, William Edwards said:

Your statement "What we know is that Saudi Arabia has chosen to produce 500 kb/d less than their quota. " tells us all we need to know regarding the difference in our perspectives. Simply stated, they sold 500 MB/D less oil because they had no buyer willing to take the oil, not because they refused to sell. They reduced production because they were forced to. It was not their first choice. That fact puts an entirely different perspective on the matter. And you answer your own solicitation of an alternative for insufficient demand. "why not change to a lower offer price so they could produce at their quota level?" That, my friend, is the obvious answer. It is also the only unilateral control that they have -- price, not production. And that fact is the underlying reason that price wars occur. Too many suppliers and too little demand. Why is it so difficult for suppliers, analysts, media and commentators to forget that you cannot put ten gallons of oil in a five gallon bucket AT ANY PRICE! Mass balance is overriding!

William,

Yes we have a different perspective. You believe that demand controls everything.  Have you ever sold a car or a house?

The price is agreed to by seller and buyer, it is a negotiation by two parties and is true of every sale.  You need a seller with a product that they are willing to sell at some price and you need a buyer with money that they are willing to part with to obtain that product.  All of these ingredients are needed and then a price that satisfies both the seller and buyer is needed for the sale to occur.

Where you see one side of the transaction as controlling, I see both sides as necessary for any transaction to occur.

In my view the complete picture is needed for a proper understanding.

As far as production and price, again you seem to like to reduce things to a single variable which oversimplifies in my view.

So now you would like to claim that only price matters, where I would say that the quantity of a good produced will affect the market price, produce more than consumers want to buy at the current price level and prices will need to fall to entice people to buy more.  I don't think we are disagreeing, in fact we are both saying Saudi Arabia wants higher prices than would be likely if they produced their entire quota.  So where you might say they have set their price too high, I would suggest they may be smarter than you believe and have chosen a price where they maximize their net revenue.  If this were not the case, why not accept a lower price and maximize their net revenue?  

You suggest the Saudis were forced to produce less, I would say this was simply a choice they made.

They could choose to lower their price or they could choose to produce less.

Again lets create a simple example where they could sell all of their exported oil at $65/b and 10 Mb/d of total output for 650 million $/d, they estimate that at a price of $68.50/b they will sell enough exports so their total output would be 9.5 Mb/d and total revenue would be 650.75 million $/d, so they produce less, but have more profits, seems like a good deal.  You seem to believe that they are choosing to forego revenue by refusing to take a lower price for their oil, for example if they got $66/b at 9.5 Mb/d then would only have 627 million $/d of revenue, a reduction of 33 million $/d in revenue, though in this case they still have the 500 kb/d in the ground to sell later.  In any case the Saudis are aware that the amount of oil on sale in the market will influence the market price of oil and that lower production levels will tend to result in higher price levels.  They may believe the market sweet spot is $75 to $80/b where demand will match supply on the World market and allow them the needed levels of revenue.

Edited April 29, 2019 by D Coyne

[ceo_energemsier + 1,818]

4 minutes ago, D Coyne said:

William,

Yes we have a different perspective. You believe that demand controls everything.  Have you ever sold a car or a house?

The price is agreed to by seller and buyer, it is a negotiation by two parties and is true of every sale.  You need a seller with a product that they are willing to sell at some price and you need a buyer with money that they are willing to part with to obtain that product.  All of these ingredients are needed and then a price that satisfies both the seller and buyer is needed for the sale to occur.

Where you see one side of the transaction as controlling, I see both sides as necessary for any transaction to occur.

In my view the complete picture is needed for a proper understanding.

As far as production and price, again you seem to like to reduce things to a single variable which oversimplifies in my view.

So now you would like to claim that only price matters, where I would say that the quantity of a good produced will affect the market price, produce more than consumers want to buy at the current price level and prices will need to fall to entice people to buy more.  I don't think we are disagreeing, in fact we are both saying Saudi Arabia wants higher prices than would be likely if they produced their entire quota.  So where you might say they have set their price too high, I would suggest they may be smarter than you believe and have chosen a price where they maximize their net revenue.  If this were not the case, why not accept a lower price and maximize their net revenue?  

KSA has played and will continue to play both sides of that coin, they will produce more for lower  priced market , maintain and increase market share as is deemed strategic for their interests and will produce less for higher priced market as it becomes opportunistic and strategic. In either scenario, as a business they are winning, selling goods to consumers of good and making profits and keep their ship not only floating but sailing.

[ceo_energemsier + 1,818]

On 4/27/2019 at 8:27 AM, William Edwards said:

There are two or three major differences in our understanding. First, if the Saudis, or OPEC, could prevent the price from dropping to $20, why did they spend 15 years trying to get the price above the $20 range (in current dollars) in the eighties and nineties? The answer is that they, like you, have an incorrect understanding of the pricing mechanism. Without a correct understanding they have been unable to actually set the price at a predetermined level, or even keep it within pre-selected bounds. The just keep hoping that the CME will establish a desirable price. That "stable" price has varied from $20/B to $150/B, randomly, without conforming to correlatable fundamental driving forces. 

I apologize if I come across as arrogant on this subject, but since my understanding of the mechanism is sound and has been judged so by reputable thinkers, I think bluntness is appropriate. Since it is unlikely that either you or I will be able to spend the time necessary for me to change your thinking, we must remain at odds on the pricing question. My model continues to explain the major price trends, as it has for the past fifty years. I would be interested in seeing an alternate mechanism that can prove that claim of validity for the alternative.

If I am allowed to make some changes in your wording, I can "correct" your statement "KSA may not/does not have a choice in being labeled as swing producer and may not and or actually does not have the option to set the price to produce as a swing producer. Unlike 40 years ago , the global oil trade is much more transparent in terms of its global and regional benchmarks and how prices are set even for countries that use OSP's for marketing their crude oil.", i.e., KSA does  have a choice in being swing producer and  actually does have the option to set the price as a swing producer. As was the case 40 years ago , the global oil trade is transparent, although through different publications, in terms of its global and regional benchmarks and how prices are set even for countries that use OSP's for marketing their crude oil. The mis-undertanding of the industry regarding futures prices, actually prices for a distinct and separate commodity, and how they relate to real oil transactions, has perverted the industry's attempts to gain a valid understanding of the mechanism for pricing real oil. 

The bottom line for the actual oil pricing mechanism: The establishment of the price comes first as set or allowed by the swing producer. Demand follows price. Production levels follow demand. The idea that production levels come first and the other elements follow is ruled out by the law of conservation of matter. Until you are able to fit ten gallons of oil in a five gallon bucket you will be unable to control the price by manipulations of production. You can change the direction of price moves over a limited production range, as allowed by tankage, but you cannot determine and achieve a specific price level or bounding ranges by trying to manipulate production. Regarding production level, producers are followers, not leaders. The customer (consumer) has ultimate control  of quantity and the producer must follow accordingly.

Turning to the IMO, I am quite interested in learning how you describe the process whereby KSA removes their share of the 13,000 tons/D of sulfur from their petroleum streams, overnight, that is mandated on January 1, 2020. I suggest that the only practical means for achieving this sulfur reduction is by leaving it in the ground, still residing in high sulfur crude. Replacement of the sour crude (left in the ground) by naturally occurring substitutes of other oil that does not contain much sulfur is both prompt and economical. Think through a switch of Arabian crude containing 2% S being replaced by US crude with less than 0.3% S. Even better, shut in Canadian oil sands production containing 5% S and replace it with US tight oil. Even though sour crude producers have not yet clicked in to the approaching disaster of a significant and abrupt reduction in demand for sour crude, it seems very likely to be here very soon. You say that KSA cannot live again with $20 oil, just hide and watch! It will be temporary, only a few years because economics drive adaptation, but it is a realistic possibility.

Stable price is relative to the time period it is being discussed for. In the 80s and 90s with the world markets, economies, demand, supply, competition, geopolitical forces and events dictated that the oil prices be range bound in the 20-30$/bbl range which also continued into the 90s and at one point the oil prices were down to 10$/bbl in the late 90s. Demand destruction from  very weak global economy due to the Asian market scares. You must have some expertise in judging a major oil producer , producing over 9mmbpd of crude oil and claiming that unlike you , they do not have a "correct understanding" of the pricing mechanism? Obviously they have lost out on what a trillion $ of profits by now if not more due to their flawed pricing mechanism? CME didnt exist till recent times for them to have based or relied upon for pricing guidance.

I do not know if I should say that you come across arrogant or not on the subject of understanding the pricing mechanism but according to my understanding and long time experience , it appears to be somewhat misguided. Bluntness is appropriate when it is relevant.

The price mechanism that has been in existence for the past 50 years as you say, and it has worked for just about everyone, except for your displeasure with it. The entire world's producers and buyers have been happy and content with it, buying , selling trading based on those pricing formulae.

You say "if you are allowed to make changes to your wording" and yet you go ahead and do it anyways? without actually first asking? LOL .

According to you, KSA does have a choice in being a swing producer and so on. KSA cannot stand by and watch the world go past them if they do not act in situations that call for them to act either to stem the production or ramp up production, if they do not act in either one of those situations, they will be labelled as unreliable by consumers and by producers. 40 years ago, global oil trade was transparent but not readily available to everyone outside of the trade and business of buying and selling, refining crude oil, shipping etc and was based on a few select benchmarks and was not as transparent as today. Yes there are many publications and industry media services, exchange houses, giving real time , timely and much more relevant and widespread data on actual deals , price structures, trade bids, closings, cargo movements , quality related matters covering a wide range of global/regional and local markets for a wide range or crude oil streams and related hydrocarbons. Argus, Platts, TOCOM, NYMEX, CME, DME,ICIS, Shanghai International Energy Exchange,  etc

I do agree that there is a divergence between futures prices and the crude oil prices realized from the physical sale of the various crude oil streams by producers of all sizes and structures, indies, state owned, integrated, majors, traders... And I also am not aware of your experience and accomplishments in the world of crude oil sales, marketing, trading, producing and managing drilloing/development and production plans/investment scope etc. So you may have an experience and have a different angle and approach to the world pricing than I may have.

Too many executives base their corporate budgets for oil and gas based on a futures benchmark and then end up losing $$$ on their regional crude oil being produced and not getting that value on paper. Specially true for produces in the US , with regional crude oils for example for Bakken getting a certain price that is removed from WTI or NYMEX or IL Basin crude, WY crude, Mid-Con crude, Appalachian Basin crude , Eagle Ford, Permian so on, while North sea crude oils are mostly based on the dwindling Brent stream.

In the end, producers will produce (most of them) as much volume of the commodity as the consumer wants to keep the balance in supply and demand and therefore the prices.

Re. the IMO: KSA can start upgrading their crude oils to lighter , lower sulphur sweeter crude oils or start blending their sour crude oil streams with their Super Light and or condensate streams. The latter will be cheaper and quicker, however for the long term, they will need to invest in crude oil upgrading techs and facilities. They already had mountains of sulphur piled up in the 90s and that I saw but there has been demand for that across various industries, with the added sulphur reduction from the industry to comply with IMO requirements, it will push down the sulphur prices. KSA can also form JV's with US producers and start blending operations of US shale crudes, condensates with their own , sour , heavier crude oils for EU markets. Will help us all out LOL.

KSA as it exists today, will not be able to survive a 20$/bbl oil price environment for an extended time period. The Royal house will collapse and the region will be thrust into chaos. The KSA Gov. as it stands , cannot survive a 20$/bbl market, all their programs to sustain them within their borders, and keeping a majority of their populace content with them , simply wont be tolerated for extended periods.

 

 

______________________________________________

 

 

[William Edwards + 708]

26 minutes ago, ceo_energemsier said:

 

Thanks for your interesting response. There are too many differences in our experiences and our perception of the industry, pricing, etc. for a written conversation. But my fifty years of involvement in the global supply system, including operations, planning, economics, buying and selling oil and futures and advising producing entities as high in stature as OPEC and its member countries, instills a reluctance for me to alter my deeply-held ideas of underlying mechanisms without considerable substantiation. Thus I expect significant differences in our views to persist.

[William Edwards + 708]

36 minutes ago, D Coyne said:

William,

Yes we have a different perspective. You believe that demand controls everything.  Have you ever sold a car or a house?

The price is agreed to by seller and buyer, it is a negotiation by two parties and is true of every sale.  You need a seller with a product that they are willing to sell at some price and you need a buyer with money that they are willing to part with to obtain that product.  All of these ingredients are needed and then a price that satisfies both the seller and buyer is needed for the sale to occur.

Where you see one side of the transaction as controlling, I see both sides as necessary for any transaction to occur.

In my view the complete picture is needed for a proper understanding.

As far as production and price, again you seem to like to reduce things to a single variable which oversimplifies in my view.

So now you would like to claim that only price matters, where I would say that the quantity of a good produced will affect the market price, produce more than consumers want to buy at the current price level and prices will need to fall to entice people to buy more.  I don't think we are disagreeing, in fact we are both saying Saudi Arabia wants higher prices than would be likely if they produced their entire quota.  So where you might say they have set their price too high, I would suggest they may be smarter than you believe and have chosen a price where they maximize their net revenue.  If this were not the case, why not accept a lower price and maximize their net revenue?  

You suggest the Saudis were forced to produce less, I would say this was simply a choice they made.

They could choose to lower their price or they could choose to produce less.

Again lets create a simple example where they could sell all of their exported oil at $65/b and 10 Mb/d of total output for 650 million $/d, they estimate that at a price of $68.50/b they will sell enough exports so their total output would be 9.5 Mb/d and total revenue would be 650.75 million $/d, so they produce less, but have more profits, seems like a good deal.  You seem to believe that they are choosing to forego revenue by refusing to take a lower price for their oil, for example if they got $66/b at 9.5 Mb/d then would only have 627 million $/d of revenue, a reduction of 33 million $/d in revenue, though in this case they still have the 500 kb/d in the ground to sell later.  In any case the Saudis are aware that the amount of oil on sale in the market will influence the market price of oil and that lower production levels will tend to result in higher price levels.  They may believe the market sweet spot is $75 to $80/b where demand will match supply on the World market and allow them the needed levels of revenue.

Our ideas differ markedly and will remain so. I may have sold more cars, houses, oil futures and oil than you, although I don't know your numbers. I am confident that I have observed more data and given the subject more hours of deliberation than you. I am confident that I have spent more time in personal discussions with Saudi Oil Ministers, OPEC Secretaries General, etc., than you. Of course, I can still be off-base, as can anyone.

Edited April 29, 2019 by William Edwards

[ceo_energemsier + 1,818]

34 minutes ago, William Edwards said:

Thanks for your interesting response. There are too many differences in our experiences and our perception of the industry, pricing, etc. for a written conversation. But my fifty years of involvement in the global supply system, including operations, planning, economics, buying and selling oil and futures and advising producing entities as high in stature as OPEC and its member countries, instills a reluctance for me to alter my deeply-held ideas of underlying mechanisms without considerable substantiation. Thus I expect significant differences in our views to persist.

I have similar experiences as well, I have a blend of crude oil and blood running through my arteries LOL 🍾 and I love the smell of crude in the morning 🍾

My background and current experience includes physical oil trading, private equity investments across the globe in natural resources, tech, healthcare etc., direct investment and operations of oil and gas companies globally (upstream, midstream, downstream, shipping & transport), as well as in other natural resources, conventional and unconventional , onshore, offshore... as well as JVs with OPEC member NOC's, indies, vertically integrated , majors etcs. I have been a founding member of several private equity companies, oil and gas companies, JVs with the majors and OPEC member NOCs , also in executive management , President, CEO/Chairman , equity partner etc.

I do a fairly decent amount of physical crude oil and products trading and LNG on spot basis as well as long term.

 

We can respectfully agree to disagree on some points and aspects. Cheers 🍾

[William Edwards + 708]

4 minutes ago, ceo_energemsier said:

I have similar experiences as well, I have a blend of crude oil and blood running through my arteries LOL 🍾 and I love the smell of crude in the morning 🍾

My background and current experience includes physical oil trading, private equity investments across the globe in natural resources, tech, healthcare etc., direct investment and operations of oil and gas companies globally (upstream, midstream, downstream, shipping & transport), as well as in other natural resources, conventional and unconventional , onshore, offshore... as well as JVs with OPEC member NOC's, indies, vertically integrated , majors etcs. I have been a founding member of several private equity companies, oil and gas companies, JVs with the majors and OPEC member NOCs , also in executive management , President, CEO/Chairman , equity partner etc.

I do a fairly decent amount of physical crude oil and products trading and LNG on spot basis as well as long term.

 

We can respectfully agree to disagree on some points and aspects. Cheers 🍾

We could probably have some worthwhile discussions if time and opportunity allowed. You are working from a substantial experience and knowledge base, some quite different from my own personal exposure. My forte is deciphering why things work the way they do, based upon real data and not suppositions or "conventional wisdom". Lofty positions in the industry tell me nothing of the competence level or degree of understanding of the occupant of the position, as I am sure that you have observed, as well. If one cannot justify his reasoning with both facts and logic, I will either still probe for answers or elect to withdraw from the discussion. If I cannot substantiate the assessment, I cannot support it, regardless of the title of the "expert".

BTW, do you agree with me that the commodity "physical oil" is a distinctly different entity than "oil futures", and operating under vastly different supply/demand considerations, although currently similarly priced?